Can the Estate Tax Solve the Fiscal Cliff?

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Warren Buffett is one of the wealthy signatories of Responsible Wealth's robust estate-tax proposal.

The battle over the fiscal cliff so far has revolved around income taxes for the wealthy and entitlement reform. But there are many other ways the federal budget deficit could be trimmed that haven’t received much of the spotlight recently, and one of those is the estate tax.

The estate tax has gone through many changes over the past 10 years, as the tax cuts enacted early in President George W. Bush’s first term reduced the rate Americans pay on inheritances and raised the threshold amount under which estates are exempt from the tax. It was briefly repealed altogether in 2010 before being re-enacted in a 2010 compromise that set the estate-tax rate at 35% for estates valued at more than $5 million ($10 million for a couple), indexed to inflation.

But without congressional action, the estate tax will revert to its pre-2001 form Jan. 1. Under that version of the law, estates valued at over $1 million were subject to an estate tax on a graduated basis from 37% to 55%, and a 5% surtax was imposed on some estates valued at over $10 million, which would eliminate the benefit of the graduated rate for very large estates.

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Now that the fiscal cliff debates are (we hope!) coming to a conclusion, Responsible Wealth — a network of business leaders and other wealthy citizens, including Bill Gates Sr., Warren Buffett and George Soros — is speaking out in favor of returning to an estate-tax structure more reminiscent of that of the pre-Bush years. In a telephone press conference this morning, the group made the following statement:

We believe that our country should have a strong tax on the largest estates. We believe that a well-funded government benefits people at all economic levels and that our families have benefited significantly from government investment in schools, infrastructure, research, technology, public safety, national defense, laws and regulations.

The group is arguing for a much lower exemption — $4 million for a couple — than current law dictates. Its members also believe that the tax rate should begin at 45% and rise on a graduated basis in proportion to the size of the inheritance. This is actually a more liberal policy than President Obama is calling for; he has proposed a maximum estate-tax rate of 45%, with a combined exemption for couples up to $7.5 million.

But how much money would this tax actually raise, and could it help avert some of the other painful choices being made in the fiscal-cliff debate? The amount the estate tax could raise, of course, depends on the details of the reform. According to a recent analysis by the Wall Street Journal, current policy, which mandates a maximum estate tax of 35%, would raise $161 billion in revenue over the next 10 years. By contrast, reverting to a pre-2001 estate tax would raise $532 billion in the same time period, while the President’s proposal would raise $276 billion. 

These aren’t the kind of proposals that are going to solve America’s budget issues overnight. The U.S.’s yearly deficits have been topping $1 trillion per year. At the same time, every hundred billion counts, and the past several months (and perhaps the entire election cycle) have been centered on whether the Bush income-tax cuts on top earners should expire — a debate over a swing of just $110 billion (more or less) in taxes over the next decade, according to the Congressional Budget Office. And if an aggressive estate tax would raise almost $400 billion more in the next 10 years than current law allows, that’s $400 billion less we would have to cut from entitlement programs.

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These figures raise the question of why the estate tax wasn’t been a larger topic of debate during the election or the fiscal-cliff negotiations thus far. These taxes affect a very small portion of American society — just 4,000 people, under the current policy — and almost all of these folks are very wealthy. It’s the most progressive section of the tax code, and reverting to pre-Bush estate-tax policy would raise more than twice the amount as reverting to pre-Bush income tax policy. So why haven’t we heard more about it?

One reason is that there is serious Democratic opposition to expanding the estate tax. Senators Mary Landrieu of Louisiana, Max Baucus of Montana and Mark Pryor of Arkansas, all of whom are up for re-election in 2014, publicly opposed raising the estate-tax rate.

But their opposition is probably just a reflection of the public’s general distaste for a robust estate tax, which, almost regardless of one’s political leanings or position on the issue, has a confiscatory feel to it. As Kevin Hassett of the right-leaning American Enterprise Institute has noted, the estate tax isn’t all that popular with Americans in general. In a 2010 poll, 56% of Americans responded that passing legislation preventing a significant increase in the estate tax should have been the most important priority for that lame-duck Congress. This ranked above issues like ratifying a nuclear-arms treaty with Russia and ending “Don’t ask, don’t tell.” “This is fascinating because few, if any, of the respondents would ever have to pay the estate tax,” Hassett writes. “The best explanation is that Americans, and especially conservatives, are wary of a government that has no respect for the basic right of an individual to dispose of his hard-earned wealth as he sees fit.”

