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July 26, 2012 9:32 AM The Moral Imperative of Maintaining Inheritance Taxes

By Ed Kilgore

The tax issue that most definitely was not addressed in yesterday’s action in the Senate was the future of federal estate taxes, for the simple reason that Democrats probably didn’t have to votes to win on it. In a Bloomberg column, Richard Rubin has the sad, sad story:

Lobbied by business owners and billionaires, Democrats including Mark Pryor of Arkansas and Mary Landrieu of Louisiana resisted a proposal from President Barack Obama to tax individual estates of more than $3.5 million — roughly three in 1,000 — at a top rate of 45 percent. The split among Democrats, who control the Senate, will give Republicans more influence on the issue after the Nov. 6 election….
Republicans favor the $5.12 million exemption, which means a compromise on the issue would be more generous to estates than Obama’s plan.
One other reason, said Paul Caron, a law professor at the University of Cincinnati, is the “brilliant” public-relations move by estate tax opponents, who rebranded the issue as the “death tax,” making it unpopular even among those who will never have enough wealth to pay it.

Yep. Given how many Democrats during the last decade succumbed to the whole “abolish the death tax” campaign, it’s a minor miracle the estate tax still exists to be fought over. In fact, the only reason it remains is that the authors of the Bush tax cuts had to disguise its ultimate costs and thus could not enact any permanent cuts.

So the current battle is not over abolition of estate taxes, but over how much to gut them lest they return to the pre-2001 levels, as Rubin explains:

The politics of the estate tax center on two numbers: the per-person exemption and the top tax rate. The exemption matters most to business owners, farmers and ranchers who can use it to avoid estate tax liability. For billionaires, the rate is the priority.
This year, the per-person exemption is $5.12 million and the top rate is 35 percent. Obama agreed to those parameters as part of a December 2010 deal with Senate Republicans that also extended expiring tax cuts and created a payroll tax cut.
Obama proposed a $3.5 million per-person exemption and a 45 percent top rate, returning to parameters that were in effect in 2009. That would require 7,200 estates, or about 0.3 percent, to pay taxes.
If Congress does nothing, as would be the case if the Democratic bill and no others became law, the exemption would drop to $1 million and the rate would rise to 55 percent. Under that regime, the tax would affect about 2 percent of estates, or 55,200, according to the JCT.
The U.S. is expected to collect $11 billion in estate and gift taxes in fiscal 2012, according to the Congressional Budget Office. Obama’s plan would raise $9 billion more, and allowing the $1 million exemption and 55 percent rate to take effect would raise an additional $22 billion beyond Obama’s proposal, according to JCT.

So why wasn’t Obama’s estate tax proposal in the Senate bill dealing with other aspects of the Bush tax cuts?

Senate Majority leader Harry Reid, a Nevada Democrat, included Obama’s estate-tax proposal in the first draft of his bill. He then backed off after hearing objections from some Democrats, including Pryor and Kay Hagan of North Carolina.

Southern and western Democrats are forever being told, and a few themselves say, that this is all about “farmers and ranchers and small businesses.” But it’s not really:

Under current rules, the tax would affect about 200 small businesses and 100 farmers, according to the Joint Committee on Taxation. That would jump to 2,700 and 2,400, respectively, if Congress doesn’t act. The numbers under Obama’s proposal would be 400 and 300, respectively.

Looking beyond all the legislative maneuvering or the advisability of this or that “compromise,” it should be clear that if progressives don’t find a way to regain the moral high ground on federal inheritance taxes, they will eventually go away, probably sooner rather than later. As the first great champion of the estate tax, Republican President Theodore Roosevelt, observed in 1907:

No advantage comes either to the country as a whole or to the individuals inheriting the money by permitting the transmission in their entirety of the enormous fortunes which would be affected by such a tax; and as an incident to its function of revenue raising, such a tax would help to preserve a measurable equality of opportunity for the people of the generations growing to manhood.

