Many members of the current Congress came to Washington with promises to repeal the federal income tax or at least replace it with a flat tax. It hasn’t happened. They and their Congressional leaders discovered that the federal income tax is too deeply rooted to be ripped out or radically changed.
As a result, members of Congress set their eyes on what they thought was an easier target, the death tax. Repeal of the estate tax, they hoped, would be the legacy of this Congress.
But the estate tax would not die. Although both houses of Congress voted to repeal the estate tax, President Clinton vetoed the repeal, and on Sept. 7 the House of Representatives failed to override his veto by a vote of 274 to 157, 14 short of the two-thirds majority needed. Under the bill, the estate tax would have been phased out in 10 years.
Although it is dead for the rest of this Congress, Republicans promised to make it an issue in the November election and to try again in the next year. The estate tax repeal movement rests on three rather wobbly legs, which should be easily knocked from under it. That they have not already been knocked away tells us the supporters of estate tax repeal have done a masterful job of obfuscation. The legs are: myths, lack of awareness and misunderstanding.
The major myths are two. First, the public believes that small businesses and farmers are dangerously affected by the estate tax. Even Vice President Gore mentioned them when accepting the Democratic nomination for president in an otherwise populist speech. But there is no factual support for that assertion. Using standard assumptions and planning techniques, family business assets of up to $5 million and farm assets of up to $8 million may be passed tax-free by a couple to their descendants. These businesses and farms certainly are not small by any measure. The owners are among the wealthiest 1 percent of people in the United States.
Second, proponents of repeal argue that the wealth subject to the estate tax has already been subjected to multiple taxes. That is not true. About 75 percent of the wealth subject to the estate tax is appreciation on property, and no tax has been paid on that amount. In other words, about one-quarter of the property subject to the estate tax comes from after-tax savings that were set aside by either the decedent or the decedent’s ancestors. The other three-quarters has never been threatened by the tax collector.
Lack of Awareness
Neither the Treasury Department nor the Congressional tax committees have presented an analysis showing the distribution of the benefits of the estate tax’s repeal, but we know that the beneficiaries are concentrated in the top 1 percent of the population. That group pays about 85 percent of the estate tax. If the estate tax is completely repealed by the year 2011, the government would lose about $50 billion a year in tax revenues. That means people in the top 1 percent of the population would receive a $42.5 billion tax cut that year and every year thereafter. The size of the cut would grow a little each year.
If we assume a population of about 290 million Americans, then there are 2.9 million people in the top 1 percent of the population. Obviously only those who die (and their heirs) would benefit each year, but if we averaged out the tax cut over time, the annual tax cut would amount to about $14,500 a year for each person for the rest of their lives. For a family of four, that cut would be the equivalent of a $58,000 yearly annuity that would grow a little over time. If the same tax cut were distributed over the entire population, the cut would be about $145 annually for each person, or about $580 for a family of four. Giving this money to the very rich means that it cannot be given to ordinary families. Thus, in order to give the very richest families a tax cut of $58,000 a year, we must keep ordinary families’ taxes $580 higher than they would be if we gave them the same money.
In fact, the data show that the benefit to the very, very rich is even more extreme. About half of the estate tax is paid by estates of decedents falling into just slightly more than the top 0.1 percent of the population. Under estate tax repeal, each parent in that group would receive on average a one-time tax cut of almost $8 million (that’s $16 million for a couple). This is why a $10,000 campaign contribution can produce a spectacular return on the investment.
The repeal of the estate tax does not provide a free lunch. If it is not repealed, other tax cuts could be enacted. The marriage penalty is not easy to fix, and doing something rational will require a substantial tax cut.
For decades people have been complaining about the complexity of the tax code. But in most cases, simplifying the tax code would reduce tax revenues. For example, we could straighten out the individual alternative minimum tax. While originally aimed at those with high incomes who pay little taxes, it touched almost a million persons last year and it is likely to affect about 12 million by 2010. There are numerous phaseouts that could be addressed: the loss of personal exemptions as income rises, the reduction of itemized deductions for persons over a specified threshold, the application of the 2-percent reduction of miscellaneous deductions when it is clearly unjustified, the complexity of the phaseouts of various tax benefits and credits. If you don’t recognize any of these tax provisions, you do not have a high income or you pay someone to do your tax returns. If we want to give a tax cut to higher-income taxpayers, eliminating these complexities in the tax code is a better way to do it than by repealing the estate tax, which will help only the super-rich.
There are also spending needs that must be addressed. Spending will grow even if we have a Congress composed entirely of rock-ribbed Republicans committed to ending the federal government as we know it. They will have to deal with deficits in Medicare, and they are likely to be enthusiastic for some kind of prescription drug program as the cost of drugs grows to about 30 percent of all health care expendituresthat translates into about 4 percent to 5 percent of the Gross Domestic Product. In addition, payment on the debt to reduce the interest portion of annual budget expenditures may be an attractive alternative to some members of Congress.
We are repeatedly told that the public supports the repeal of the estate tax. I am sure that when people are asked, Should the death tax be eliminated? the answer is a resounding yes. But that’s the wrong question. It is a true/false examination. The question should be, Do you think that the estate tax should be the first tax to be reduced?
Put another way, the test should be a multiple-choice examination: Which of the following tax cuts should be made first? When told of the facts and given some of the alternatives mentioned above, can there be any doubt that most of those polled would put the estate tax dead last?
The public has not been told about the choices to be made. The public does not understand that eliminating the estate tax will be a blow at high taxes that hits the public squarely on the nose. The nose will be bloodied, and the public’s blood will end up on the hands of the wealthiest people in the wealthiest society that ever existed.
That is the legacy this Congress and its leaders wanted to leave us. Will this legacy contribute to the preservation of our society and the common good? Not likely. Public policies consciously designed to increase the concentration of wealth and increase the gap between the richest and the poorest usually have not contributed to the stability of a society.
Until voters see through the myths and obfuscation supporting the movement to repeal the estate tax, it will continue to resurface in future Congresses.