When the Obama-McConnell tax compromise passed the House last week, 112 Democrats voted against the legislation. Just 139 Democrats supported the bill. The split within President Obama’s own party underlines the uncertainty as to whether passage of the legislation really represented a “win” either for the president–or for the country.
Bloomberg that “Representative David Obey, a Wisconsin Democrat who is retiring after 40 years,” was among those who expressed his disgust with the deal. “’Wonderful,' he said, as he left the House floor for one of the last times in his career. “Just what we need: [a law that] further exacerbates income inequality in this country.”
“It is a huge giveaway to the super-rich in these tough economic times,” added Representative Jim McDermott, a Washington Democrat. “It just boggles the mind. It’s indefensible, unconscionable.”
According to Bloomberg, even House Speaker Nancy Pelosi, who played the role of a loyal lieutenant by selling the legislation to House liberals, sounded less than thrilled: “I salute President Obama for getting in the bill what is in there,” she said. “I’m sorry for the price that has to be paid by our children and our grandchildren to the Chinese government,” she added, referring to the fact that this bill will add $860 billion, plus interest, to the deficit– for a total of more than $1 trillion. (China is among the many foreign investors who buy our Treasuries, lending us the money needed to carry an extraordinary amount of debt. As of July 2010, the U. S. Treasury reports that China owned $846.7 billion, or 20.8 percent of U.S. debt held by foreigners.)
The Estate Tax-“Do You Like Sam’s Heirs That Much?”
Pelosi, like many other House liberals, was most upset about the sweet estate tax deal that McConnell brokered for multi-millionaires and billionaires.
To understand the deal, you need to know a little about the history of the estate tax.
Conservatives have been working toward eliminating estate taxes since the beginning of the Bush administration. In 2001, Congress passed the “Economic Growth and Tax Relief Reconciliation Act” (EGTRRA), a sweeping piece of legislation that phased out inheritance taxes over a ten-year period.
When the project began at the start of the decade, only the first $675,000 of an estate passed to heirs tax-free, everything over $675,000 was taxed at 55%. In the years that followed, EGTRRA called for the exemption to rise while the tax rate slid. By 2009 the exemption had worked its way up to $3.5 million; at that point the rate had fallen to 45%. And finally, in 2010 the Bush Dynasty’s dream was realized: this year, the estate tax disappeared altogether.
But this was only a one-year reprieve for the very rich. To avoid violating procedural rules, the original legislation had stipulated that the law would “sunset” in ten years, reinstating the inheritance tax in 2011–unless, of course, Congress chose to pass new legislation making the repeal of the tax permanent. Otherwise, the inheritance tax would return at pre-EGTRRA levels, exempting just the first $1 million of an estate, and taxing the remainder at 55%.
Given the size of the deficit, few thought that Congress would vote for permanent repeal of the tax beginning in 2011. The government could not afford to give up that much revenue. But conservatives refused to let the inheritance tax revert to 55%, as scheduled, with just $1 million of an estate exempt. So while the estate tax does return next year, it offers heirs an even better deal than they had in 2009–estates over $5 will be taxed at 35%. (The exemption for couples is $10 million.) These rates will apply for the next two years, adding another $88 billion to the deficit.
Conservatives told liberals that if they didn’t take the deal, they could forget about extending unemployment benefits.
It is telling that, for conservatives, the cut in estate taxes was the most important part of the Obama-McConnell compromise. “A number of sources with direct knowledge of the negotiations have fingered the estate tax as the major player in the size of the deal,” Ezra Klein reported early in December. “‘Republicans were extremely eager to get benefits for the top tenth of a percent of Americans,’ says one senior administration official.” It was the estate tax,” Klein added that “in this telling, secured Republican support for, among other things, the two-year extension of the refundable tax credits and the payroll tax cut” that President Obama wanted.
“Republicans believe that the two-year extension of the estate tax at 35%, with the first $10 million exempted will turn into a permanent extension of the estate tax at these levels,” Klein explained. “So they attached much more importance to it than the price tag might suggest.”
While only a tiny slice of the population will benefit, the amount of money at stake is enormous. According to the Congressional Research Service, the new formula will subject just 0.14 percent of U.S. estates to a tax; roughly 40,000 estates, worth somewhere between $1 million and $10 million will escape inheritance taxes altogether.
Meanwhile, if the new law is extended beyond two years, the country’s wealthiest families could continue to consolidate their wealth, gaining roughly $44 billion a year, year after year. To put that number in context: over ten years, this tax break would cost us more than $440 billion (not including inflation)– or roughly half of the price of health care reform over the same ten years. And unlike the tax deal, health care reform pays for itself, while reducing the deficit. Meanwhile, loss of estate tax revenues will add to the deficit–unless we cut domestic spending by a commensurate amount. (This is where Social Security, Medicare, Medicaid, SCHIP and subsidies for health care reform become vulnerable.)
For a few, the windfall will be enormous. As Bernie Sanders pointed out on the Rachel Maddow show last week: “If we abolish the tax, the Walton family would receive over $37 BILLION in tax cuts. ONE FAMILY! This is patently insane.”
Maddow then turned to her audience: “Do you, as a taxpayer, want to pay the interest on $37 billion added to the deficit so that you can make such a large gift to the Walton family? You might like Sam, you might like Wal-Mart–but do you like Sam’s heirs that much?”
