The Estate of Misguided Choices
If only I were a more talented writer, I might be able to do justice to describing how distorted the priorities and values are that motivated the US Senate’s decision today to move forward in the efforts to repeal (or nearly repeal) the estate tax. – at a cost (including interest) of about $1 trillion between 2012-2021. In my Bloomberg column today, I ask what it says about our commitment to the value of economic mobility when we are shortchanging pre-school for those who start life with the least at the same time we give a massive tax cut to those who end life with the most. This is hardly the vision of our founders who feared a perpetual concentration of wealth while wanting America to be a land where merit, and not the accident of birth was most determinative in shaping ones future.
To give just a taste as to why the effort to repeal the estate tax – or to pass alternatives that are nearly as costly as repeal – are so misguided, here are four points that are worth digesting:
1. All Compromises Go Only To Those Over $7 Million: Imagine you heard that the United States Senate was going to enter a major debate with the following limitation: the tax cut must cost hundreds of billions of dollars over the next decade and it must be limited entirely to couples with estates worth over $7 million. That is the debate that will take place today, plain and simple. You will hear many different variations of rates and exemptions but remember this: one could likely get agreement from a broad group of Democrats for an estate tax worth $7 million per couple – which is where the law will be in 2009, with a 45% rate above that amount. Therefore, every – and I mean every – so-called compromise, whether it is from Republicans or Democrats, that will be debated this week will be about how whether to spend an additional $400-$500 between 2012-2021 on estates solely above $7 million per couple– or just as some so-called compromises suggest, only provide them $200-$300 billion additional tax relief. Just a reminder: 99.7% of estates will not pay a penny of federal estate tax in 2009. All of this extra money goes to the wealthiest 3 of 1000 estates. 3. Real Compromises and Fake Compromises: It’s the Rate Stupid. After Katrina, even the most ardent estate tax repeal advocates decided it was unseemly to push for complete repeal. Thus one started to hear so called compromises, particularly from Senator Jon Kyl of Arizona, that simply raised the exemption level to $5 million per person (remember that is $10 million per couple) and applied a 15% rate to estate value over that. Another so-called compromise seeks to have a 15% rate for estates between $7-$10 million per couple; 25% for estates between $10-$20 million, and a 35% rate for even the very richest estates above this $20 million threshold. Funny thing though: According to the Joint Tax Committee, the Kyl “compromise” will cost 84% as much, and according to Tax Policy Center, the graduated rate” compromises” would cost 74% as much. These so-called compromises show -- to paraphrase James Carville -- that when it comes to the estate tax, it is the rate stupid. While those arguing against the estate tax point to the 45% rate above the $7 million exemption level in 2009 – they fail to mention that the effective rate – the share of the estate that will actually be paid in taxes – is only 17%, less than most workers will pay in federal income and payroll taxes. When you lower the statutory estate tax rate to 15% the Tax Policy Center estimates that the effective rate will fall to only 6%. 4. Why Is This Tax Cut Different From All Other Tax Cuts? Let’s see. The nation is at war and troops have been having trouble getting the safest equipment. Child poverty has been on the rise for four straight years. Deficits are projected to total $4 trillion in the next ten years, our entitlement challenge is unresolved, working wages have been stagnating or declining, and fixing the estate tax for the top 3 of every 1000 estates in 2011 is what we should rush to the floor of the Senate in the summer of 2006? But even if you are only moved by tax cuts, someone ought to remind the Senate leadership that all of the middle class tax cuts expire after 2010 too. Why in the world then should the United Senates decide that only the most expensive, regressive tax cut perhaps ever proposed is the sole one that must be rushed to the floor? Any Senator looking for a reason to vote no on the motion to proceed should not have to look much further than that. Also note that you will not hear a word this week from supporters about how to pay for this tax cut so that it does not increase the deficit. Even a supporter of repeal – who also believes in pay-as-you go principles – could easily decide that if we are going to spend an additional $400 billion in tax cuts for estates worth over $7 million – we should only do so if we can find offsets so that we are not passing on the debt and interest payments to the 99.7% of Americans – including our children and grandchildren -- who will not benefit one penny from these proposals.
2. Double Your Money: The Estate Tax is Twice as Generous as it Appears. For those who thought the estate tax exemption was $2 million in 2006 and $3.5 million in 2009 – not $7 million let me explain. Estate taxes are about the only income level in taxation that is always described in per person terms, as opposed to per family terms. Right now, a married couple can leave $4 million tax free to their heirs and in 2009 it will be $7 million. If a few people are falling through the cracks here, than lets do a sensible reform that says every couple can automatically leave double the personal amount automatically without any tax planning.