Sure, some of this is standard-issue conservative opposition to taxes. But I think many people of all political persuasions recoil when they see headline rates of 55%. We seem to widely feel that nobody, no matter how rich, should have to fork over more than half of their wealth when they die.

On the other hand, it also seems true that many Americans dislike the tax because they don’t understand it. The large deductions of the estate tax mean that few estates end up paying anywhere near those headline rates. And as one of the wealthy signatories on the phone call this morning, Vanguard Group founder Jack Bogle, said, the tax’s best selling point is its progressiveness. The U.S. is obviously in a fiscal crunch that can’t be solved simply by cutting services, argued Bogle. Taxes will be part of the equation, and “if [the wealthy] don’t pay it, somebody else will,” he said. “We have to explain to people that those who have the most resources to bear the burden have to step up to the plate.”

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35 comments
NathanIsbell
NathanIsbell

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 "Not only is that fiscally irresponsible, it's morally reprehensible" - Mr. David Walker We Can Fix "IT" and the Solution is just TOO EASY!!!  FREE Personal Financial Legacies that avert a 55% Death Tax and leave an eternal Legacy of "SELF" for the Love of Humanity.  Merry Christmas 2012 ;) http://legacywillandtrust.com/“Compound interest is the eighth wonder of the world.He who understands it, earns it ...he who doesn't ... pays it”"The rule of 72 is the greatest mathematical discovery of all time,greater than E=Mc2"

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AdamSmith1
AdamSmith1

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KeithSchultz
KeithSchultz

All good observations.  If you want to collect capital gains from an Estate, then by all means.  But, the Estate taxes net assets, whether the sum has been taxed or not.

I don't agree with seizure by the people of any estate.  The owner should direct where the wealth goes.  But, I don't like people under the substantial exemption sitting in judgment of how much 'the wealthy' should pay from their estates.

Everyone should feel the sting of the govt. seizure of their parents estate, no matter how small.  Then, if they still want to tax the rich, they can understand how it feels.

KeithSchultz
KeithSchultz

Chris:  When Dems speak of most taxes, they usually emphasize 'need.'  e.g. can't raise taxes on the middle class because it 'needs' its money.  But, they don't make the 'need' argument when it comes to Estate Tax.  I guess people don't really 'need' to inherit money.  If you take away the 'need' reason, then every estate should be taxed.  If mom leaves $75k, the govt. should take $40k and the children keep $35k.  Seems fair.  Let's all pay our fair shares.

CarlLegg
CarlLegg

@KeithSchultz But the $75k mom left has already been taxed. Estate tax effectively raises the tax rate from 35% to 65%. Anyway, the wealthy don't worry about estate tax -- they simply create generational trusts which funnels their wealth to offspring before they die. The government gets nothing. Ha...

tedshep
tedshep

@CarlLegg @KeithSchultz  If any part of mom's estate consists of unrealized capital gains or assets in tax-deferred retirement accounts, then, no, the money has not already been taxed. That's no rationale for government confiscation, though.

CarlLegg
CarlLegg

@tedshep  Agreed, after a certain inheritance threshold, any realized gains should be taxed, but only when they are actually realized. Unless the heir realizes a gain (sells the stock, sells the home, etc.), there should be no taxable event. The transfer of property (stock, real estate, etc.) should remain a private matter within the family until a gain is realized. Otherwise, the State effectively forces the heir to sell the family-held asset to pay the tax due.

Christopher_Matthews
Christopher_Matthews moderator

@tedshep @CarlLegg @KeithSchultz Abigail Disney made it a point in the press conference to note that the vast majority of her inheritance came in the form of Disney stock the appreciation of which had never been taxed. I would imagine that most of the super-rich's wealth would be passed on in similar form. As tedshep notes, this isn't a slam dunk argument for a robust estate tax, but it's worth considering in your analysis.