Some on the right hope to eliminate the estate tax altogether. According to Bloomberg “the Family Business Estate Tax Coalition sees this as just a first step, as do many other conservative.” Bloomberg quotes the Coalition, “a $5 million exemption and 35 percent rate will provide much-needed estate tax relief until full repeal becomes possible.’”
Consider what this would mean for the economy–and for our society. As Justice Louis Brandeis once said, “We can have concentrated wealth in the hands of the few, or we can have democracy, but we can’t have both.” At one time, before we had an inheritance tax, the richest 1% of the population owned 50 percent of the nation’s wealth. The estate tax, which was passed in 1916, began to chip away at that top-heavy—and potentially destabilizing –consolidation of assets. And in the 1950s and 1960s, the American middle-class grew and flourished. By 1976, the top 1% possessed just 20 percent of the nation’s wealth.
But over the past three decades, more conservative tax policies have reversed the trend. Today, the middle-class is disappearing while the richest 1% have laid claim to one-third of the nation’s wealth– leaving 80 percent of Americans with just 16 percent of the pie. If one wonders why a small group of Americans seem to have such unprecedented political power, these numbers go a long way toward explaining how an oligarchy operates.
Of course, liberals who voted for the tax-cut legislation argue that the bill lowers the estate tax for just two years. This is merely temporary stimulus designed to create jobs, they say, while the economy recovers. But conservatives do not see this as a temporary fix to help prop up the economy; clearly they are reinstating the phase-out, hoping that in two years, they can once again repeal the tax.
Why Lower Tax Rates Won’t Create the Jobs We Need
Morever, candid politicians admit that the notion that slashing inheritance taxes will create jobs is a fiction. People who inherit $20 or $30 million don’t head out to the mall to spend it. They invest. (A study by Moody’s going back to 1989 shows that the rich also salt away money saved when their income taxes are trimmed. )
Those who believe in “trickle-down economics” are fond of the notion that if the wealthy invest in U.S. corporations, these companies will create jobs. But today, corporations already are sitting on plenty of cash. They don’t need money to create jobs; they need customers. They won’t begin hiring until Americans consumers start buying. (Many products made in the U.S. are too expensive for consumers abroad. This is why companies are moving operations to countries where labor is cheaper.)
The bill’s backers also argue that the legislation will encourage the middle-0class to spend. But as I noted in part 1 of this post, if you add up all of the tax breaks in the compromise legislation (including the lid on the Alternative Minimum Tax (AMT) , the middle class (those on the third step of a five-step income ladder) would wind up with only $1,521. And this is not a “windfall.” The legislation merely extends existing tax breaks. Income tax rates remain exactly where they were this year, and restrictions on the AMT simply continue to protect middle-class taxpayers, making an adjustment for inflation, without putting any new money in anyone’s pockets.
To understand why the American consumer is no longer shopping until she drops, you need to take a look at credit card debt. “Twenty years ago, the average American household’s debt equaled 83 percent of its income,” Paul Krugman points out. But “by 2000, that had crept up to 92 percent. And by late 2007, debts had growchn to 130 percent of income.” This is when consumers began to sober up; instead of shopping, they began saving. Yet household debt still equals a daunting 118 percent of income.
“A strong recovery would bring [household debt] down further,” Krugman adds, “but we’re still at least several years from the point at which households will be in good enough shape that the economy no longer needs government support.”
Consumers will shop more next year only if their incomes rise. Unfortunately, employers are not planning on handing out hefty raises. According to the 2010/2011 Compensation Planning survey that Mercer published this month: while “more than 98% of companies plan to award base pay increases in 2011, their largesse will be limited. The average executive can hope for a 3% pay hike, while all other employees (including managers) can expect 2%.
With luck, this will cover higher prices for the necessities of life: food, utilities, gasoline, and health care (See part 1 of this post for estimates on how much consumer prices will rise next year.)
My guess is that unemployment will have to drop to 1990s levels before middle-income and many upper-middle-income households will feel comfortable about loading up their credit cards –especially now that they know their home is worth much less than it was four or five years ago. Real estate cycles move slowly; the “negative wealth effect” of the real estate recession will linger.
Savvy financial professionals understand this. As Pimco’s Mohamed El-Erian recently observed on Bloomberg;: “The tax-cut deal is not enough to add the jobs we need. “True stimulus would require a more meaningful push to improve America’s long-term competitiveness, “he added, “which has been compromised by our lagging behind in infrastructure improvements and education, as well as resource misallocations.” The government should be investing in America. But if we are spending $139 billion to provide income tax cuts for the top 2 percent over the next two years, (plus another $88 billion to trim taxes for mega-estates), where will we find the money?
Earlier this month the New York Times’ David Leonhardt posed a provocative question : “What else might that $60 billion a year buy? [At the time the consensus was that, over two years, income tax cuts for households earning over $250,000 would cost $120 billion. Since then, that figure has been updated to $139 billion, the number that the Times itself used in an editorial yesterday.]
Here are a few of Leonhardt’s suggestions:
- A tripling of federal funding for medical research.
- Universal preschool for 3- and 4-year-olds, with relatively small class sizes.
- A national infrastructure program to repair and upgrade roads, bridges, mass transit, water systems and levees.
- Twice as much money for clean-energy research as suggested by a recent bipartisan plan.
- Free college, including room and board, for about half of all full-time students, at both four- and two-year colleges.
Leonhardt provides more detail on the math behind his proposals here.
