As early as next month, some Democrats seem ready to go along with most Republicans and implement a permanent repeal to the estate tax, a change that would reward the wealthy and drag down the economy by increasing the deficit. But it doesn't have to be this way.
The estate tax represents a profoundly American idea: Although parents should be able to pass on wealth to their children, great concentrations of personal wealth should not grow unchecked from generation to generation. As Franklin Delano Roosevelt put it, “Inherited economic power is as inconsistent with the ideals of this generation as inherited political power was inconsistent with the ideals of the generation which established our government.”
Today, only about the wealthiest 1 percent of those who die in a given year pay the estate tax. With estate planning, married couples can leave at least $3 million to their children completely tax-free.
In 2001, President Bush's first tax bill phased out the estate tax by 2010, but because the tax changes expire after that year, the tax returns in 2011. Now, the president, Senator Jon Kyl, and other members of Congress are pushing to make the phaseout permanent. That would eventually cost about $75 billion per year, and another $23 billion a year in interest expenses.
Many advocates for eliminating the estate tax use deceptive data. A prime example is the American Family Business Institute (AFBI), which, according to its Web site, is “devoted to the singular goal of the permanent repeal of the Federal Estate Tax.” The AFBI recently ran an ad in Montana stating, “When you die, the IRS can bury your family in crippling tax bills,” and claims, “It can cost them everything.” But the average estate-tax rate for the handful of people actually paying in 1999 and 2000 (when the tax was higher) was just 13 percent. By 2009, only 25 people would have to pay the estate tax each year in Montana. The ad mentioned none of that.
Many Washington political pundits say the estate tax is a losing issue with voters, especially in red states with lots of farmers.
But the truth is that Americans support reforming the estate tax, not repealing it. When given the choice between reform and repeal, a majority chooses reform by 59 percent to 29 percent, according to a July poll by Penn, Schoen & Berland Associates. And that margin holds even though many middle-income families believe, thanks to misleading ads, that they'll pay the estate tax when they die. When the costs of repeal are made clear -- budget cuts, higher taxes for everyone else, or bigger deficits -- and the benefits of reform are emphasized, support for repeal drops to 22 percent. Even among farm and business owners, support for repeal is less than a third.
Most Senate Democrats and some Republicans have balked at full repeal. And so, aiming for a compromise, a working group of Democratic senators and their staffs have been looking at reform options from a practical perspective.
Meanwhile, Senator Kyl has suggested a “compromise” setting the estate-tax rate equal to the capital-gains rate, which (thanks to President Bush's 2003 tax cut) is currently just 15 percent. Some proposals would set the tax-free exemption to $8 million, or at best $3.5 million. Either way, the cost of this “reform” is enormous -- a $3.5 million, 15-percent reform would spend about 80 percent as much as full repeal. That's nearly $60 billion a year in tax cuts for multimillionaires.
Consider what we could do with even a small portion of the $60 billion that a bad “reform” would cost:
- Prevent the proposed $10 billion in cuts to Medicaid included in the 2005 budget;
- Replace the Army's 10,000 Humvees that rely on improvised shielding with armored vehicles;
- Offer help with job search and retraining, similar to the Trade Adjustment Assistance program, to all unemployed workers;
- Offer progressive saving incentives of $500 per year, on top of Social Security, to 50 million families.
In fact, we could do all of the above for less than a bad reform. If Democrats and Republican moderates can stand against full repeal, they also need to stand against a bad compromise.
The president and some members of Congress are pressing for estate-tax repeal at the moment the president's tax reform commission announces its proposals. Over the last four years, Congress has been doing the real work of this administration's tax “reform” agenda: eliminating taxes on wealth and shifting the tax burden onto ordinary wages. The repeal of the estate tax is the perfect embodiment of that idea -- before the commission says a word.
All Americans, including the wealthiest, deserve some certainty as they engage in estate planning. Farmers and small businesses should continue to be protected, and there is room to improve and simplify some of the special provisions that are already aimed at these groups. And the vast majority of Americans should continue to pay no estate tax at all. But these goals can and should be accomplished without losing $60 billion in annual revenue our country needs.
John S. Irons is the director of tax and budget policy at the Center for American Progress. Robert Gordon is the center's senior vice president for economic policy.