This debate has never been about logic or good fiscal policy it has been about the ability of a small group of the super wealthy to stage a decade long disinformation campaign for their own benefit. If you haven't seen the report dealing with how they did this here is the link:
The Campaign of the Super Wealthy to Kill the Estate Tax
What is interesting about this report is that it provides a well documented example of how many such special interest programs are foisted off on the public by means of astro-turf front groups, intellectually questionable "think tanks" and buying the support of legislators.
My current hobby horse on how this works is tobacco. Fifty years after the link with disease had been pointed out it is still widely available and two whole generations have been hooked. Wealth (both private and institutional) has thwarted social progress for half a century. Our "democratic" institutions are not working and liberals have not been effective in getting progressive policies enacted.
--- Policies not Politics
Daily Landscape
June 7, 2006 8:21 AM | Reply | Permalink
The Republican MO seems to basically be "Let's punish children for choosing the wrong parents!"
From health care to access to higher education, from adoption bans to income maintenence.
Patria est ubicumque est bene. Their 'homeland' is wherever they can turn a buck. Cicero, Tusculan Disputations
June 7, 2006 8:31 AM | Reply | Permalink
Gene, How much does Frist stand to benefit from the legislation as currently written? This smacks of a last ditch attempt to grab the brass ring before the republicans lose control. If they pass this, then any subsequent attempt to reinstate the "death tax" will be billed by their media outlets as a "tax increase" and anyone who votes for it will be tagged with having voted for a huge tax increase on "family farmers." Funny, but the windfall for the Frist family and others like them will never be part of the debate.
June 7, 2006 8:42 AM | Reply | Permalink
I think the most important point is the one that Mr Sperling raises about the founding fathers. This bill could create an American aristocracy in a single generation and is directly opposite of the intent of the founding fathers.
Our tax system today does not tax all income equally. Right now it is only increases in wealth attributable to wages that are taxed while increases in wealth due to investment can be deferred indefinitely. If the estate tax is abolished, those deferrals would be permanent: income in the form of increases in wealth other than wages will never be taxed.
Not only should the estate tax remain, we need to have a tax on intangible wealth analagous to the real estate tax. Florida has one already. Without it, only income from work is taxed while income from wealth is not. That also strikes me as the opposite of the intent of the founding fathers.
June 7, 2006 9:06 AM | Reply | Permalink
Gene
Why are some Democrats buying into the "lets protect the family business or farm" lies? Perhaps even more importantly few issues seem as Democratic as preventing this enshrinement of the mega-rich. Where are the Democrats explaining, teaching and arguing againsst this nonesense?
Daniel A. Greenbaum
June 7, 2006 9:08 AM | Reply | Permalink
I am wondering about this beginning statement of your Bloomberg piece, especially because you use the qualifier "if." Do you really think that they should be, or are you just trying to put yourself in the realm of the opposition in order to point out that if one goes by values, they are pushing some that are wack?
I also wonder why I so often see only ideologically-based arguments about this as if reality was that there are no such things as a continual array of tax avoidance schemes constantly invented by the best tax lawyers and accountants for the wealthy with each new law change. My point: does the Fed estate tax as it is really help those pre-school kids, or is this just about the Federal government making a symbolic, theoretical point about supporting meritocracy? (Don't get me wrong here, I am fully in support of making sure the U.S. never ends up with the kind of aristocracy or class system the founders sought to move away from and many immigrants came here to leave behind.)
Why do I see little discussion, for instance, about the reality of state estate taxes and their multitude of actual effects, and the linkage or not to Federal? I have no idea how current this info. is, but it will serve to get the gist across:
What I want to know is: what can we do to have a Federal Estate Tax that really does the pro-meritocracy thing and doesn't just punish those who have accrued significant wealth but have dumb estate planners? Is the ideology really aided by the actualities, the practicalities, or has what we have had until now more just "for show?"
June 7, 2006 9:28 AM | Reply | Permalink
I was at a funeral last week. Afterwards, I was asked for some advice about the will and probate information. (I'm a lawyer) Anyway, I was really suprised how everyone thought that there would be some kind of estate tax on this guy's estate. Yes, the decedent was a farmer with land and all, but I had to keep repeating myself, "listen people, he wasn't poor, but he certainly wasn't 'estate tax' wealthy."
People have been programmed to think that the tax will affect them. Sorry to tell you, but only in your dreams will you ever have enough money to owe estate tax. It's ridiculous how ignorant many people are.
June 7, 2006 9:35 AM | Reply | Permalink
Its not the brass ring, its like they're stripping the copper pipes from the house before the eviction.