Arguably, these investments in education, infrastructure, clean energy research and medical research would do far more to add to the wealth of the nation than tax breaks for couples who haul home more than $250,000–or inherit more than $10 million.
In the end, just how many jobs will this tax deal create? Even Leonhardt, who, at his most optimistic, calls the tax deal “a second stimulus bill,” acknowledges that “initial estimates by economists suggested that the overall legislation would reduce the unemployment rate by one-half a percentage point to a full point over the next year, compared with allowing all the tax cuts to expire and passing no new stimulus.” In other words, the official unemployment rate might fall from 9.8% to 9.3%–or maybe 8.8%.
Could the President Have Negotiated A Better Deal?
I don’t know.
Conservatives threatened that, unless liberals acceded to their demands, they would both cut off unemployment benefits January 1 and would kill income tax cuts for the middle-class and upper-middle-class. These would have been incredibly unpopular decisions.
Would they have done it? After all, conservatives are focused taking the White House back in 2012. Would they risk alienating so many voters? Again, I don’t know. But I wish Democrats had tried to call their bluff.
Even if the president could not win a better compromise, I wish that he had stood back, as he did during the health care debate and let Congress duke it out for at least two weeks. We needed a public debate.
Imagine Nancy Pelosi and Mitch McDonnell squared off on television. Pelosi smiling, and decked out in Christmas red– McConnell scowling. (It doesn’t matter what he wears.) Pelosi asking pointed questions about whether unemployed families should be denied benefits that average $300 a week unless we guarantee multi-million-dollar tax cuts for the top 2%. And how does Senator McConnell plan to pay for those benefits? Does he think that we should cut Medicare or raise Medicare co-pays? What about Social Security?
Even if, in the end, liberals lost the vote on the House floor, Democrats could have replayed clips from such a debate again and again throughout the 2012 campaign.
What Will Happen in 2012?
With this tax deal, conservatives are paving the way for the 2012 election. They recognize that recovery on Main Street will be painfully slow. At the end of 2012 economists expect that at least 8% of Americans will be officially unemployed, while another group (who have given up looking for jobs or have settled for part-time work) will remain either jobless or under-employed, bringing the total to 15%–perhaps higher.
Most Americans do not understand how long recovery can take after a serious financial crisis– in part because the administration itself was overly optimistic, predicting that the first fiscal stimulus would bring unemployment down to 7% by the end of 2010. Instead, the official jobless rate remains stuck at nearly 10%.
When voters go to the polls in 2012 who will they blame? The party that controls the White House will be an obvious target.
Meanwhile, conservatives will take credit for a 2-point drop in unemployment, arguing that without the tax cuts, the jobless rate would have climbed higher. Is this true? Not if you think that the money spent on tax cuts could have created public sector jobs. But we’ll never know.
In 2012, it is possible that the Republicans will pick up enough votes in the House to able to extend the $44 billion annual tax break for heirs, or even eliminate the tax. Keep in mind that conservatives have been successful in renaming the “estate tax” the “death tax.” As a result many upper-middle-class Americans fear that they, too, may be robbed just as they step into the grave. They don’t understand that only a tiny percentage of Americans are affected by inheritance taxes.
What is certain is that in 2012 liberals and conservatives will be engaged in a battle that will determine the future of the country for at least four years–perhaps longer. At that point, the deficit will be enormous. Unemployment will remain unacceptably high. Liberals will want to let tax breaks expire. Conservatives will campaign to cut domestic spending while maintaining all of the tax breaks in the compromise legislation.
Who will win the argument? How many voters will support lawmakers who want to end the 2% cut in Social Security taxes? And what will that mean for Social Security benefits? How many younger Americans will feel that Medicare beneficiaries should be required to have more “skin in the game,” paying higher co-pays and deductibles? (Never mind the research showing that when co-pays are lifted, elderly Americans defer needed care.)
As for health care reform, I can imagine what conservatives will say: “See, we told you so. We can’t afford these fat subsidies for middle-class and low-income families. Look at the state of the economy. Look at the deficit. And if you’re a middle-class person earn over $50,000 or so, the government won’t be helping you buy health insurance. You won’t qualify for a hand-out. We’re going to have to roll back those subsidies.
“But, don’t worry, we’ve already talked to the insurance industry, and they have said that they are willing to offer low-cost ‘stripped down’ policies that will fit the needs of most Americans–as long as they take good care of themselves, and don’t land in a hospital.(This is, after all, really a matter of personal responsibility.)
And, by the way, “We can still call it ‘universal coverage.’ Everyone will get something.” P.S. See Naomi’s recent post on “bare bones insurance”
Maggie —
Everything you say is correct, but just a point about estate tax.
The total amount of money being argued about by the GOP and the Dems in the estate tax was, in reality, about $10 billion a year and less than 2% of the total cost involved in the tax compromise.
In reality there never was a proposal by anyone to return the estate tax to the levels of the Clinton era. The Democrats — including Pelosi and other congressional leaders — had proposed that the rate that was in force in 2009 be made permanent. That would exempt all estates up to $3.5 million (or up to $7 million for a couple with good estate planning) and make the tax rate 45%, as opposed to the $5 million/$10 million limit with a 35% tax rate that the deal with the Republicans ended up at.
