off the charts
POLICY INSIGHT
BEYOND THE NUMBERS

You are here

Estate Tax Cut a Bitter Pill to Swallow

December 8, 2010 at 4:16 PM

The provisions of the new deal on tax cuts and unemployment insurance that would give a huge windfall to the heirs of the nation’s wealthiest estates cannot be justified on the grounds of either economic growth or fiscal responsibility.

Let’s be clear:  as we explained yesterday, we believe Congress should approve the new deal  —  its rejection will likely lead to a more problematic package that does significantly less both for working and middle-class families and for the economy.  But, in 2012, the President should be ready to veto any further extension of the high-end tax cuts or weakening of the estate tax beyond the 2009 rules.  Otherwise, policymakers could extend these provisions again and ultimately make them permanent, making our serious long-term fiscal problems considerably worse.

The new tax break for the nation’s largest estates comes in the context of growing discussion over how, when the economy is strong enough, the nation’s leaders should address deficits and debt that will grow to unsustainable levels in coming decades.  Lawmakers, budget experts, and others are discussing cuts in Social Security, Medicare, and Medicaid; large cuts in both domestic and defense discretionary spending; and measures to raise more revenue.

President Obama’s National Commission on Fiscal Responsibility and Reform, for instance, voted 11-7 last week for a plan from its co-chairs that would cut Social Security benefits and raise Medicare co-payments on elderly widows living on as little as $20,000 a year.  It would cut non-security discretionary programs — the part of the budget that includes everything from education to environmental protection to medical research — in 2013 by 14 percent below the 2010 level, adjusted for inflation, and by 22 percent by 2020.

At a time when policymakers should further stimulate the economy in the short term while not making the deficit problem worse in the long term, it makes no sense to provide far more generous tax relief to the wealthiest heirs in the country, which will do virtually nothing to promote economic growth.  Such a move is even more indefensible if policymakers are talking about demanding sacrifices in the years ahead from vulnerable people, possibly including even elderly widows with very modest incomes.

President Bush’s 2001 tax cuts, enacted at a time of large budget surpluses, slashed the estate tax.  By 2009, a wealthy couple with two children could pass on a trust fund worth $3.5 million for each child entirely tax free — more money than a middle-class family making $70,000 a year would make in a lifetime. Only the wealthiest 1 out of every 400 estates — the top one quarter of 1 percent of estates — owed any tax because the first $7 million of a couple’s estate was totally exempt.  The small number of estates big enough to be taxable owed less than 20 percent of the estates’ value in tax, on average.

That, however, apparently wasn’t good enough for Senator Jon Kyl.  At his insistence, the new budget deal includes a provision, based on an earlier proposal by him and Senator Blanche Lincoln, that would raise the estate-tax exemption level to $10 million per couple ($5 million per individual) and lower the top tax rate on the taxable portion of an estate from 45 percent to 35 percent.  The only people who would benefit are the wealthiest one-quarter of 1 percent of estates in America, since they are the only people who would owe any estate tax if the 2009 rules were continued, as the President proposed in his budget.

  • The heirs of an estate that would have a taxable value of $10 million under the 2009 rules would save $1.35 million,
  • The heirs of an estate that would have a taxable value of $50 million under the 2009 rules would save $5.35 million; and
  • The heirs of an estate that would have a taxable value of $1 billion under the 2009 rules would save $100 million.

The cost to the nation also would be considerable:  $125 billion in added deficits over the next decade (compared to the President’s proposal to extend the estate tax at the 2009 level) if policymakers decided to extend this provision beyond the next two years.

Estate-tax opponents have advanced various dubious arguments, such as that many small, family-owned farms and businesses must be liquidated to pay estate taxes.  In reality, however, only 110 small business and farm estates in the entire nation would owe any estate tax at all in 2011 under the 2009 rules, according to the Urban Institute-Brookings Institution Tax Policy Center, and virtually none would have to be sold to pay the tax.

Opponents have also argued that the estate tax constitutes double taxation because it applies to assets that already have been taxed once as income.  But research shows that more than half of the assets of the largest estates consist of unrealized capital gains that have never been taxed.  Moreover, heirs do not owe capital gains taxes on the unrealized capital gains they inherit; nor do they pay ordinary income taxes on inherited wealth.

In short, the estate tax provisions of the new deal are a bitter pill to swallow.  It’s appalling that they should be part of the price for providing needed help to working families and the economy.


chuck_marr-500x500.jpg

Senior Director of Federal Tax Policy

SHARE