Absolutely nothing has changed in the last century that requires an abandonment of TR’s perspective on the issue of untaxed inherited wealth, the great enemy of equal opportunity. While I admire those Democrats who are fighting a difficult rearguard action against the destruction of the estate tax via small but steady measures, at some point it will be necessary to get out of the weeds and make the broad moral arguments very loudly, even if it discomfits some Democrats who have drunk the hemlock of “death tax” rhetoric.

Ed Kilgore is a contributing writer to the Washington Monthly. He is managing editor for The Democratic Strategist and a senior fellow at the Progressive Policy Institute. Find him on Twitter: @ed_kilgore.

Comments

  • Al on July 26, 2012 9:44 AM:

    When a family is grieving over the death of a loved one, it is not the time to tax them into poverty.

  • T2 on July 26, 2012 9:58 AM:

    gee Al, I'm not sure I'd say that an estate of over 3.5 MILLION Dollars is going to fall to poverty levels if it's taxed a bit more.

  • c u n d gulag on July 26, 2012 10:01 AM:

    Calling it the "Paris Hilton Tax" made a little bit of headway - but now she's yesterday's news.

    Call the tax break, "The Aristocrat's Tax Break," "The Royalty of Wall Street Tax Break."
    And change the tax's name from "The Inheritance Tax" to "The No Duke's and Dutchesses In America Tax."

    Right now, we're setting up aristocracies left an right - from the Romney family to the Walton clan.

    Trust fund babies do nothing to earn their inheritance. They were just lucky to be born into "The Lucky Sperm Meets Lucky Egg Club."

    What hard work did they do to earn that money?
    Gestate?

    The "No Duke's and Dutchesses In America Tax" needs to be at 75-80%

    We don't want to totally cut-off the hapless bobo children of the wealthy, who have no talent or job skills - they'll just add to the social safety net's costs.

  • Timfrk on July 26, 2012 10:19 AM:

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  • jpeckjr on July 26, 2012 10:24 AM:

    If I understand this right, the exemption will drop from 3.5 mil to 1 mil and the rate will go from 35% to 55% if Congress DOES NOTHING.

    Given that NOTHING is the only accomplishment of the current Congress, I expect the fed estate tax to become higher through both a lower exeemption and a higher rate.

  • dweb on July 26, 2012 10:29 AM:

    That "brilliant" inheritance tax PR effort was underwritten with about $100 million supplied by the Walton family of Walmart fame and a few others and it was a puny investment in return for the literally billions they wound up saving when the effort paid off. As a result, today, the wealthiest in America make more than about 44% of all other Americans. Before the bill passed, it was about 39%....and of course it still isn't enough.

    Meanwhile, you may want to see just what life is like for "lumpers" -- the workers who toil daily in California's Inland Empire, moving goods from the inside of ocean shipping containers to trucks for distribution to Walmart Stores. Take 125-degree temps in the trucks for starters, along with choking dust....

    The full story here via the Guardian: http://www.guardian.co.uk/business/2012/jul/25/walmart-supply-chain-warehouses?INTCMP=SRCH

  • TOK on July 26, 2012 10:33 AM:

    It will difficult to shift back public opinion on the question of the 'death tax.' Why not just lobby for treating money you receive via inheritance the same as any other income, subject to the same sort of (progressive) tax rates? If you really want to, you could build in some sort of threshold where the first X dollars are exempt.

    Then the framing of the argument becomes much easier. Why should the income people receive just because they happen to have rich parents not be taxed, whereas the income people earn through their own work is? Isn't that grossly unfair?

  • john sherman on July 26, 2012 10:38 AM:

    If it really were a "death tax" and people were taxed for dying, the poor would have to live forever.

  • jim filyaw on July 26, 2012 10:40 AM:

    memo to al: having been acquainted with a few of the 1%ers, i can tell you that i've seen far more grieving over the tax bite than the loss of the one who passed. i daresay death's unprying of their fingers from the booty was cause for rejoicing more often than not.

