Fiscal Discipline and the Estate Tax
There have been a number of stories recently that deal with our expanding budget deficit and ever-increasing national debt. Much GOP criticism of the health care reform bill has been focused on the issue of affordability. Republicans criticize Obama and the Democratic controlled Congress for embarking on a spending spree the country cannot afford. That may be true but it’s more than a bit disingenuous coming from the party responsible for the current fiscal mess thanks to an enormous unfunded $1.4 trillion tax cut to benefit the wealthy (estimated to cost some $4 trillion in the next ten years), an unfunded Medicare prescription drug program estimated to cost $1 trillion over the next ten years, and an unfunded war that has already cost roughly $1 trillion. That’s a whole lot of unfunded trillions and makes arguments about the cost of health care reform, estimated by the non-partisan CBO to be deficit neutral if not deficit cutting, sound rather hollow. But here’s another nice piece of the budget puzzle I’d forgotten about – the estate tax changes introduced as part of the Bush tax cuts. This is a crazy situation that will just slip into the deficit without the fanfare it deserves.
In crafting his tax cuts Bush used a ridiculous fiscal trick to make the program look better financially. The estate tax threshold would rise every few years through 2009 from kicking in at $1 million to a new $3.5 million level ($7 million for married couples) while the tax rate would fall from 55% down to 45%. And in 2010 the estate tax would become zero. That’s right – effective January 1, 2010 the federal estate tax rate is zero. If you’re old, in poor health, and stinkingly rich 2010 will be a very good year to die. But then, as if by magic, on January 1, 2011 the zero tax ends and the old, pre-Bush tax cut rates come back into effect – estates of $1 million or more will be taxed at the old 55% rate. And here’s the thing – all budget projections going forward assume that this is in fact what’s going to happen. OK, by a show of hands, who thinks there is any chance that the estate tax rate is going to revert to the old levels? Right — not going to happen. With only 3 weeks before estate taxes hit zero the House has passed a bill permanently establishing the 2009 rates and limits. The “cost” of that change (versus a 0 tax in 2010 and then the old rates thereafter, as currently projected) is estimated to be $250 billion over the next ten years. Unfunded. More deficit spending. The Senate is engrossed in health care and will probably not deal with this issue until the new year. I don’t know if they can set new rates retroactive to January 1 but if I was an elderly, wealthy person I’d steer clear of my heirs and watch my back come January 1. Happy New Year!
And where do the fiscal conservatives stand on the proposed change to make the 2009 levels permanent? The House vote was 225-200 with all Republicans opposed. Why? What they want is to make the 2010 change permanent – that is, a permanent repeal of estate taxes. Or, at least, as Jon Kyl has proposed, a further cut in the tax rate to 35% and an increase in the taxable level to $5 million ($10 million for couples). A permanent repeal would cost up to $1 trillion over ten years. The Kyl proposal would cost a mere $750 billion. Yes, unfunded deficit spending to benefit the 3 in 1000 estates that come up each year among the richest people in the country.
I don’t begrudge the wealthy their money and much of what they have has already been taxed; but now is not the time to give the wealthy the estate tax break they so richly deserve. And now is not the time for fiscal conservatives intent on containing the costs of health care reform, designed to benefit the poorest of our citizens, to rally on behalf of the mega-wealthy. The Senate should pass the House bill and then come up with a long term plan in 2010. If you want to eliminate the estate tax then figure out how to pay for it. If you want to create loopholes for small business owners and farmers then go ahead but figure out how to pay for it. The irony of eliminating estate taxes for the ultra-rich while debating health reform that can provide basic medical care for the poor is just staggering.
There is nothing more disgusting than the estate tax. That is taxing something thats already been taxed—double dipping by greedy politicials so they will have more for their pork laden bills. Small farmers and small business people will be hurt the most, but in this new age of Obama’s “Kinky Kenyan Keynesian” thats to be expected—yep, the KKK is back Obama style.