The reason that Democrats had settled on what may seem to be limits designed only for rich people is the potential impact on family farms and family businesses. Real estate values, equipment, livestock, buildings, inventory, and the calculated value of future earnings can quickly add up and create an estate worth well into the millions in a farm or business that — with income split between members of multiple generations — provides a yearly income in relatively modest ranges. This issue is especially sensitive in farming areas and in smaller communities, where estate taxes can end family businesses and can transfer ownership to large corporate entities when families do not have the millions needed to pay estate taxes without selling the farm or business.
So in the end the battle was not over $75 billion to $100 billion a year and return to Clinton era rates but over about $10 billion a year and a difference between the $3.5 million and $5 million exemptions and the 35% and 45% rates. It is true that in some situations very wealthy families like the Waltons, the Mellons, Marses, and various internet and hedge fund billionaires will benefit by retaining an extra 10% of their holdings, but in reality most of the super-rich are protected from the full force of estate tax by careful estate planning that avoids most tax, and were able to pay relatively little estate tax even in the pre-Bush era. The entire issue is more symbolic than real, since the original purpose of the estate tax when it was created in the early part of the 20th century — prevention of formation of dynastic wealth in the United States — has long ago been subverted by clever lawyers and accountants.
So Paris Hilton is safe, with or without congressional Democrats drawing a line in the sand, and the money involved in the estate tax portion of the tax compromise is less than 2% of the total cost of the deal.
Pat S.
I know about the compromise that Obama and Pelosi backed.
Nevertheless, economists calculating the cost of the Obama/McConnell compromise compare it to the original plan of bringing estate taxes to 2001 levels ($44 billion a year) as well as the cost of bringing estate taxes back to the levels that liberals were willing to agree to when faced with a Republican majority in the Senate and the threat that Republicans would cut off unemployment benefits–
$22 billion a year, not $10 billion. (Don’t know where you got $10 billion. $22 billion is the number used by CBO, etc. when calculating the cost compared to the deal Obama and Pelosi were willing to cut.
You will find these numbers ($22 billion and $44 billion) in a chart that the Washington Post ran here http://www.washingtonpost.com/wp-srv/special/business/tax-cut-compromise/index.html?hpid=topnews
based on numbers from Moody’s & the CBO.
As for the argument that estate taxes threaten the family farm and small businesses, this is something conservatives have been saying for years.
The Center on Budget & Policy Priorities lists this as “Myth # 3” about estate taxes:
“Myth 3: Many small, family-owned farms and businesses must be liquidated to pay estate
taxes.
Reality: The number of small, family-owned farms and businesses that owe
any estate tax at all is tiny, and virtually no such farms and businesses have tobe liquidated to pay the tax.
The estate of only 0.24 percent of all people who die in 2009 (i.e., the estates of
between two and three of every 1,000 people who die) are expected to owe any estate tax, according to the Tax Policy Center.
And only about 1.3 percent of the few
estates that still are taxable are small business or farm estates.
TPC estimates that only 80 small business and farm estates nationwide will owe any estate tax
in 2009. This figure represents only 0.003 percent of all estates.
Furthermore, the minuscule number of small business and farm estates that do owe estate tax generally owe only a modest percentage of the estate’s value in tax. The 80
small farm and business estates left by people who die in 2009 that will owe any estate
tax will owe the tax at an average rate of just 14 percent.
Despite the oft-repeated claim that the estate tax has dire consequences for family farms and small businesses, no evidence supports that charge. Indeed, the American
Farm Bureau Federation acknowledged to the New York Times several years ago, when the estate tax was more expansive than it is today, that even then it could not cite a
single example of a farm having to be sold to pay the estate tax.
A Congressional Budget Office study, as well, exploded the myth that small businesses
and farms have to be liquidated to pay the estate tax. CBO found that of the few farm
and family business estates that would owe any estate tax under the 2009 parameters,
the overwhelming majority would have sufficient liquid assets (such as bank accounts, stocks, bonds, and insurance) in the estate to pay the tax without having to touch the
farm or business. For instance, of the 65 farm estates that would owe any tax after the
$3.5 million exemption, just 13 could potentially face liquidity constraints, and CBO
explained that even this figure likely overestimates the number of farm estates with
liquidity constraints, because CBO was unable to take into account certain assets heldin trusts (such as life insurance trusts) when calculating the liquid assets available to
estates to pay the tax. Furthermore, the few, if any, farm estates that would face any
liquidity constraints would have other important options available to them — such as
spreading their estate tax payments over a 14-year period — that would allow them to pay the tax without having to sell off any of the farm assets.”
What’s amazing to me is that this myth has stayed alive–for a great many years–despite the lack of supporting evidence. Barron’s was debunking the family farm and small biz argument about estate taxes years ago. . . .
I don’t know where you got your $10 billion number, but the issue is NOT “more symbolic than real.”
(MYth #1 on the CBPP list: “Weakening the estate tax wouldn’t significantly worsen the deficit because the tax
doesn’t raise much revenue.”
Yes, many wealthy people manage to evade estate taxes, but it has gotten harder to pass great wealth to your heirs over a period of years before you die.
The number of estates that pay inheritance taxes is tiny, but the amount of money at stake is huge. (The Republicans understand this–and they understand that if they can phase out the estate taxes, conservatives will be able to take control of government– see excerpt from Jane Mayer’s article below.)
The Center on Budget and Policy Prioritites pionts out that “Making the 2009 estate tax parameters permanent itself would cost $609 billion– $485 billion in revenue losses and $124
billion in added interest costs.”
$609 billion over 10 years–that is 2/3 of the cost of health care reform that insures millions of uninsured, as well as millions who are underinsured.
