Thursday, June 08, 2006

Republicans fail to abolish estate tax

The idea that the Republican Congress would be cutting back medical care for poor children while they got ready to deliver a windfall to multi-millionaires by abolishing the estate tax may sound like a crude parody, but in fact it's just business as usual in Bush-era Washington DC--a characteristic mixture of fiscal lunacy, political irresponsibility, and moral shamelessness. Up until today, it looked as though this scenario might actually get played out. As it was, the Republican leadership in the Senate managed to get a 57-41 vote in favor of abolition, but they needed 60 votes to push it through, and they failed to reach that. It would be too strong to say that political sanity prevailed, but at least it wasn't simply rolled over. From the Associated Press report:
Under current law this year, the first $2 million of a person's estate or $4 million of a couple's, escapes taxation. The remainder can be taxed at rates up to 46 percent.
According to the most recent statistics available from the Internal Revenue Service, 1.17 percent of people who died in 2002 left a taxable estate. [....]
Two Republicans, Sen. Lincoln Chafee of Rhode Island and Sen. George Voinovich of Ohio, broke with their party.
'Repealing the estate tax during this time of fiscal crisis would be incredibly irresponsible and intellectually dishonest,'' Voinovich said.
While only two Republican Senators did the right thing, it is also worth noticing that this measure could not pick up enough Democratic defectors to push it over the top. This may be a sign that marginal Democrats are already feeling less intimidated as the fall elections approach and Bush's poll ratings drop ever lower--which may, with luck, help to restrain further acts of political insanity by the Congressional leadership between now and November. (One can always hope.)

As Brad DeLong and others have noted, there was surprisingly little support for abolishing the estate tax from any intellectually respectable quarters, even from people who are normally anti-tax, pro-market, and unconcerned about inequality. Two strong arguments against abolition, reproduced below, came from (the staunch pro-marketeer) Sebastian Mallaby in the Washington Post and from Paul Krugman in the New York Times. Both of them clearly expected that this measure, for which Mallaby correctly said "there is no possible excuse," would nevertheless get passed. It didn't--which is a welcome piece of good news.

--Jeff Weintraub

[P.S. 6/9/2006: See also Teddy Roosevelt & Adam Smith on inheritance taxes (Susan Dunn & Sam Fleischacker)]
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New York Times (On-Line)
June 8, 2006

Senate Rejects Effort to Cut Estate Tax

WASHINGTON (AP) -- Senators voted Thursday to reject a Republican effort to abolish taxes on inherited estates during an election year with control of Congress at stake.

GOP leaders had pushed senators to permanently eliminate the estate tax, which disappears in 2010 under President Bush's first tax cut, but rears up again a year later.

A 57-41 vote fell three votes short of advancing the bill. Senate Majority Leader Bill Frist, R-Tenn., said the Senate will vote again this year on a tax that opponents call the ''death tax.''

''Getting rid of the death tax is just too important an issue to give up so easily,'' he said.

A small group of senators, knowing Republicans lacked the votes to eliminate the tax, had hoped to keep the issue alive with an agreement to remove the tax from smaller estates and lessen the hit on larger ones.

Frist had given the negotiators a lift by agreeing to give such a compromise a vote. That didn't give the tax's strongest critics enough support to maneuver the issue around Democratic opponents, however.

''The estate tax is an extremely costly tax for a wealthy few that comes at the expense of every other American born and yet to be born for decades to come,'' said Senate Minority Leader Harry Reid, D-Nev.

Sen. Max Baucus, a Democrat who favors repealing the tax, had warned that negotiators working on a compromise needed more time. He said he hoped the vote would drive senators back to those talks.

Under current law this year, the first $2 million of a person's estate or $4 million of a couple's, escapes taxation. The remainder can be taxed at rates up to 46 percent.

According to the most recent statistics available from the Internal Revenue Service, 1.17 percent of people who died in 2002 left a taxable estate.

Sen. Jon Kyl, R-Ariz., had been brokering a compromise among Republicans and Democrats interested in paring down the tax and rewriting the quirky law that kills and resurrects the tax.