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“There is nothing more disgusting than the estate tax.” Ron, you’ve made some pretty outrageous statements before but surely this is the most disgusting comment I’ve ever had the displeasure of reading on Political Realties. Tens of millions of Americans don’t have enough food to eat. Millions of elderly have to choose between food and medicine. The list of things more disgusting than the estate tax is endless. You need to drop an extra twenty in the collection box this weekend and reconsider what this country is about. Yes, the estate tax is unfair; but it’s wayyyyy down on the list of national priorities. And Barack Obama had absolutely nothing to do with it yet you seem to lay even this at his feet in some convoluted fashion. Amazing!
Great post, and interesting assessment.
One of the things that everybody discounts about the changes in estate taxes is the negative impact on charitable giving that elimination has. Fair or not, many wealthy people provide handsomely for charities in their lifetimes and in their final estates to take advantage of tax breaks and, sometimes,to lower their estate liability. These charities, in turn, help the poor and disadvantaged in a way that takes an awesome burden from both society and government. Some of the US’s finest medical institutions (Mayo, Clevland Clinics) benefit hansomely from this sort of estate planning and use the proceeds to offer care to the indigent and uninsured…
The ultra-rich will probably continue to donate to charities, but those “on the cusp” will no longer need to and thus probably won’t. To accurately judge the impact of no estate taxes on the wealthy, ask any estate planning attorney or anyone who runs a philanthropic enterprise that relies on the donations.
I have to be honest, I do not like the idea of an estate tax. As Mike has pointed out, it is inherently unfair in it’s nature. I can relate to that because my parents are getting elderly and will soon be passing from this world. It would be a shame to see what they have accumulated go to pay an estate tax, when it is intended to go to their children.
Having said that, the current state of the estate tax is not the fault of President Obama. It has been in motion for a long time before he arrived on the scene. I will address this article more later, when I have more time. For the time being, suffice it to say that I have to agree with what Mike said in his last comment.
The Bush tax cuts have been much aligned as tax cuts for the rich, but I would contend that they actually cut taxes for those who were paying most of the taxes in this country. After all, how can you cut taxes for those who pay few, if any taxes? Yes, the wealthy received the greatest benefit but again, they are paying more to start with. I am not sure you can realistically fault Bush for that.
I agree that George W. Bush was not as fiscally responsible as he should have been. However, I do not agree that the Republican Party is totally responsible for the “current fiscal mess” we find ourselves in. I think the mess is the product of neither party really wanting to make the hard decisions that would bring about fiscal responsibility in Washington, D.C.
The Bush tax cuts, as Mike clearly stated, were unfunded. In fact, they were made using borrowed funds which now must somehow be paid back (with interest!) by all of the taxpayers. Bush and the GOP cut revenue, borrowed money, gave it to the rich and then stuck the middle class with the bill. What was smart about subsidizing the rich with money from the middle class? No wonder this country is broke.
I have to agree with Ron. It is a double-dipping effort of the part of the government. People pay taxes on their property, and then, get hit again when they die. Many times, small businesses and family farms have to be sold to pay the tax. So, something that families counted on for their prosperity has to be sold to pay the tax. I honestly view it as a “death tax,” and I really wish it would have been abolished.
Also, unless the death is unexpected, many people transfer their property so that the government won’t take it.
And, if memory serves, the estate tax contributed to the demise of the Packard company.
Matt, I agree with everything you’ve said. The estate tax is unfair and if we were starting from scratch I’d argue strongly in opposition to introducing it. But we’re not and if the tax is going to be reduced or eliminated it needs to be offset with other spending cuts or revenues. We simply can’t afford anything more than keeping the 2009 rates in place.
Larry, I’m sure we could go around in circles on Bush’s role in getting us here but I believe history will lay our fiscal situation at his feet. He inherited a budget surplus and in 3 unfunded steps (tax cuts, Iraq war, prescription drug plan) turned it into an enormous and growing deficit — and that’s including his use of financial manipulation (tax cut expiration in 2010, estate tax expiration, and keeping war costs off the books) to make it look better than it is. I don’t really see how that can be argued with since Congress was also Republican when those measures passed. Did many Dems support those measures? For sure, but history measures the man in the Oval Office by what happened on his watch and it’s not going to be pretty for W.
