Estate tax debate to continue, as billions trickle away to rich

We’ll get to have the same arguments for the next two years, while more untaxed billions trickle away in windfalls to the rich.

Mike Owen
Mike Owen

Americans’ generosity to the wealthy knows few boundaries. Those boundaries appear to be relaxing even further in the tax deal announced Monday. Case in point: the estate tax.

Various options on the table for the estate tax would relax its impact on inherited wealth from current law. While not in effect in 2010, current law would return the estate tax to a level higher than it was as recently as 2009, when the maximum rate was 45 percent, with an exemption for the first $7 million ($3.5 million per spouse). President Obama had proposed making those 2009 parameters permanent, which would cost between $229 billion and $253 billion over 10 years, compared with current law, not including the interest on the added debt it promised.

Generous, to be sure, but until the deal announced Monday, it appeared to be a workable compromise. No one seriously expected they could repeal the estate tax, and no one expected the estate tax to return to a 55 percent maximum rate and $2 million exemption ($1 million per spouse) as it exists in current law for 2011. And the repetitive, often misinformed debate would effectively be ended. Now, instead of the President’s compromise, we appear to be looking at an estate tax of only 35 percent, with an exemption of $10 million ($5 million spouse), for two years.

Keep in mind that even at 2009 levels, the estate tax affected less than three-tenths of 1 percent of all estates — only the extremely richest fortunes being passed on — and is the only means to tax previously untaxed income for those fortunes. So, while working families see most of their income taxed, the extremely rich do not without an estate tax.

As noted in a Center on Budget and Policy Priorities analysis earlier this year, the parameters for a new estate tax as agreed to by the White House and Republican negotiators will be much more costly than the generous compromise earlier offered by the President. When proposed earlier this year by a bipartisan group of senators who have supported full repeal of the estate tax, including Iowa’s Chuck Grassley, CBPP noted the 35 percent/$10 million parameters would “cost considerably more” than the President’s proposal:

That would cost at least $60 billion more over ten years than making the 2009 rules permanent, despite soaring federal budget deficits. Moreover, the larger the estate, the greater the tax cut for wealthy heirs would be.

However, even that estimate is understated, because it assumed a phase-in of the 35 percent/$10 million parameters. As proposed, the cost is estimated to be more than double — $125 billion over 10 years.

Worth noting: The deal in Washington on the estate tax would be for two years. So, if the deal passes, we’ll get to have the same debate and hear the same arguments for the next two years, while more untaxed billions trickle away in windfalls to the rich.

Posted by Mike Owen, Assistant Director

Author: iowapolicypoints

The Iowa Policy Project is a nonprofit, nonpartisan organization that provides research and analysis to engage Iowans in state policy decisions. We focus on tax and busget issues, the Iowa economy, and energy and environmental policy. By providing a foundation of fact-based, objective research and engaging the public in an informed discussion of policy alternatives, IPP advances effective, accountable and fair government.

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