Reward for the Hereditary Elite . . .

Another good analysis of the estate tax repeal issue that the Senate will vote on this week (as early as tomorrow).


Reward for the Hereditary Elite . . .
http://www.washingtonpost.com/wp-dyn/content/article/2006/06/04/AR2006060400782.html
By Sebastian Mallaby
Monday, June 5, 2006; Page A15

It doesn't matter if you are liberal or conservative, Democrat or Republican. There is no possible excuse for doing what Congress is poised to do this week: Abolish the estate tax.

The federal government faces a future of expanding deficits. Thanks to the baby bust and medical inflation, spending is projected to rise by nearly 3 percent of gross domestic product by 2030, a growth equivalent to the doubling of today's Medicare program. What is the dumbest possible response to this? Take a source of revenue and abolish it outright.

The nation faces rising inequality. Since 1980 the gap between the earnings of the top fifth and the bottom fifth has jumped by almost 50 percent. The United States is by some measures the most unequal society in the rich world and the most unequal that it's been since the 1920s. What is the dumbest possible response to this? Identify the most progressive federal tax and repeal it.

The nation faces the prospect that inequality will damage meritocracy. When the distance between top and bottom widens, it becomes harder to traverse the gap; people of low birth are stuck at the bottom, and human talent is wasted. What is the dumbest possible response to this? Take the tax that limits what the super-rich pass on to their children and get rid of it. Send a message to hereditary elites: Go ahead, entrench yourselves!

For most of the past century, the case for the estate tax was regarded as self-evident. People understood that government has to be paid for, and that it makes sense to raise part of the money from a tax on "fortunes swollen beyond all healthy limits," as Theodore Roosevelt put it. The United States is supposed to be a country that values individuals for their inherent worth, not for their inherited worth. The estate tax, like a cigarette tax or a carbon tax, is a tool for reducing a socially damaging phenomenon -- the emergence of a hereditary upper class -- as well as a way of raising money.

But now the House has voted to repeal the estate tax, and the Senate may do the same this week. Republicans are picking up support from renegade Democrats, such as Blanche Lincoln of Arkansas, Bill Nelson of Florida, Ben Nelson of Nebraska and Max Baucus of Montana. Several more may go over to the dark side if a "compromise" bill, which would achieve nearly everything that abolitionists dream of, is introduced in the Senate. President Bush, who has already muscled a temporary repeal of the estate tax into law, would be delighted to sign a bill making abolition permanent.

If the abolitionists succeed, some other tax will eventually be raised to make up for the lost revenue. So which tax does Congress favor? The income tax, which discourages work? A consumption tax, which hits the poor hardest? The payroll tax, which is both anti-work and anti-poor? Really, which other tax out there is better?

The abolitionists don't respond to this question because there is no convincing answer. Paul Volcker, the former Federal Reserve chairman, has written that "we would be hard-pressed to find evidence that, compared with the alternatives, a reasonable estate tax significantly discourages work or innovation or savings." In other words, killing the estate tax and raising some other tax instead would damage the economy. And that's before you take into account the positive distortions introduced by the estate tax, such as more social mobility and higher charitable giving. Charitable bequests will fall by at least a fifth if the estate tax is repealed permanently.

People often remark on the perversity of popular support for estate-tax repeal. A majority wants to abolish the tax, even though only the richest 2 percent of households have ever had to pay it. Yet this shoot-your-own-foot weirdness is easily explained: Most people just don't know that, under the law's current provisions, a couple can bequeath $4 million without paying a penny to the government.

But I'm fascinated by the spectacle of elite support for this policy. How can the president and the abolitionists in Congress, who understand the tax and its details, possibly want to kill it? They all say they accept the principle that the tax system should be fair -- Bush officials are constantly claiming that their tax cuts are progressive. They all accept the principle that free trade and competition get the best out of American firms, so what about subjecting rich heirs to competition from ordinary Americans?

Repealing the estate tax is like erecting protectionist barriers around the hereditary elite. It is anti-meritocratic and unfair -- and antithetical to this nation's best traditions.

smallaby@washpost.com

A One Trillion dollar misunderstanding – The need for Estate Tax repeal.

I was trying to understand the other day how discussion of the estate tax has lead to a vote in the next few days on repealing the estate tax. Do folks not know that portion of an estate that is exempt from taxation has doubled since 2000 to $2 million ($4 million per couple) in 2006, with the current law stating that it will rise to $3.5 million ($7 million per couple) in 2009? Do folks not know that the above has caused the number of estates being taxed each year to drop 75% compared to what it would have been under pre-20001 law, with the 2009 increase in the exemption level causing that low number to drop by about another 50%? In 2006 only five out of every 1,000 people who die this year (and about half that in 2009) will pay any estate tax. It is estimated that only 123 farms, and 135 small businesses, would have paid any estate tax in 2006, and that for 2009 this drops to 100 family businesses and only 65 farm estates (few call these "family farms"), with only 13 farms facing a liquidity constraint because of failure to put aside money in bank accounts, stocks, bonds or insurance, perhaps forcing them to use the allowed spreading of the estate tax payments over a 14-year period in order to avoid a sale of the farm estate.

The goal of any estate tax reform should be to relieve smaller estates from the tax while capturing the unpaid capital gains tax at the same tax rate applied to wage income, thereby preserving a large share of estate tax revenue and focusing the tax on those wealthy estates most able to pay. The GOP has no plan for replacing the One Trillion of revenue lost over 10 years, other than passing it onto the backs of future children as a “birth tax increase”. What is the reasoning for the repeal the "death tax" -and it is not a death tax since it only tries to capture the unpaid capital gains tax at the income tax rates applied to wages –that is a goal of the GOP despite the corresponding increase in the birth tax - the deficit caused national debt that future births must handle? Are the GOP being truthful when they say repeal is a needed benefit for Farms and Small Businesses?

Perhaps the GOP has not read the Congressional Budget Office study. “Effects of the Federal Estate Tax on Farms and Small Businesses,” July 2005, which exploded the myth that family farms and businesses must be sold to pay the tax? The CBO study analyzed how many farm and family-owned business estates would have been subject to tax in 2000 had the 2006 exemption level of $2 million ($4 million per couple) been in place. It found that the number of taxable farm estates would have fallen by more than 90 percent and the number of taxable family-owned businesses by almost three-quarters. Only 123 farms, and 135 small businesses, would have paid any estate tax

To fix this non-problem, Senator Jon Kyl wants to raise the exemption level to $5 million ($10 million per couple) and slash the rate by two-thirds, to 15 percent, at a cost in terms of an increase in the average kids birth tax that is only 84% of the cost of full repeal, based on estimates by the Joint Committee on Taxation, with as always under a GOP tax cut idea, about 76 percent of the tax cut benefit going to the unfortunate folks inheriting estates valued at more than $10 million.

I know the GOP would never lie to us so as to help the rich, so it is sad to see these poor folks showing themselves to be uninformed and incompetent legislators.

I read your post in a Gen Discussion thread where havocmom highlighted your work.

:-)