June 7, 2006 10:06 AM | Reply | Permalink
Possibly because there are actually a few stories out there of the kids having to sell the family business to pay the STATE estate taxes. (As opposed to the Federal which has a very high bar.) Come to think of it, I have a gay friend in CT who had to take out another mortgage his house a few years back to pay the CT estate taxes after his 20-year life partner died with him as the heir of the other half of the house; it was a bill in the mail of like $100K, payable immediately. (No surviving spouse benefit--throw that one out to those who are both "family values" and "anti-estate tax.")
I myself wonder why more national level dems don't raise the whole shell game of State v. Federal taxation more often, that the money has to come from somewhere, that if you give genuine Federal tax cuts along with the fiscal discipline on pork that so many conservatives say they want, that State collection will have to go up. Maybe because many red states often end up with more Fed funds than they put in? Or maybe they like the idea of having a main employer in their state as the prison system because they have few other government programs (state OR federal)?
June 7, 2006 10:24 AM | Reply | Permalink
Eric
Aren't here also specially provisions that further protect estates largely made up of either family businesses or farms?
Daniel A. Greenbaum
June 7, 2006 10:31 AM | Reply | Permalink
You're correct about the writing difficulty. In particular, in #1 everything after "Therefore.." is not comprehendible. That "how whether" really screws it up.
June 7, 2006 10:33 AM | Reply | Permalink
You're correct about the writing difficulty. In particular, in #1 everything after "Therefore.." is not comprehendible. That "how whether" confuses matters.
June 7, 2006 10:46 AM | Reply | Permalink
Just read it without the "how". It makes perfect sense.
June 7, 2006 10:58 AM | Reply | Permalink
It is un-American to tax meritocracy - or so say those who would do away with estate taxes. (Of course the merit of the recipient is usually a matter of birth.) If we're going to do away with taxes on estates gifted to heirs, why tax the money (above 11 grand in CA) received as a gift. The only difference is the former is from the dead while the latter is from the living. (It should be obvious by now that the federal tax code is a tool used to reward or punish and we all know who gets rewarded and who gets punished.)
June 7, 2006 11:04 AM | Reply | Permalink
What is interesting about this report is that it provides a well documented example of how many such special interest programs are foisted off on the public by means of astro-turf front groups, intellectually questionable "think tanks" and buying the support of legislators.
Perhaps even more interesting is the fact that they're willing to spend hundreds of millions on front groups in order to save hundreds of millions in taxes. I can't imagine they're getting a great return on their investments.
June 7, 2006 11:23 AM | Reply | Permalink
The number calculated in the report is that the 18 families involved in this effort stand to save $72 billion in taxes. So actually they are getting a very good return on their investment.
--- Policies not Politics
Daily Landscape
June 7, 2006 11:52 AM | Reply | Permalink
Oh. My ability to conceptualize money ends at about 5 zeros.
June 7, 2006 11:59 AM | Reply | Permalink
Eighteen wealthy US families funded a ten-year plan to repeal the estate tax (mistakenly identified as the “death tax”) and with that repeal these families alone can save $71.6 billion in taxes.
These families want you to disregard that an average American is four times more likely to be hit by lightening than have to pay estate taxes on a farm or small business. The stories about family farm and small business ruin have been negated now that $3.5 million can pass tax free to the family ($7 million as husband and wife).
At a time of record deficits, out of control national debt, reduction of “real wages”, and $3 gas prices Senator Bill Frist is seeking a vote this month on the repeal. These “super rich” families are tired of waiting. If the tax is eliminated, I hope Paris Hilton will have the good breeding to send hand written thank you notes to the working folks of America.
June 7, 2006 12:15 PM | Reply | Permalink
It's ironic that the party of Personal Responsibility feels it necessary to protect the children of the wealthy from lifting themselves by their bootstraps. If social Darwinism is the goal, why shelter wealthy inheritors from it? Why don't they worry about the stigma of having been helped more than other deserving people?
I vote we call the estate tax the Personal Responsibility Tax.
June 7, 2006 12:23 PM | Reply | Permalink
If the Democratic establishment in DC were smart enough (how so many individually brilliant people form such a piss-poor whole is beyond me), they would realize that the GOP has just alley-ooped us a chance to destroy the fraying and unnatural alliance between the Christian Right and Big Business Republicans for good.
Christian nationalists could justify their support of the Iraq war using some convoluted, half-baked theology, but they should have no choice but to see this Estate Tax business as the flagrant violation of New Testament doctrine that it is.