Mike,
That statement is why some of us oppose some of the things the government is wanting to do with this health care reform legislation. Once something like this is implemented, it is nearly impossible to remove it. So now, we have an unfair tax on money that has largely been taxed already and we can not afford to get rid of it because the government needs the money. There is something very wrong with that scenario.
First I have to agree with LD, once a government program starts, it’s next to impossible to get rid of it. Here’s a success, however…
http://www.usatoday.com/money/industries/telecom/2006-05-25-phone-tax_x.htm
This discusses a tax on phone service that was put in to pay for the Spanish American War (1898). It was finally abolished in 2006 after 108 years!
As for tax cuts, Mike, I think you are making the classic error of describing tax cuts as spending. They are not. Simply put, governemnt can’t spend something they never had in the first place. Historically, tax cuts under JFK and Reagan increased revenue, as they increase the money used for economic activity, which is taxed, albeit at an lower rate. (I would add Clinton to the list, but it was the Congress that did the Contract with America-he signed it, but he didn’t have much of a choice.) Conversely, tax increases takes money out of the economy, and results in decreased revenue. Hoover, FDR, Bush I, and Clinton all experienced that. The other part of the equation is one that has evaded everyone, in that the government should NOT spend more than it is taking in. If somebody would combine the two, reduced spending and tax cuts, we would begin to pay off this ponderous debt.
Matt, you lost me. You said “Simply put, governemnt can’t spend something they never had in the first place” but of course we’re $12 trillion in debt so we spend lots of money we don’t have. There is, at some level, a “proper” level of taxes. Surely you agree we can’t drop taxes to zero or there would be no revenue to run defense, build and maintain infrastructure, etc. What’s that level? Even Reagan had to raise taxes from his initial drop after realizing he’d overshot. I suggest the Clinton era cuts were pretty close — but it’s hard to tell because they merged with the technology revolution and the economy took off. Cutting taxes right now is a leap of faith I can’t support.
The more I look at the estate tax, the more unpalatable it becomes to me. I am all for fiscal responsibility, but I fail to see the connection between the estate tax debate, fiscal responsibility, and the current debate on health care reform. Yes, there are many people without health care insurance, but if the wealthy in this country want to help, it should be up to them to do so. Instead, the government seems to want to take it upon themselves to do the deed.
They are already talking about an extra tax on the wealthy to help finance their lofty goals concerning health care reform. Combine that with the estate tax and it is just one more way the federal government is using to pull more and more tax dollars into their coffers. Every time they think they need more money, they find another tax to levy. The wealthy are taxed if they live and they are taxed if they die. As I mentioned in one of my earlier comments, it is an inherently unfair system.
As for Matt’s comment about transferring their property before their death, that is exactly the steps my father has taken. That way, the property he has managed to hang onto for many years stays in the family, instead of being sold off to satisfy the government’s insatiable appetite for more money.
Transferring property has become common for those who want to subvert the Medicare rules and stick the government with the tab of whatever medical expenses one can run up. I find it ironic that many of these same people are shouting to the hills to “get the government out of their healthcare” without ever considering the free ride they arrange for themselves in the end.
Laurie,
I can tell you this about the steps my Dad has taken. It has nothing to do with subverting the Medicare rules and sticking the government with the tab of his medical bills. It does, however, have everything to do with making sure someone besides the government gets what he has accumulated in his 83 years of life. He has worked too hard and too long to let the government take it after he is gone and there is nothing you or anyone else can say that will convince me it should be any other way. I will promise you this. He has never looked to anyone for a free ride and he isn’t about to start now.
Of course- realized as soon as I wrote this that it seemed like an indictment of your father unintentiaonally.
Somebody earlier had asked Mike what this had to do with health care reform, and I was (seperate from regualr estate planning) pointing our that there are many folks who get to a certain age, learn about the fact that they will have to exhaust their resources to care for themselves according to the Medicare rules, and simply transfer property so they don’t have to pay for anything and can rack up whatever bills they wish on Medicare. And many who scream that the government shouldn’t pay for health care will do this exact thing, indicative of an American attitude I find telling: Some won’t waste their own money on extraordinary end of life care, but have no problem taxing a government program way beyond what they ever paid in. A