Policymakers hope to cut federal deficits by trillions of dollars over the next decade, requiring wrenching choices and likely imposing painful sacrifices on millions of Americans. So it's astonishing that they're also considering million-dollar tax cuts for a few thousand of the nation's wealthiest heirs and heiresses by extending an extravagant 2010 cut in the tax on inherited estates that's set to expire at year-end.
The cost: $119 billion over the next decade, compared to restoring the estate tax rules in effect in 2009, as President Obama has proposed and the Bowles-Simpson fiscal commission assumed. This lavish new tax break would confer a $1.1 million average tax cut per estate on the estates of the richest three out of 1,000 people who die.
If policymakers blithely toss away $119 billion, then other Americans will have to sacrifice more as part of the deficit-cutting effort. To put the figure in perspective, policymakers could raise roughly the same amount over the next decade by raising the age at which seniors qualify for Medicare from 65 to 67 (affecting more than five million people by 2021) or shutting both the FBI and Food and Drug Administration.
The 2009 estate tax rules were already quite generous. Between 2001 and 2009, the threshold under which an estate was fully exempt from taxation more than tripled. By 2009, all estates worth up to $3.5 million in the case of an individual who dies - effectively, up to $7 million for a couple when they both pass on - were entirely exempt.
Consequently, a wealthy couple with two children could pass on a trust fund worth $3.5 million for each child completely tax-free. That's more money than a middle-class family earning $70,000 a year makes in a lifetime.
The Urban Institute-Brookings Tax Policy Center reports that, under a reinstatement of the 2009 rules, only the estates of the top three out of 1,000 of Americans who die would face any estate tax. And, for them, the tax would apply only to what's above the first $7 million (per couple) of assets. Because those are the only estates that would face any tax under the 2009 rules, they are the only estates that benefit from the more generous rules that are due to expire at year-end.
The other 997 of every 1,000 Americans who die would pass on all of their assets tax free under the 2009 rules - so, they get no additional benefit under the more generous rules that are due to expire.
Nor would the estate tax be excessive for the small number of large estates that would face it under the 2009 rules. That top three out of 1,000 estates would owe a tax equal to 19 percent of the estate's value in 2013, on average - far below the top statutory estate tax rate of 45 percent because it reflects the large exemption and numerous deductions.
Despite proponents' claims that small businesses and farms are heavily burdened by the 2009 rules, the Tax Policy Center estimates that only 60 small farm and business estates nationwide would owe any tax next year if those rules were in effect. Moreover, due to special provisions that extend substantial relief from the tax to the tiny number of taxable farm and business estates, such estates face much lower effective tax rates than do other taxable estates. Under the 2009 rules, the tiny number of small business and farm estates that would owe any tax would face an average effective tax rate of less than 12 percent next year.
Extending the additional estate-tax break that's now in effect - under which the exempted amount rose from $3.5 million under the 2009 rules to $5.1 million (and from $7 million to $10.2 million per couple) while the tax rate fell from 45 to 35 percent - is especially indefensible in light of stunning increases in income inequality. It's also indefensible as policymakers consider cuts in programs from Medicare and Social Security to assistance for the poor to health care for returning veterans.
Between 1979 and 2007, average after-tax income quadrupled among the top 1 percent of households. It grew by 304 percent after inflation, while rising just 39 percent (about 1 percent per year) among the middle 60 percent of households.
Wealth is even more concentrated than income. The top 1 percent now own a third of the nation's wealth, while the bottom half of the population owns less than 2 percent.
Those who want to extend the rules that are scheduled to expire at year-end are essentially saying that - despite exploding deficits, widening inequality, and surging incomes at the top - the 2009 rules just aren't generous enough for America's wealthiest heirs.
The fact is, however, that this lavish new tax cut for the heirs and heiresses of the nation's hugest estates wouldn't just be ill-advised fiscal and tax policy. It would be a disgrace.
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