DarylBrunt
DarylBrunt like.author.displayName 1 Like

American is done and the only thing you have to blame is this concept called "Democracy". The sad thing is...very few people are actually students of history or economics or economic policy. Unfortunately without understanding of all 3 fields most people are easily misled and feel that things are fine. The simple fact IS Democracy requires War, removal of War inhibits the only form of Growth that Democracy promotes is that of "RENEWAL". Death causes a reduction in population and that affects availability of manpower and labour. History confirms this. the US seeks War outside of the US so that misleading growth can be achieved by the CORPORATIONS or the STOCK MARKET. That is NOT growth. That is NOT real GDP, that is NOT moving forward. ALL Democracies will suffer from this. The US will be done within 100 yrs. Why? Because the CORPORATIONS don't actually care. They care about their CONSTITUENTS otherwise know as SHAREHOLDERS who VOTE for the Board and VOTE for the pay scales, the Governments job is ACTUALLY to care about its own CONSTITUENTS aka the Voters, yet at some stage they deviated from this MANDATE, and some stage the CORPORATIONS convinced them to work together for the benefit of the FEW. Someone open their eyes...seriously. Go to Economics Class America... I suggest you start a CIVIL WAR and destroy a few bridges or buildings and STIMULATE Employment. (FYI don't look to the rich for your safety...Democracies ACTUALLY lack the LEGACY approach the Chinese have OR the old royal families who had the commonsense to KNOW when they needed to rebuild things regardless of the emotional connection. MOST major developments in HISTORY were because of GROWTH needs)

mary.waterton
mary.waterton like.author.displayName 1 Like

Tax the rich till they bleed red ink and Washington will still be running TRILLION dollar deficits right up till the day the economy collapses. I guarantee it. AMERICA IS DOOMED.

tedshep
tedshep

The article mentions serious Democratic opposition to expanding the estate tax. It comes from Senators up for election in 2014. Other Democratic senators will support high estate taxes. They are, evidently, those who know their voters in their home states also want no expansion of the estate tax. These cynics expect that those voters will forget who voted for high death taxes by the elections of 2016 and 2018. Are the voters truly that short of memory?

In discussing death taxes to break up huge estates, the exemption somehow gets set to drain quite modest estates. After aiming class warfare arguments at the truly rich, it is, as usual, mostly the middle class that will be hit. The argument goes "We must not let anyone pass on billions  after death." Then, the law says that we cannot pass along even a few million without confiscatory taxation.

One of the lamest arguments AGAINST the estate tax is that the money in estates has already been taxed and should not be taxed again. That is not true since many estates, like mine, include unrealized capital gains and tax-deferred retirement accounts.

Some writers seem amazed that large majorities of voters oppose the death tax though they have essentially no chance of paying it or having heirs who have to pay it. Part of the explanation is a great lack of envy. We see, for example, that there is no movement to impose extra taxes on lottery winnings. Another part of the explanation is the voter's ambition to accumulate a large estate himself to pass to his family. That is worth doing out of love for spouse and children and grandchildren. It is worth doing also to defy inept government that squanders our resources and to resist a consumerist society that chooses debt over savings and investment. Some voters may see that the estate tax damages the country in general without focusing just on their own situation. The government will use the money to increase dependency through welfare, while the private owners use the money to promote jobs and self-sufficiency through investing or spending.

xsnake
xsnake like.author.displayName 1 Like

Reminds me of a friend years ago who quit smoking.....went through the house in the middle of the night looking for butts...ashtrays, wastebaskets, trash.....everywhere.

 I really don't think that's what our gubment should be doing to solve our fiscal problems. They've never come to the conclusion that they are merely spending too much.....and the crazies are still proposing "investments" in the coming term.

  How is it possible that 51% of this years voters are that bloody ignorant as to vote for the same BIG spender....welcome to the new "hippie America."

StewartCockrell
StewartCockrell

How about going away from the IRS and enacting a national sales tax.  Then it is fair to everyone and we can move on from the discussion of who deserves more or less.  It is simple, you purchase and item, you pay a tax.  You don't, then you don't. 

HallKyle
HallKyle

Interesting that plutocrats like Buffett have so much helpful advice regarding estate taxes, which even at confiscatory or communist levels, won't balance our budget deficit which is spread across decades.

Assuming a husband and wife together work for 40 years (age 25-65), and during that time manage to accumulate $2 million --- likely not all is cash, but rather a mix of:   house, insurance proceeds, maybe some U.S. T-bonds for the grandkids, and some Certificates of Deposit or other liquid savings.