He proposed exempting the first $5 million of an individual's estate, or $10 million of a couple's, from taxation. The size of estates escaping the tax would increase each year to keep pace with inflation.

Estates between $5 million and $30 million would be taxed at rates equal to capital gains, and the remainder would be taxed at 30 percent.

''That is a fair way to help the people at the lower end of the spectrum and yet collect the revenue from those very, very wealthy estates that we all agree can pay part of this estate tax,'' Kyl said.

That effort attracted some of the senators who had been wary of repealing the tax but agreeable to shrinking its impact on heirs, but it did not attract enough Democrats who had expressed interest in negotiating a deal.

Two Republicans, Sen. Lincoln Chafee of Rhode Island and Sen. George Voinovich of Ohio, broke with their party.

''Repealing the estate tax during this time of fiscal crisis would be incredibly irresponsible and intellectually dishonest,'' Voinovich said.

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Washington Post
Monday, June 5, 2006 (page A15)

Reward for the Hereditary Elite...


It doesn't matter if you are liberal or conservative, Democrat or Republican. There is no possible excuse for doing what Congress is poised to do this week: Abolish the estate tax.

The federal government faces a future of expanding deficits. Thanks to the baby bust and medical inflation, spending is projected to rise by nearly 3 percent of gross domestic product by 2030, a growth equivalent to the doubling of today's Medicare program. What is the dumbest possible response to this? Take a source of revenue and abolish it outright.

The nation faces rising inequality. Since 1980 the gap between the earnings of the top fifth and the bottom fifth has jumped by almost 50 percent. The United States is by some measures the most unequal society in the rich world and the most unequal that it's been since the 1920s. What is the dumbest possible response to this? Identify the most progressive federal tax and repeal it.

The nation faces the prospect that inequality will damage meritocracy. When the distance between top and bottom widens, it becomes harder to traverse the gap; people of low birth are stuck at the bottom, and human talent is wasted. What is the dumbest possible response to this? Take the tax that limits what the super-rich pass on to their children and get rid of it. Send a message to hereditary elites: Go ahead, entrench yourselves!

For most of the past century, the case for the estate tax was regarded as self-evident. People understood that government has to be paid for, and that it makes sense to raise part of the money from a tax on "fortunes swollen beyond all healthy limits," as Theodore Roosevelt put it. The United States is supposed to be a country that values individuals for their inherent worth, not for their inherited worth. The estate tax, like a cigarette tax or a carbon tax, is a tool for reducing a socially damaging phenomenon -- the emergence of a hereditary upper class -- as well as a way of raising money.

But now the House has voted to repeal the estate tax, and the Senate may do the same this week. Republicans are picking up support from renegade Democrats, such as Blanche Lincoln of Arkansas, Bill Nelson of Florida, Ben Nelson of Nebraska and Max Baucus of Montana. Several more may go over to the dark side if a "compromise" bill, which would achieve nearly everything that abolitionists dream of, is introduced in the Senate. President Bush, who has already muscled a temporary repeal of the estate tax into law, would be delighted to sign a bill making abolition permanent.

If the abolitionists succeed, some other tax will eventually be raised to make up for the lost revenue. So which tax does Congress favor? The income tax, which discourages work? A consumption tax, which hits the poor hardest? The payroll tax, which is both anti-work and anti-poor? Really, which other tax out there is better?

The abolitionists don't respond to this question because there is no convincing answer. Paul Volcker, the former Federal Reserve chairman, has written that "we would be hard-pressed to find evidence that, compared with the alternatives, a reasonable estate tax significantly discourages work or innovation or savings." In other words, killing the estate tax and raising some other tax instead would damage the economy. And that's before you take into account the positive distortions introduced by the estate tax, such as more social mobility and higher charitable giving. Charitable bequests will fall by at least a fifth if the estate tax is repealed permanently.

People often remark on the perversity of popular support for estate-tax repeal. A majority wants to abolish the tax, even though only the richest 2 percent of households have ever had to pay it. Yet this shoot-your-own-foot weirdness is easily explained: Most people just don't know that, under the law's current provisions, a couple can bequeath $4 million without paying a penny to the government.

