Thursday, June 08, 2006

Democracy Defeats Plutocracy - U.S. Senate Fails To Permanently End Estate Tax

Senate Republicans failed on Thursday (June 8th) to muster the votes needed to abolish the estate tax on inherited wealth, but supporters of a compromise held out hope for a deal this year that could attract enough Democrats to pass. Voting 57 to 41, with only a few lawmakers crossing party lines, the Senate was three votes short of the number needed to end debate on the bill, dooming it on procedural grounds. The vote all but killed hopes at the White House and among Republicans on Capitol Hill of eliminating the tax on large estates, which under current law would be phased out by 2010 but would return in 2011. Click here for full story in the New York Times.

Alaska Senators Ted Stevens and Lisa Murkowski were part of the 57 who voted YEA. This means they wanted to permanently end the estate tax. Republicans are now debating whether to give up on their goal and attack Democrats in the coming midterm elections as obstructionists on a measure that they say has considerable support, or settle for a bipartisan measure that would stop short of eliminating the tax entirely. Though lawmakers have floated scores of alternative proposals, from reducing the rates to excluding all but the very biggest estates from any tax, many Republicans refuse to settle for anything that falls short of repeal, and many Democrats refuse to agree on a bill that would reduce tax revenues by hundreds of billions of dollars over the next decade.

"We were foreseeing ourselves putting this over the line," said Dick Patten, executive director of the American Family Business Institute, a group that has led much of the political campaign against the estate tax. Though insisting that he was still trying to line up another two votes, Mr. Patten had already begun to talk about making the issue central in the 2008 elections.

The Senate majority leader, Bill Frist (R-TN, pictured at left), had pushed ahead with the measure even though he knew that Democrats and a few moderate lawmakers in his own party had a good chance of blocking its passage. Senator Frist had initially resisted efforts to come up with a deal with conservative Democrats that would slash the tax but not abolish it entirely. But he signaled on Wednesday that he would allow a floor vote on a compromise if he could not pass a full repeal.

Few tax measures have generated as much passion. The estate tax currently affects less than 1 percent of families, and it is the most progressive tax in the country because its impact is almost entirely on the nation's richest families. But opponents have campaigned for its repeal for more than a decade. They argue that it endangers family-owned businesses and farms, that it discourages saving and investment and forces people to spend billions of dollars a year on estate-planning efforts to minimize their tax liabilities.

But Democrats argued that repealing the estate tax would provide a windfall to the richest families and widen the federal budget deficit at the same time the nation's baby boomers reach retirement age and start running up the costs of programs like Social Security and Medicare. "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 Senator Harry Reid of Nevada, Democrat of Nevada and the Senate minority leader.

Under current law, which was part of President Bush's tax cut package of 2001, the estate tax is set to decline and eventually disappear in 2010 — but then resume in 2011.

At the moment, the government imposes a tax of about 46 percent on estates worth more than $2 million, or more than $4 million in the case of couples. Repealing the estate tax would lead to a reduction in federal revenues of more than $700 billion in the first 10 years after it became effective in 2011, according to the Joint Committee on Taxation. However, opponents say repeal of the tax would actually cost far less, in part because it would spur investment and in part because it would eliminate an incentive for tax avoidance. But supporters of the tax contend the cost of repeal could top $1 trillion, if the higher interest expense of bigger deficits is taken into account.

Earlier this week, Senator Kyl (R-AZ) circulated a alternate proposal that would have eliminated the tax on estates worth less than $5 million and imposed a graduated tax of up to about 30 percent on estates worth more than $30 million. But that proposal failed to win over more than two or three Democrats.

Recommend you also read the Anchorage Daily News editorial from June 8th opposing repeal of the estate tax. They provide a comprehensive laundry list of reasons to retain it.

Analysis: This is a good time to dust off one of Bill Clinton's catchphrases, "Mend it, don't end it". This applies to the estate tax. The main problem with the estate tax is that too many people who inherited homes and businesses were forced to sell them to pay the taxes. This is not only ridiculous, but contravened the decedent's wishes. However, the original concept was designed so that if the idle rich pass on huge gobs of cash from one generation to the next, we get a piece of the action.

My recommendation: Make the estate tax apply to cash inheritances only. Start with 20% at the $1 million level, gradually escalating to 40% at the $10 million level (these are numbers I toss out mostly for the sake of argument). This not only exempts homes, businesses, and other commodities, but simplifies the process for cash inheritances. Our taxation system should be designed to promote revenue enhancement and continued voluntary compliance, not create a huge class of financial parasites who spend every waking moment figuring out the latest tax dodges.

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