  • c u n d gulag on July 26, 2012 10:43 AM:

    Dear CRAPTCHA,
    Yet again, you have failed in your job as a guard dog.

    You're more like like some sort of poll tax on commenters.
    THAT, you're GREAT at!

    No site has anything nearly as feckin' annoying and time consuming as you.

    And to what effect?
    "Timfrk" just got past you with a make-money-from-home grift.

    I guess his computer had no trouble getting through your "security" - unlike me and the rest of the poor commenters here.

    WaMo - either get CRAPTCHA to do it's job, or get the feck rid of it.

    A lot of us are losing patience.
    And I'm sure a lot have already stopped commenting here because of that thing.

    But, hey - it's YOUR site!

  • Irwin on July 26, 2012 10:46 AM:

    Many of the right-wing jerks talk about the culture of dependency - if people are given things without working for them, they'll never become fully functional. I'd like one of these guys to be asked why they support doing away with the inheritance tax. Don't Paris Hilton and Kim Kardashian deserve the same character-building benefits that the kids of a Walmart cashier get.

  • Anonymous on July 26, 2012 10:55 AM:

    There is no Estate Tax. THere is a tax on Useless Wastrels. When someone inherits, they have NO moral right to that money. It's NOT their money. It's usually money obtained by fraud, tax cheating, and is untaxed. The Useless Wastrel Tax should start at 2 million with 25%, and go up fast. At 5 million, it should be 75%.

    Thomas Jefferson was most afraid of inherited money. He warned against it over and over.

  • Snarki, child of Loki on July 26, 2012 11:09 AM:

    If the GOP thinks that taxing estates is bad, how about reducing the tax rate BELOW ZERO? Minus 1% has gotta be better than zero%!

    That's right, worthless GOP scions of great (potential) wealth: bump off your old folks and collect the loot, with some extra cash from Uncle Sam. Sweet!

    Why, it's a pretty good thing that GOPsters instill such strong values in their families, or they might have reason to be afraid of their kids, hmm?

    Call it the "BOUNTY on Billionaires", and it would be worth every penny.

  • stratplayer on July 26, 2012 11:11 AM:

    How about if the state just stops spending public funds on facilitating post-mortem wealth and property transfers through the probate courts so people will have to make inter-vivos transfers of their estates while they're still alive? No probate estate, no "death tax."

  • Tony greco on July 26, 2012 11:13 AM:

    I second TOK's suggestion that the estate tax be treated as ordinary income. It's not the ideal way to go, but it is the simplest--and therefore the most effective--way to frame the issue.

  • Peter C on July 26, 2012 11:23 AM:

    There a level of wealth at which you simply cannot spend all of the income generated by that wealth (either after tax for those investments in productive assets or tax-free when those assets are invested in US Treasuries). There is only so much money that one can actually spend. When you reach this level, you automatically get richer and richer every year. If your income is all from tax-free sources; you get richer even though your contribution to society is minimal. This would happen even with progressive income taxation featuring much higher top marginal rates as long as the Government issues treasury securities to deal with the national debt. When they die, the wealth goes to their offspring (like the Koch brothers) who continue to automatically get wealthier and wealtheir and wealthier. They've passed the critical number even before they were born.

    Note: in 2000, the fiscal responsibility of the Clinton administration threatened this cushy arrangement by putting the country on a path to eliminating the national debt, without which there would be little need to issue treasury securities. Thus, the main economic thrust of the 2000 campaign was to reverse this path and 'give the money back!' rather than eliminate our national debt. "The Government is keeping too much of YOUR money!", the Republicans screamed.

    Well, the Bush tax cuts fixed that; they gave all that money to the super-rich and Bush ran huge deficits every year of his Presidency. The Republicans changed course through reconcilliation (since they had minimal Democratic support) and to hide the true cost of their scheme, they made all of their tax cuts stop after 10 years. They figured that re-instating the tax levels would be too unpopular and no future Congress would dare try it. So, they'd get permanent tax cuts without the political heat for the fiscal damage they were actually intentionally causing.