Then, from age 65 to age, let's say, 79, they spend a million bucks --- spending a lot especially in the last years as one or both of them end up in a nursing home or fighting cancer or Alzheimer's or something like that.   Leaving a million bucks as the "estate".

This million bucks is all that is left of two working lifetimes:   husband, 40 years of work (age 25-65), and wife, same.    "80 work years", if you will.    This translates to $12,500 saved (or "accumulated", as it is not all liquid cash), per person, per working year.

And THIS is the relative PITTANCE that Buffett and the other bizarre plutocrats want to tax at 49%, or 52%, or whatever weird rate they decide to toss out.     Money hard-saved over two working lifetimes, slated perhaps to go to the kids and/or grandkids and/or local Church and/or PBS and/or the local animal shelter.

Instead of talking so much about how to tax other people's estates, Buffett and his cohort should quit talking and START WRITING CHECKS TO THE U.S. TREASURY ON THEIR OWN BILLIONS UPON BILLIONS OF DOLLARS.

In case this concept is confusing to Buffett, he can look at this:

http://www.treasurydirect.gov/govt/reports/pd/gift/gift.htm

The U.S. Treasury is waiting with open arms and empty coffers.

lfm1962
lfm1962 like.author.displayName 1 Like

@HallKyle What you said doesn't make sense.  They want to exempt $4M per couple i.e. what they own at their deaths.

bryanfred1
bryanfred1

I'm glad the article at least highlights the real problem.  Allowing the rop rate to reset raises enough money to cover 1% of our projected deficit over the next 10 years, assuming no negative economic consequences from raising those rates (a big assumption).  $100 billion on $10 trillion doesn't begin to move the needle.  Another $400 billion does little more.  Tax collections shot up after the 2001 cuts because there was more incentive to earn and report income.  The problem is our spending outpaces even that rate of collections.  We don't have a revenue problem - we have a spending problem. 

How about this - we agree to that $500 billion increase in taxes; now go find out how to control the other $9.5 trillion deficit before servicing it consumes the economy.

wandmdave
wandmdave

@bryanfred1 That argument doesn't really hold that much water because unless we cut entire major programs wholesale (which isn't going to happen, nor should it) most of the deficit is going to be reduced in small chunks like that.  Your last line pretty much sums it up what should be done.  Ok lets do that and move on to finding another $9.5 trillion.

Chosun1
Chosun1

Cutting major programs will eventually have to be the answer.  You can't spend what you don't have... or, in the case of a democratic republic, what the people aren't willing to allow the government to get.  The people want to get more and pay less.  Simple politics with very bad long term fiscal policy and even national stability implications.

bryanfred1
bryanfred1

I'm not suggesting cutting major programs entirely, but we went from $2 trillion of spending to $4 trillion in less than 10 years.  Do what a business does - look at the trends, see why changes were made and what you got for it.  Consolidate duplicative agencies.  Take food stamp eligibility back to where it has been historically.  Eliminate automatic annual agency budget increases.  Most importantly, increase Medicare and Medicaid eligibility ages and change the Medicare cost of living index from wage growth to price growth.  The last one takes care of much of the problem, but anyone who suggests it is portrayed as wanting to throw old people off of cliffs.  Which is worse, asking people to work another year or pretending there's no problem and everything will be fine, until one day we're out of cash and the programs have to be drastically cut (essentially turning them into the welfare programs they were never intended to be, because the method for cutting would be means testing, not across-the board reductions).  I'll take the former; anything else is whistling by the graveyard.

akpat
akpat

The top 400 families make aout 139 million a year and about 100 million comes from capital gains.

On average they can make more in an hour than the median family income. If you are lucky enough to be born into such a family you dont have to be smart, work or worry.

So yes estate tax is necessary and about 50% is not to much.

bryanfred1
bryanfred1 like.author.displayName 1 Like

But you're not talking about families with estates worth $4 million (the value of a small business); you're talking about the wealthiest 0.00001% of people in the country.  That's where the argument always breaks down - e.g. increasing taxes on "millionaires and billionaires who can afford to pay a little more," then placing the threshold at $200k.  Right now that's about $150k after taxes - a nice living, but hardly the stuff of billionaires.  It's sure not "wealthy."