The Center adds a footnote: “The official ten-year cost estimate is much lower: $670 billion, but that estimate is misleading because it covers a tenyear
period, 2009-2018, that captures the full cost of only six years of making repeal permanent.
(http://www.cbpp.org/6-5-06tax.htm)”
Finally, the McConnell/Obama compromise costs us more than $609 billion in lost tax revenues over 10 years because it doesn’t go back to 2009 parameters. AS I point out in the post, the wealthy are getter a better deal than they had in 2009.
If you look back at U.S. economic history, it becomes apparent how important the estate tax is as a tool which makes sure that too much money is not consolidated at the top of the pyramid.
A small number of very wealthy families (Koch etc.)have great behind-the scenes political power in this country.
Jane Mayer wrote an outstanding piece about the Koch brothers in the New Yorker: http://www.newyorker.com/reporting/2010/08/30/100830fa_fact_mayer?currentPage=all
This is not a conspiracy theory: Mayer is not a conspiracy theorist.
Here is an excerpt from her story:
“With his brother Charles, who is seventy-four, David Koch owns virtually all of Koch Industries, a conglomerate, headquartered in Wichita, Kansas, whose annual revenues are estimated to be a hundred billion dollars. The company has grown spectacularly since their father, Fred, died, in 1967, and the brothers took charge. The Kochs operate oil refineries in Alaska, Texas, and Minnesota, and control some four thousand miles of pipeline. Koch Industries owns Brawny paper towels, Dixie cups, Georgia-Pacific lumber, Stainmaster carpet, and Lycra, among other products. Forbes ranks it as the second-largest private company in the country, after Cargill, and its consistent profitability has made David and Charles Koch—who, years ago, bought out two other brothers—among the richest men in America. Their combined fortune of thirty-five billion dollars is exceeded only by those of Bill Gates and Warren Buffett .. .
After the 1980 election, Charles and David Koch receded from the public arena. But they poured more than a hundred million dollars into dozens of seemingly independent organizations. Tax records indicate that in 2008 the three main Koch family foundations gave money to thirty-four political and policy organizations, three of which they founded, and several of which they direct. The Kochs and their company have given additional millions to political campaigns, advocacy groups, and lobbyists . . .
The Kochs are longtime libertarians who believe in drastically lower personal and corporate taxes, minimal social services for the needy, and much less oversight of industry—especially environmental regulation. These views dovetail with the brothers’ corporate interests.
In a study released this spring, the University of Massachusetts at Amherst’s Political Economy Research Institute named Koch Industries one of the top ten air polluters in the United States. And Greenpeace issued a report identifying the company as a “kingpin of climate science denial.” The report showed that, from 2005 to 2008, the Kochs vastly outdid ExxonMobil in giving money to organizations fighting legislation related to climate change, underwriting a huge network of foundations, think tanks, and political front groups.
Indeed, the brothers have funded opposition campaigns against so many Obama Administration policies—from health-care reform to the economic-stimulus program—that, in political circles, their ideological network is known as the Kochtopus.”
The Koch’s put up the money to launch the Cato Institute–and they are not alone in funding conservative and libertarian think tanks. A relatively small group of very wealthy families have funded the major right-wing think tanks.
They are much better funded than liberal/progressive think tanks, and so have been able to continue to spread myths– about estate taxes, about health care reform as a “govt takeover,” about immigrants, etc. etc. (The only major bilionaire funding liberals is George Soros–and he doesn’t work behind the scenes. He’s quite out-front about what he hopes to accomplish.)
Pat, the fact that you (extremely intelligent and well-read) believed the myths about estate taxes shows how effective they have been.
I know about estate taxes only because as a financial jouranlist, I often wrote about taxes. Also I did a huge story when the government took the Newhouse estate (as in Cy Newhouse) to court.
Sorry to go on at such lenght, but the estate tax issue is extraordinarily important– as the Republicans realize.
This is why it was #1 on their agenda.
Maggie —
I got the number from an article in a local paper, which I will admit is pretty right wing overall.
I realize that these calculations are a moving target. In fact, you are citing two different numbers in your response that differ by more than 100% — the $22 billion figure from the CBO and a second figure of $48 billion a year from the Center for Budget Priorities lower in the piece. My figure is undoubtedly a low end estimate, just as the $48 million figure is probably a high end estimate.
Even accepting that the $22 billion is correct — and all of these numbers are just estimates of a number that is very dependent on events that are rare enough to be difficult to estimate and on financial conditions that fluctuate with the economy — it is a very small part of this bill: about 3%.
If I had my way, I would like to see the estate tax restored to its historic role of trying to see that America does not develop a permanent financial elite and that success is based on effort and merit, not luck. I agree with the idea that people like the Kochs have an undue influence due to their great wealth, but disagree that estate taxes as they have existed since WWII have been able to prevent that, as the Kochs themselves prove. The rich can expect that they will avoid paying large percentages of their estates in taxes, although they do have to accept that they will have to make decisions that are not ideal from their viewpoint in order to assure that that will happen. We had a case here in Minnesota where a person with an estate of nearly a billion dollars died while re-arranging his will so that he did not have his estate as protected and paid a large enough tax so that he actually fixed the state budget for one year. His heirs successfully sued his attorneys for a huge settlement on the grounds that he should have been able to avoid most taxes if they had been properly prepared with an interim will while the revision was going on. Very rich people pay very small estate taxes, certainly nothing near the rates of 35%, 45%, or 55% that the laws would suggest.