But I'm fascinated by the spectacle of elite support for this policy. How can the president and the abolitionists in Congress, who understand the tax and its details, possibly want to kill it? They all say they accept the principle that the tax system should be fair -- Bush officials are constantly claiming that their tax cuts are progressive. They all accept the principle that free trade and competition get the best out of American firms, so what about subjecting rich heirs to competition from ordinary Americans?

Repealing the estate tax is like erecting protectionist barriers around the hereditary elite. It is anti-meritocratic and unfair -- and antithetical to this nation's best traditions.

smallaby@washpost.com

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New York Times
June 5, 2006

Shameless in the Senate
By PAUL KRUGMAN

The Senate almost voted to repeal the estate tax last fall, but Republican leaders postponed the vote after Hurricane Katrina. It's easy to see why: the public might have made the connection between scenes of Americans abandoned in the Superdome and scenes of well-heeled senators voting huge tax breaks for their even wealthier campaign contributors.

But memories of Katrina have faded, and they're about to try again. The Senate will probably vote this week. So it's important to realize that there's still a clear connection between tax breaks for the rich and failure to help Americans in need.

Any senator who votes to repeal the estate tax, or votes for a "compromise" that goes most of the way toward repeal, is in effect saying that increasing the wealth of people who are already in line to inherit millions or tens of millions is more important than taking care of fellow citizens who need a helping hand.

To understand this point, we need to look at what Congress has been doing lately in the name of deficit reduction.

The Deficit Reduction Act of 2005, which was signed in February, consists mainly of cuts to spending on Medicare, Medicaid and education. The Medicaid cuts will have the largest human impact: the Congressional Budget Office estimates that they will cause 65,000 people, mainly children, to lose health insurance, and lead many people who retain insurance to skip needed medical care because they can't afford increased co-payments.

Congressional leaders justified these harsh measures by saying that we have to reduce the budget deficit, and there's no way to do that without inflicting pain.

But those same leaders now propose making the deficit worse by repealing the estate tax. Apparently deficits aren't such a big problem after all, as long as we're running up debts to provide bigger inheritances to wealthy heirs rather than to provide medical care to children.

And the cost of tax cuts is far larger than the savings from benefit cuts. Under current law — what I once called the Throw Mama From the Train Act of 2001 — the estate tax is scheduled to be phased out in 2010, but return in 2011. According to the Joint Committee on Taxation, making repeal permanent would cost more than $280 billion from 2011 to 2015. That's more than four times the savings from the Deficit Reduction Act over the same period.

Who would benefit from this largess? The estate tax is overwhelmingly a tax on the very, very wealthy; only about one estate in 200 pays any tax at all. The campaign for estate tax repeal has largely been financed by just 18 powerful business dynasties, including the family that owns Wal-Mart.

You may have heard tales of family farms and small businesses broken up to pay taxes, but those stories are pure propaganda without any basis in fact. In particular, advocates of estate tax repeal have never been able to provide a single real example of a family farm sold to pay estate taxes.

Nonetheless, the estate tax is up for a vote this week. First, Republicans will try to repeal the estate tax altogether. If that fails, they'll offer a compromise that isn't really a compromise, like a plan suggested by Senator Jon Kyl, Republican of Arizona, that would cost almost as much as full repeal, or a plan suggested by Senator Max Baucus, Democrat of Montana, that is only slightly cheaper.

In each case, the crucial vote will be procedural: if 60 senators vote to close off debate, estate tax repeal or something close to it will surely pass. Any senator who votes for cloture but against estate tax repeal — which I'm told is what John McCain may do — is simply a hypocrite, trying to have it both ways.

But will the Senate vote for cloture? The answer depends on two groups of senators: Democrats like Mr. Baucus who habitually stake out "centrist" positions that give Republicans almost everything they want, and moderate Republicans like Lincoln Chafee of Rhode Island who consistently cave in to their party's right wing. Will these senators show more spine than they have in the past?

In the interest of stiffening those spines, let me remind senators that this isn't just a fiscal issue, it's also a moral issue. Congress has already declared that the budget deficit is serious enough to warrant depriving children of health care; how can it now say that it's worth enlarging the deficit to give Paris Hilton a tax break?

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