FrankBlank
FrankBlank like.author.displayName 1 Like

Estate taxes are a good idea.  There simply needs to be an adjustment to prevent the tax from forcing the sale of a family business or farm.  That would be easy to do and would remove the only rational objection to the tax.

And, as the would-be aristocrat Thomas Jefferson pointed out, they are also good and necessary social policy since estate taxes would tend to prevent the establishment of an hereditary aristocracy based on money rather than a king's grant of nobility. As he also pointed out, hereditary aristocracy = the death of a democratic republic.  Subsequent events suggest he was right about that. 

CarlLegg
CarlLegg

@FrankBlank Reality check. The wealthy don't worry about estate tax -- they create generational and "skipping" trusts which funnel their wealth to offspring before they die. And if they have no family, they donate it ahead of time. Estate tax is immoral. The money has already been taxed once. What remains deserves to stay in the family that earned it.The solution is a fair, graduated flat tax. Abolish the IRS and immediately re-coup $400B.

FrankBlank
FrankBlank

@CarlLegg @FrankBlank For posterity's sake, correction to the above moron.  1. It's easy to outlaw the tax dodges the rich use to redistribute wealth to themselves.  Make a couple rules closing the wallets and legs of their paid congressional prostitutes. 2. The estate tax is completely moral.  After all the greatest threat to the republic is the concentration of wealth in few hands, exactly what you are advocating.  3. The money was never taxed.  Money doesn't get taxed, transactions get taxed.  4. 'family who earned it.' How do you know they didn't steal it?  5. "graduated flat tax"??  Graduated to 40% on everything over 300K?  45% on everything over 1000K?  Including dividends and capital gains?  

Reality check: you need to try to understand what you're talking about.   

bryanfred1
bryanfred1 like.author.displayName like.author.displayName 2 Like

The best way to avoid a permanent aristocracy is to make it easier for subsequent generations to climb the ladder.  Nearly 90% of U.S. millionaires are self-made, and that's a great thing.

RyszardEwiak
RyszardEwiak

This is not a remedy for the crisis situation. Where are we going? An ancient vision says: "And [the king of the north] will go back (to) his land with great wealth [1945]; and his heart (will be) against the holy covenant [state atheism]; and will act [it means activity in the international arena]; and turned back to his own land [1991-1993. The collapse of the Soviet Union and the Warsaw Pact. Russian troops returned to their country]. At the appointed time [he] will return back." (Daniel 11:28, 29a, literal translation) The return of Russia in this context means crisis, which will eclipse the Great Depression. Not only the eurozone will break up, but also the European Union and NATO. Then many countries of the former Eastern block will return to Russia's zone of influence. Russian troops will be stationed here again. This will be the last sign before the global nuclear war. (Daniel 11:29b, 30a; Numbers 24:23, 24; Matthew 24:7; Revelation 6:4) All the details of this vision are being fulfilled from the time of ancient Persia, in chronological order. It is true that this vision is variously interpreted. As one can see, it has a lot of details. Therefore the insightful person is able to detect any error or sophistry. (Daniel 12:10) In 1882 British troops occupied Egypt. Great Britain then took the role of "the king of the south". Around the same time, Russia expanded its influence in the region, which previously belonged to Seleucus I Nicator, and took the role of "the king of the north". (Daniel 11:27)

KenDreger
KenDreger like.author.displayName 1 Like

@RyszardEwiak - And onDecember 21 th world will end!   Time for a reality check here.... The DEATH Tax is CRAP! Just give every person and company a FLAT tax and stop all this madness.

Chosun1
Chosun1

The problem with the tax code is it defies most of the major requirements of the "rule of law"....  Until it is simply understandable, transparent, stable, applies to all people equally, provides due process, etc., it will continue to be one of the great faultlines that could very well cause the American republic/empire to fall.  I'm not predicting it will fall soon but an empire cannot stand when it is engaged in such reckless spending policies, layered on top of a system of taxation that is continually being used first for winning votes, second for social engineering and third (or fifth, or seventh?), raising revenue sufficient to meet the needs of government (as it seeks to meet the basic needs of the people for good governance, security, etc.).   The laws of economics and the rule of law must return to the forefront of the minds of the policymakers in DC....