I would also have liked to see the Bush tax breaks for the rich ended and high level income taxes brought to levels similar to Canada, Germany, and elsewhere where higher taxes certainly have not harmed their economies — economies that are outperforming ours. However, I am very convinced that the GOP was ready, even eager, to sacrifice the unemployed, low income earners, and even to sacrifice the middle class for a short time to get what they wanted, and believe that the deal actually was better than would have happened if Obama had called their bluff and ended up waiting until the next much more difficult congress was seated, resulting in an agreement just as beneficial to the rich as this one, if not more, but much worse for low income people. The estate tax agreement, which is much closer to the Democrat’s proposal than the GOP goal of no estate tax, is just one small part of a deal that ended with Obama actually winning — an opinion shared by most right wing and tea party pundits. The main thing the Republicans won was kicking the issue down the road to the election year of 2012 and getting the signature of Pelosi, Obama, and other high profile Democrats on the extension of the Bush cuts.
As to the idea that family businesses and farms are jeopardized by estate taxes, I am well aware that this is primarily a slogan, and that actual business and farm failures due to estate taxes are very rare. However, they do happen, as even some of the experts you cite acknowlege. I know of one in my own extended family (a real estate development business, not a farm,) and would certainly agree that a combination of bad luck and poor planning is at least as important as the estate tax itself. However, people hear of these stories and then create the political environment that caused the Democrats to propose the estate tax package that was much nearer to the deal they got than to the return to the past that informed people might prefer, but which is not politically viable. Nancy Pelosi, no friend of the rich, was convinced of this enough to back the original proposal of freezing the 2009 rates in place, and in the end, after some political posturing, willing to accept the Obama compromise.
Politics, as both of us agreed in the passage of the ACA, is the art of the possible, not the ideal. This was what was possible, and is certainly better than the Republicans came to the table asking for, especially in the estate tax provision.
Posted by: Pat S |
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Maggie —
I got the number from an article in a local paper, which I will admit is pretty right wing overall.
I realize that these calculations are a moving target. In fact, you are citing two different numbers in your response that differ by more than 100% — the $22 billion figure from the CBO and a second figure of $48 billion a year from the Center for Budget Priorities lower in the piece. My figure is undoubtedly a low end estimate, just as the $48 million figure is probably a high end estimate.
Even accepting that the $22 billion is correct — and all of these numbers are just estimates of a number that is very dependent on events that are rare enough to be difficult to estimate and on financial conditions that fluctuate with the economy — it is a very small part of this bill: about 3%.
If I had my way, I would like to see the estate tax restored to its historic role of trying to see that America does not develop a permanent financial elite and that success is based on effort and merit, not luck. I agree with the idea that people like the Kochs have an undue influence due to their great wealth, but disagree that estate taxes as they have existed since WWII have been able to prevent that, as the Kochs themselves prove. The rich can expect that they will avoid paying large percentages of their estates in taxes, although they do have to accept that they will have to make decisions that are not ideal from their viewpoint in order to assure that that will happen. We had a case here in Minnesota where a person with an estate of nearly a billion dollars died while re-arranging his will so that he did not have his estate as protected and paid a large enough tax so that he actually fixed the state budget for one year. His heirs successfully sued his attorneys for a huge settlement on the grounds that he should have been able to avoid most taxes if they had been properly prepared with an interim will while the revision was going on. Very rich people pay very small estate taxes, certainly nothing near the rates of 35%, 45%, or 55% that the laws would suggest.
I would also have liked to see the Bush tax breaks for the rich ended and high level income taxes brought to levels similar to Canada, Germany, and elsewhere where higher taxes certainly have not harmed their economies — economies that are outperforming ours. However, I am very convinced that the GOP was ready, even eager, to sacrifice the unemployed, low income earners, and even to sacrifice the middle class for a short time to get what they wanted, and believe that the deal actually was better than would have happened if Obama had called their bluff and ended up waiting until the next much more difficult congress was seated, resulting in an agreement just as beneficial to the rich as this one, if not more, but much worse for low income people. The estate tax agreement, which is much closer to the Democrat’s proposal than the GOP goal of no estate tax, is just one small part of a deal that ended with Obama actually winning — an opinion shared by most right wing and tea party pundits. The main thing the Republicans won was kicking the issue down the road to the election year of 2012 and getting the signature of Pelosi, Obama, and other high profile Democrats on the extension of the Bush cuts.
As to the idea that family businesses and farms are jeopardized by estate taxes, I am well aware that this is primarily a slogan, and that actual business and farm failures due to estate taxes are very rare. However, they do happen, as even some of the experts you cite acknowlege. I know of one in my own extended family (a real estate development business, not a farm,) and would certainly agree that a combination of bad luck and poor planning is at least as important as the estate tax itself. However, people hear of these stories and then create the political environment that caused the Democrats to propose the estate tax package that was much nearer to the deal they got than to the return to the past that informed people might prefer, but which is not politically viable. Nancy Pelosi, no friend of the rich, was convinced of this enough to back the original proposal of freezing the 2009 rates in place, and in the end, after some political posturing, willing to accept the Obama compromise.
Politics, as both of us agreed in the passage of the ACA, is the art of the possible, not the ideal. This was what was possible, and is certainly better than the Republicans came to the table asking for, especially in the estate tax provision.
