"Death Tax" Dead, But Don't Send Flowers

In late March, Houston pipeline entrepreneur Dan Duncan died, leaving an estate said to be worth $9 billion. As the New York Times notes, he may become the first American billionaire ever to leave a totally tax-free estate to his heirs. If he'd died four months sooner, billions would have been owed to the federal government as a tax on the estate.

This week, George Steinbrenner, owner on the New York Yankees, reportedly become the third billionaire to die with no tax owed on his estate. Heirs got a tax break of at least $328 million, maybe considerably more. (He was "smart enough to die in 2010," Senator Jim Bunning (R-KY) said Wednesday.)

What's going on here?

In 2001, Congress passed a package of tax cuts. The budget impact of these cuts was enormous. So to mask the total revenues that would be lost, Congress put a 10-year limit on the cuts, assuming they'd be extended.

The estate tax was one item in this package. The 2001 legislation phased it out, ending with a total repeal this year. Next year, the tax will revert to its pre-2001 level, unless Congress acts. And it almost certainly will.

The question is, What will it do?

The Center on Budget and Policy Priorities estimates that the federal government will lose nearly $1.3 trillion by 2021 if Congress extends the repeal without an offset. If it extends the 2009 estate tax provisions, as President Obama's Fiscal Year 2011 budget proposes, it will lose about half that amount.

Under the 2009 provisions, estates left by an individual would be entirely tax-free unless they were valued at more than $3.5 million. The tax-free value for couples would be $7 million. Above these amounts, the top tax rate would be 45 percent. But, as CBPP says, the actual rate would be much lower because a large portion of the value left after the exemptions could be shielded by deductions.

No one actually expected Congress to give estates a free pass in 2010. Last year, President Obama proposed the same extension he's proposing now. The House of Representatives passed it. But the Senate was bogged down in health care reform. And passing the extension wasn't going to be easy.

Among other things, some Senators thought the exemptions weren't big enough. Senators Max Baucus (D-MT) and Kent Conrad (D-ND) wanted to index the tax-free amounts so that they'd grow at the rate of inflation. These Senators are lead players because they chair the Finance and Budget Committees.

Senators Jon Kyl (R-AZ) and Blanche Lincoln (D-AK) proposed an even more generous tax break. They wanted to lift the tax-free amount to $5 million for an individual and $10 million for a couple and, at the same time, reduce the top rate to 35 percent. CBPP estimated the costs at $440 billion more than what the 2009 provisions cost. And that was only for the first 10 years.

One might think that the Kyl/Lincoln proposal is as good as dead. After all, self-proclaimed deficit-hawks have just blocked urgently-needed measures to save and create jobs. But the proposal is alive and kicking. In fact, Wonk Room blogger Pat Garafalo reports that Senator Kyl will try to attach it to a small business bill that may come up for a vote in the next couple of weeks.

Why in times like these is anyone trying to make a large tax giveaway bigger? One reason, of course, is that wealthy people have an inside track when it comes to legislation affecting their interests. Who, after all, provides big bucks for election campaigns?

But it isn't that simple.

The estate tax has been under fire for a long time. Indeed, the phase-out legislation capped a very successful PR campaign to redefine it as a "death tax" that throttles small businesses and destroys family farms. This claim has been repeatedly debunked.

For example, in 2005, the Congressional Budget Office reported (pdf) that fewer than two percent of all estates had owed any estate tax in recent years. In 2000, a maximum of 138 estates left by farmers and 164 left by small business owners didn't have enough in liquid assets, e.g., insurance, money in bank accounts, to cover what they owed.

These figures don't mean that any heirs had to sell a farm or close a business to get the cash for the tax. In fact, back in 2001, when the estate tax phase-out was pending, the New York Times reported that the American Farm Federation, a champion for repeal, couldn't cite even one farm that had been lost because of the current tax.

Opponents also argue that the estate tax is unfair because it's a form of double taxation. The claim here is that the assets taxed have already been subject to federal payroll, income and/or capital gains taxes. Michael Kinsley at Slate took this argument apart nicely when a group led by Robert L. Johnson, then-chairman of Black Enterprise Television, campaigned for a repeal of the tax.

As Kinsley's analysis suggests, the claim could well be true if the tax covered very modest estates.  But it's hardly true for the wealthiest estates. Real estate, for example, isn't subject to federal tax until it's sold. The same is true for works of art and for stocks.

If the purchases were smart, then assets like these have increased in value. Yet tax was paid only on the income used to buy them. Under ordinary circumstances, heirs pay nothing until they sell an asset — and then only capital gains on any increase over what it was worth when they inherited it.

There's also a more fundamental objection rooted in the view that people are entitled to all the wealth they've accumulated. The estate tax doesn't just take some away. It's said to be like Robin Hood because it takes from the haves to give to the have-nots.

There's some truth in this, though there's no guarantee that revenues raised by the estate tax will be used to fund benefits for low-income people rather than, say, new military hardware or subsidies for large agricultural producers. Still, the revenues do enter a general pool that pays for safety net and related benefits.

What's interesting here is that some very wealthy people, whose estates would take the biggest hit, don't object to the redistribution. In fact, they've been beating the drum for a higher estate tax. Bill Gates, Sr. had led the charge, with a petition signed by some other super-rich executives.

They support a robust estate tax in part because, without it, we'll have, in Warren Buffett's words, "an aristocracy of wealth," in which control of our nation's resources depends on birth, rather than hard work, smarts and, as Gates notes, a lot of luck.

Do I hear you saying that birth already counts for a lot? I think so too. But the billionaires — and others less fortunate — have an additional argument for a substantial tax on substantial estates.

Americans couldn't accumulate wealth without advantages our taxes pay for — a stable government, a strong legal system, public education, our vast transportation network and more.

"Society," Gates says, has a "just claim" on the fortunes of those "who have benefited so greatly from our country's investment in [their] lives .... And that claim goes by the name estate tax."

I'm all for the Buffett-Gates charitable initiative that fellow blogger Charlotte Hill has been pumping. But I'm even more strongly for a tax system that will shift the burdens to the people who can best afford them because they and like as not their parents have benefited from what our taxes support.

Photo credit: dbking