President Obama's tax cut deal with congressional Republicans, if enacted by Congress, will achieve what President George W. Bush could not get done: create a path to effectively kill the estate tax.
Some elements of the "compromise" reached Dec. 6 that would extend the expiring Bush tax cuts are well worth the increase in the federal budget deficit, as they help struggling families cope with the worst economy since the Great Depression while simultaneously providing a boost to the economy. At the top of this list are the 13-month extension for unemployment insurance benefits and a two percent cut in the payroll tax for employees for all of 2011. Indeed, the nonpartisan Congressional Budget Office (CBO) estimates these two policies could provide up to $1.90 and $0.90, respectively, in additional economic activity for every budgetary dollar put into them. Similarly, extensions of a more generous child tax credit and the Earned Income Tax Credit-- also part of the tax cut deal -- are much-needed pocketbook buffers that help the economy.
But this aid to working families comes with a price. Specifically, Obama would write a $163 billion check to the nation's richest families and reverse himself on his campaign promise to let the tax cuts for the wealthy expire. There's no shortage of commentary on the extension of the lower tax rates for those earning more than $250,000, but what deserves special attention is how Obama inexplicably gave away the store to Paris Hilton and other heirs to vast fortunes through the evisceration of the estate tax.
Temporarily repealed in 2010, the estate tax is ready to spring back to life in 2011 with its former vigor, returning to the parameters of 2000 with a 55 percent rate on inheritances above a $1 million exemption ($2 million for couples). In 2009, the year before the estate tax was temporarily put on hold, there was a 45 percent tax on estates greater than $3.5 million ($7 million for couples). At the 2009 levels, less than one quarter of one percent (0.25 percent) of estates with people passing away would incur any estate tax liability. In fact, as a compromise on the estate tax, Obama has been calling for extending the 2009 levels in his annual budget requests. Progressives, however, had been calling for smaller exemption levels ($1 million to $2 million ($2 million to $4 million for couples)) and higher rates (45 percent to 55 percent, and even higher for the super-wealthy). Conservatives and some like the U.S. Chamber of Commerce have argued that the estate tax, the nation's most progressive tax, should be eliminated. However, it has been clear that Obama would not agree to permanently repeal the estate tax.
So it would seem that, as Obama agreed to temporarily extend the Bush tax cuts, he would also agree to temporarily extend the estate tax at 2009 levels. But that isn't the deal he struck. Instead, he went with a proposal being pushed by conservatives to lower the tax rate to 35 percent and to increase the amount exempt from any tax to $10 million for couples.
This is exactly the strategy that conservatives and their wealthy benefactors have united behind over the past couple of years. The scheme was hatched by Sens. Blanche Lincoln (D-Ark.) and Jon Kyl (R-Ariz.) and is known as Lincoln-Kyl. (Lincoln hails from the home state of the Waltons, heirs of the Wal-Mart fortune, and Kyl is the senator who is holding up Obama's effort to get the START treaty ratified in the Senate.) Under Lincoln-Kyl, only 0.15 percent of estates would pay any tax at all. That's about half of the number of estates that would have owed tax at 2009 exemption levels. Additionally, compared to keeping the 2009 levels, it adds another $90 billion to the deficit. Basically, the Lincoln-Kyl proposal, now endorsed by Obama, eviscerates the estate tax.
The estate tax is not just an important revenue stream (one that could lower the deficit by $100 billion through 2015 and by one quarter of a trillion dollars through 2020 if formulated correctly), it also ensures that the resources of those who benefit the most from our economic system -- the tippy top of the wealth ladder -- strengthen the very system that has allowed them to prosper. Even more importantly, the presence of an estate tax provides an incentive for the wealthy to contribute to charitable organizations. And in this harsh economic environment, institutions that feed the hungry, shelter the homeless, and train jobless workers are acutely feeling the crush of an increased demand for their services as their funding sources dry up.
Claims that the estate tax would wreak havoc on family businesses and farms are a myth perpetuated by opponents of the tax. According to the Congressional Research Service, only 0.2 percent of estates with at least half of their assets in a business would owe any estate tax, and those would pay an average effective rate of 9.3 percent. The Congressional Budget Office estimated that if the estate tax were set at the 2009 level, only 13 farm estates would have insufficient liquidity to pay the estate tax. This isn't about family businesses and farms: if it were, it would be easy to provide a fix to address their concerns. This is really about greed.
The enactment of the Obama compromise would represent a huge victory for opponents of the estate tax. After the champagne bottles are emptied, you can be sure that they'll get back to work further weakening the estate tax, pushing the bounds of compromise further to the side of the rich in 2012 when the tax cuts and the estate tax deal will come back up for debate. They have already said they want the tax rate lowered to 15 percent and the exemption level raised to $12 million or $14 million for a couple.
Unless Obama has some hidden master plan to create an annual tax on wealth in the coming years, he's playing a dangerous game. As he gives in to Republicans and those Democrats who despise fair taxation, the baseline will move further and further from his previously stated goals, to the point where even the best compromise is yet another win for the top half-percenters, adding even more to the disparity between the rich and the rest of us. In short, the path to an estate tax-free world is getting shorter, and Obama appears to be merrily holding hands with those who want to push the estate tax off a cliff.