Posted by: Pat S
Pat–
Thanks for your comment. I agree with much of what you say, but:
I quoted the Center for Budget Priorities saying that the estate tax break at 2009 levels would cost $485 BILLION OVER TEN YEARS, not $48 Billion.
Yes, these are estimates, but they are based on past experience. And virtually all reliable sources agree: $22 BILLION over 1 year, $44 Billion over 2 years. Ten-year estimates — 485 billion over ten years are, of course, better becuase, as you say, short-term estimates are talking abour relatively rare events– the death of a multi- billionaire.
Regarding the numbers in the post: Pat, I spent about 5 days writing this post, and much of that time was spent checking and cross-checking all of the estimates
There were many, many bad numbers in the mainstream press. It was maddening.
So I went to what journalists call “red checks”– sources you can rely on. For instance, when it comes to financial numbers, the Wall Street Journal virtually always gets them right (or, when we’re talking about estimates, they are well within the ball park). This is their bread & butter.
The New York Post, like your local paper, is not a red check.
And when it comes to finance and economics, the New York Times is not as reliable as the WSJ.
When you’re a financial journallist you have to get the numbers right. Otherwise, readers could lose money. And you could lose your job.
At Barron’s I sometimes mis-spelled people’s names.
But I never had to publish a retraction correcting a number (And many of our readers were very well-informed; they would be quick to spot a bad number–especially, perhaps, because I was always writing from a more progressive perspective than the mainstream of our readers.)
I can remember telling my editor: “I’m so annoyed with myself — I spelled his name MC Donald and it’s actually MAC Donald. Such a stupid mistake.”
My editor shrugged: “He should change it and spell
it the way we printed it.”
(This was said with great irony, but in a way he was right.)
This is not how my top editor at the NY Times would have reacted. Names, and spelling them right, were very, very important.
Different audience, different priorities.
In fact, my editor Barron’s was right about our audience and sources. . My sources didn’t care how I spelled their names– they just wanted to be quoted in Barron’s (except, of course, in those cases where I was accusing them of criminal activity.)
Back to the importance of estate taxes: it doesn’t matter that the $44 billion represents only 3% of the cost of this bill.
This not a one-time
cost: consrvatives plan to eliminate the estate tax permanently. Compounded, after inflation (with wealth continuing to climb at the top), we are talking about $1.3 trillion over 10 years.
Moreover, the nation as a whole gains nothing in return. This break goes to one-quarter of one percent of all Americans–giving them growing political power.
Consider this: Today the top 1% owns 1/3 of the nation’s assets (cash, stocks, bonds, real estate, investments in commodities, art, etc. etc. etc.)
That’s where the Big Money is–in the top 1%.
And that’s where Big Money becomes scarey.
This really isn’t about Paris Hilton. I’m concerned that her name trivializes the issue.
I’d urge you to read this book: The Conservatives Have No Clothes– a short, very well-written book by Greg Anrig, of the Century Foundation. It describes the power that the nation’s wealthiest families have accumulated since 1980,
Again, as Ezra Klein reported, estate taxes were the Republcican’s #1 priority because they understand that, if you want political power, estate taxes are far more important than income taxes.
This is also what Justice Brandeis understood.
Much has been written about the importance of estate taxes throughout history.
Depression.
When I was writing Bull!, I read aa great deal of financial history. It’s eye-opening to see what has happened since 1980–and how different it is from what was happening from the 1930s through the 1970s.
A great many people assume that things have always been the way they have been for the past 30 years. This simply is not true.
It was only after 1980 that we began to pay CEOs enormous salaries and give corporations enormous power. (This is when salaries for speicalists also began to skyrocket. When they compared themselves to CEOs, they felt underpaid.)
The amount of power that Wall Street has gained over the past 30 years is unprecedented.
Unfortunately, most of Barack Obama’s financial advisers are from Wall Street. This is why they greatly outlook for Main Street.
They don’t know much about Main Street– as Paul Krugman, Joe Stiglitz and others have pointed out repeatedly.
First, please stop reading your local paper. Or only read the wedding annoucements and obituaries.
For financial and economic history and analysis. Read books. of all of the financial papers and magainzes out there, I can only recommend the Financial Times (though it has it’s own rather peculiar spin), and online, New Deal 2.0 comes to mind. (James Galbraith, John Kenneth Galbraith’s son, is among the many brilliant analysits/historians who writes for it. The Center for American Progress also publishes some excellent work, as does the Center for Budget Policy that I quote here. The Economic Policy Institute is very good.
I quoted the Center for Budget Priorities saying the estate tax break at 2009 levels would cost $485 BILLION OVER TEN YEARS, not $48 Billion.
Yes, these are estimates, but based on past experience, and virtually all reliable sources agree: $22 billion over 1 year, $44 billion over 2 years.
I spent about 5 days writing this post, and spent much of that time checking and cross-checking all of the numbers.
When you’re a financial jouranlist you have to get the numbers right. Otheriwse, people could lose money. And you could lose your job.
At Barron’s I sometimes mis-spelled people’s names. I can remember telling my editor: “I’m so annoyed with myself– I spelled it MC Donald and it’s actually MAC Donald.”
My editor shrugged: “He should change it and spell it the way we printed it.”
In fact, my sources didn’t care how I spelled their names– they just wanted to be quoted in Barron’s (unless, of course, I was accusing them of criminal activity.)
Barron’s was all about hte numbers.