Somebody start a PAC called "Americans for New Testament Values" or something. Be careful not to call yourself a Christian organization if you are not one, but New Testament values are both universal and Liberal.
Go on a PR offensive in Red States (heart of the beast and media purchases are much cheaper). Put them on the defensive. While the RNC & Friends are plotting justifications, we generate the demand for explainations. The GOP can justify anything, but you can't explain this stuff without pointing out that low income Christians are being played for fools.
June 7, 2006 12:41 PM | Reply | Permalink
Wheaton Pat: Eighteen wealthy US families funded a ten-year plan to repeal the estate tax (mistakenly identified as the “death tax”) and with that repeal these families alone can save $71.6 billion in taxes.
I’ve read that, too. I think that meme is all it takes to counter this campaign. Repeal is simply robbing the poor to give to the rich. I make no claims to political finesse, but this seems like a great opportunity for the Democrats to draw the line and begin the offensive they need running up to the midterms. Yes, the “death tax” campaign has been a coup but only because there has been little organized opposition from Congress. It can be reframed. A concerted effort to re-educate the public on the fine points and pound the points that Sperling makes here would, I think, carry the day. If filibusters and “obstructionism” are ever called for, this is the time. And Democrats would be perceived as Democrats again.
June 7, 2006 12:49 PM | Reply | Permalink
1.) "Right now, a married couple can leave $4 million tax free to their heirs and in 2009 it will be $7 million."
I'm confused about the whole concept of 2x the exemption for a couple - What exactly does that mean in the real world? If a single person wills me his/her $10m estate, then I get $2m tax free, and pay 45% on the remainder. Right?
OK so what if my parents are worth $10m and I'm their sole heir, under what circumstances do I get to use this double exemption so I only pay tax on $4m? If one parent dies and hands off the $10m to the other, then a year later that second parent croaks and leaves it all to me, Seems like I'm inheriting from only 1 person, so I only get $2m exempted. I mean, do they have to die simultaneously in order to get the double exemption?
I don't know a thing about estate planning and wills, but I would like to understand this point because I don't want to be in a discussion about it with my nutty right-wing brother in law and not have all the facts straight.
2.)To me Carville has it exactly wrong - it's not about the rate it's about the exemption level. IMO the obvious compromise is to keep the rate at 45%, but raise the exemption to $8 or $10m per person, or even higher. At that point, you innoculate yourself completely from any kind of hearstring-pulling 'i had to sell the family farm ' stories. We all know very few of those stories actually exist, but they do resonate with the public. Of course $2 million is a lot of money, but it's not an egregious amount - I can sort of empathize with someone inheriting an appreciated plot of land and suddenly having to sell a third of it to cover taxes. But, you move up to $8 or $10m and you would really have to stretch to muster up sympathy for someone who just received that size of a windfall. So if you must: maintain the rate, but raise the exemption, tax revenues probably aren't greatly affected and you narrow the complainers down to only the extremely wealthy. Any veneer of Repubs 'protecting the humble hardworking families who've found some success and are being punished for it' is gone.
3.) The easiest justificaiton for keeping the tax is very simple and I don't see why it's not used more often: the estate tax is really just another form of income tax, and in this day and age, for right or wrong, the government taxes all income every April 15 for everyone, no matter how you came by it. If you want to change the whole tax philosophy of the country, we can talk about it, but it is what it is. When you inherit money, it's income, just like a paycheck, or if you have a business and earned it, or won it on a game show. 'Double taxation' is just a lie - even if the person who earned it actually did initially pay income tax on it. YOU didn't. The IRS recognizes spouses and dependents...they don't recognize families as a special tax unit. Sure your parents paid tax on that money they earned, but they're not YOU.
Democrats need to tackle this head on, and not waiver, and not to give in to some crap compromise that lowers the rate to 5% or whatever. As usual, facts and common sense are on our side.
June 8, 2006 4:08 AM | Reply | Permalink
There is a 100% estate credit between spouses. Each individual also has an estate tax credit. Thus if one spouse wills their entire estate to the other spouse and the second to die spouse wills the remaining estate to their children one of the estate credits will be lost.
However, if the first to die spouse wills the amount of the estate tax credit to a trust, sometimes known as a B trust or a credit saving trust, they will be able to use their credit to protect the amount put in the trust. The income from the trust can go to the surviving spouse as can the remainder of the estate. Then when the second spouse dies their estate can pass to the heirs with their full tax credit and the money in the B trust can go to the heirs estate tax free as well.
The result is that you would receive your parents estate protected by both their estate tax credits.
Daniel A. Greenbaum
June 8, 2006 7:46 AM | Reply | Permalink