    Their 'think tanks' cooked up the 'Laffler Curve' to provide 'theoretical' cover. "Trust us!", they said, "Lowering tax rates will actually RAISE revenues because of the 'Laffler Curve'!". Of course, it was fraud and bullshit. Lowering rates lowers revenues, and now we've got huge defecits.

    The National Debt is not a bug; it's a feature. Having created the defecits, the Republicans have pivoted to using them to eliminate the bits of Government (social programs) which don't personally benefit them. "We can AFFORD Social Security of Medicare or Medicaid; our DEFECITS are too high!", they scream.

    Of course, they can afford the military; it exists to protect their overseas assets. Ever wonder why we needed a 'Department of Homeland Security'? Isn't 'protecting the homeland' what the department of DEFENSE is about??? Actually, no. The Department of Defense isn't really protecting us from invasion; it's protecting oil tankers in the Persian Gulf.

    This has all happened before. The accumulation of wealth in France was solved by the guillotine. We could solve the problem with harsher income taxes on the living; this would be justified just to have them pay their share of our unprecedentedly large military. Alternatively, we could let them keep all their wealth while they are alive and pass on amazing large sums to their offspring through inheritance taxes. Even this is called 'class warfare!', though, which (after the Bush tax cuts), they no longer have to actively wage. Of course, they wage it anyway, but call it 'Austerity' and 'Saving Medicare and Social Security' and 'Controlling Entitlements'.

  • majun on July 26, 2012 11:45 AM:

    An obvious compromise that comes to mind is to apply separate exclusions and rates to liquid assets (cash, stocks, bonds, jewelery, art, etc.) and capital assets (real estate, production machinery, business inventory, etc.). That way the tax could be structured so that family farms and businesses could be passed on from one generation to the next without any substantial burden from the estate tax, but simple raw wealth would not. That would actually protect the real job creators, those who put their wealth to real productive uses, while punishing the parasites, those who earn through passive investment, where the sole purpose is to increase personal wealth. In other words, make the estate tax a mirror image of the income tax.

  • Zinsky on July 26, 2012 12:00 PM:

    I see one of the right-wing Kool-Aid drinkers (Al), has joined us. I'd be willing to bet the farm (pun intended), that Al doesn't know and will never meet anyone who will have to pay estate tax. Not only that, estate tax doesn't have to be paid for nine months after someone dies, so this maudlin concern about the "time of grieving" is melodramatic FoxNews nonsense.

    Just remember, the first thing a cult does is to tell it's members that everyone else is lying to them.

  • c u n d gulag on July 26, 2012 12:17 PM:

    Zinsky,
    I hate to tell you this - but Al is a parody of a troll.

    He and Hedda Peraz are great at it!!!

    I fell for it, too, a long time ago - so don't feel bad.

  • Big River Bandido on July 26, 2012 1:30 PM:

    The tax issue that most definitely was not addressed in yesterday’s action in the Senate was the future of federal estate taxes, for the simple reason that Democrats probably didn’t have to votes to win on it.

    You lost me with the second clause of that sentence. The estate tax is a winning issue for Democrats — just like all the other issues they've claimed to champion over the last decade, and failed to do a damn thing about. This is Exhibit A for a Democratic Party that has no principles, no leaders, and no point.

    None of the last decade of disaster would have happened if we'd had an actual party of the left.

  • zandru on July 26, 2012 3:01 PM:

    Per Al, the Estate Tax "taxes people into poverty." Every Repub knows it and says it as often as possible

    Thus, it falls to Democrats who are running for office and those of us who are of a lib/prog bent to start asking the questions. Like, how is receiving $3,500,000 or more putting you "into poverty"? Corollary: just how much are YOU worth, anyway?

    A few words about the EXEMPTIONS for family farms and small businesses are also in order.