And this is not a one-time cost: consrvatives plan to eliminate the estate tax permanently. Compounded, after inflation (with welath continuing to climb at the top), we are talking about an enormous amount of money
Again, as Ezra Klein reported, estate taxes were the Republcican’s #1 priority because they understand that, if you want political power, they are far more important than income taxes.
This is also what Justice Brandeis understood.
Much has been written about the importance of estate taxes throughout history.
When I was writing Bull!, I read a great deal of financial history. It’s eye-opening to see what has happened since 1980–and how different it is from what was happening in the preceding 40 years– from the 1930s through the 1970s.
A great many people assume that things have always been the way they have been for the past 30 years. This simply is not true.
It was only after 1980 that we began to pay CEOs enormous salaries and give corporations such power. (This is when salaries for specialists also began to skyrocket. When they compared themselves to CEOs, they felt underpaid.)
The amount of power that Wall Street has gained over the past 30 years is unprecedented.
Unfortunately most of Barack Obama’s financial advisors are from Wall Street. This is why they greatly underestimated how much harm the real estate bubble had done to Main Street.
They don’t know much about Main Street– as Paul Krugman, Joe Stiglitz and others have pointed out repeatedly
Regarding the estate tax, if it were up to me, I would have kept the exemption at the 2009 level of $3.5 million for an individual ($7 million for a couple) as the Democrats proposed. At the same time, I think the top rate should be the same as the top federal income tax rate, currently 35%. There are also proposals out there to convert the estate tax to an inheritance tax. The inheritor would include the bequest as part of ordinary income and pay federal taxes based on his or her income including the amount inherited. The exemption, whatever that amount is, would be allocated either as part of the provision of the will or, if there are no such instructions, the executor could make the allocation instead.
As for very wealthy people not paying estate taxes, the two main ways they make this happen as far as I can tell are (1) leave the money to charity or a charitable family foundation. This is what Bill Gates and Warren Buffett are doing. Or, (2) transfer assets long before they increase greatly in value to a trust for the benefit of children or other heirs. That’s how Sam Walton did it. Bequests to charity are not such a bad thing. I view gifts to charity as a voluntary tax with the donor getting to choose who benefits from his or her generosity rather than the government. On balance, I think a 35% top federal estate tax rate is enough, especially considering that many states also have either estate or inheritance taxes as well. While I don’t advocate eliminating the estate tax and never have, I think there is plenty of room for differences of opinion as to what’s fair and reasonable.
The wealth disparity now is even higher than it was in the Great Depression.
Civilized socirties are not sustainable with this degree of disparity.
People and governments have been able to make ends meet through borrowing. There comes a time, however, where the limit is reached, in which people no longer have the “full faith and crdit of the U.S. Government.” Staying on this course, I believe that time will happen.
The faith is based on perception. And, that perception will be from the average Joe, the masses, not the 1% of economists who praise our fiat currency, and the dollar as the world’s currency. They seem to believe the U.S. is immune from hyperinflation, even if we are supposedly immune to default.
Why would our country have a God-given right to be so unique from all the other empires who borrowed themselves into oblivion?
There are 2 things I know. There is a God, and it is not the U.S.Government.
Don Levit
Maggie —
I am not questioning the quality or thoroughness of your research and concede that the quality of my research was poor, since I quoted a source that was questionable.
However, there is a large disparity between your two main sources. $485 billion over ten years is $48.5 billion a year — they then added in the value of interest to arrive at $609 billion for ten years as the true cost. The $22 billion a year figure is $220 billion in ten years. My number — and I am willing to concede that the source probably was motivated to choose a low ball estimate and that it probably is too conservative — was $10 billion a year.
What this means is that the sources you cite differ by over 100% in their estimates, and that the source I cited differs by over 100% compared with the CBO.
I do not question either the integrity or the skill of either of your two sources. They just ended up with two markedly different results, illustrating the problem of making good calculations about this subject.
The main problem with all of these estimates is that they depend on three things, all of which are moving targets.
First, they must estimate the number of deaths of wealthy and very wealthy people per year. Since there are a fairly small number of these people, that estimate is less reliable statistically than estimates involving larger populations and subject to wide variation over almost any period shorter than a whole lifetime.
Second, the actual amounts of wealth involved also fluctuates widely. On average, someone who died in 2006 would have left a much larger estate than someone who died in 2009, after the recession had effected his wealth. Someone dying in 2010 may have recovered a good share of her losses by that time. The Forbes 500 list of the wealthiest individuals always shows considerable variation, with some people gaining wealth and others losing depending on both management decisions and financial trends.
Third, the actual value of taxes collected varies widely depending on how individuals plan their estates. Buffet and Gates will pay much less estate tax if they follow through with their plans to give the bulk to the charity they have created. The Waltons avoid taxes by dispersing wealth through the family well ahead of deaths. There are more estate tricks than most people know — for example, irrevocably assigning the management of a resource like real estate or a business to someone other than the owner sharply reduces the value of the owner’s stake, since the inability to make decisions about the asset makes it potentially worth much less to them.
All this is not to say that everything you say about the estate tax is not correct, especially about the impact of hereditary financial elites on the operation of democracy. It does say that the real dollar value of what the Democrats gave up on the estate tax in the tax deal is hard to quantify and most likely smaller than the most alarmist progressives would like us to think. The issue has much greater traction as an issue of social justice and political power than as an issue of raw dollars. From the raw dollar perspective, the top tax bracket rate is much more important.