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The Public Policy
A Tale of Two Taxes
For Washington's tax writers, it is the best of times and the worst of times. On one hand, the alternative minimum tax, which has created political angst for years running, has already been "patched" for another year. On the other, a looming debate over the estate tax could be even more politically charged. Examining these two taxes -- with important similarities but a fundamental difference -- yields great insight into the dynamics of U.S. tax policy.
Perennially "patched" to negate its unintended ensnaring of middle-income earners, the AMT has become the tax world's Sisyphean task. Its sizable cost -- and whether it should be offset -- make it the stone Congress laboriously rolls up the Hill each year…only to see it roll down the next. This has made it a "lights out" legislative issue -- done at year's end with other tax items attached. Until this year. The economic stimulus' size and urgency allowed the AMT to pass rapidly and unoffset through Congress.
But those thinking Washington will be spared a tax fight, can think again. Looking deeper into the tax code, one finds an even more politically explosive tax provision lurks.
Labeled the "death tax" by foes, the estate tax has more facets than the Hope diamond. Reduced in the 2001 tax cuts, it goes on a whip-sawing roller coaster ride over the next three years. In 2009, it assesses a 45% rate on estates over $3.5 million, disappears completely in 2010, and then reverts to its pre-2001 level of 55% for estates over $1 million in 2011.
Political liability and fiscal opportunity arise from this wild ride compelling legislators to it. Politically, it will be extremely difficult to have the tax disappear for one year and then sky-rocket back to pre-2001 heights. For opponents, this would be akin to Moses leading his people into the Promised Land…and then seeking to lead them out a year later! Fiscally, this on-off-on scenario opens the door to "budget baseline arbitrage" -- anything less than 2010's full repeal will yield "savings" relative to budget estimates -- a fiscal windfall worth billions.
This tale of two taxes has some intriguing similarities.
First, both are expensive. When the Congressional Budget Office estimated the 10-year cost of maintaining just the 2007 AMT fix (then the most recent), it was $646 billion. CBO estimated permanently eliminating the estate tax would cost $668 billion over the same period. Second, both affect a small percentage of respective filers. Separate 2005 CBO studies showed just 1 percent of income tax filers were subject to the AMT in 2000 and "…fewer than 2 percent of all estates have had to pay estate taxes."
The two are also exemplars of unintended consequences. The AMT was designed to ensure no wealthy individuals escaped tax liability. With its exemption and rate brackets unadjusted for inflation, it captures increasing numbers of middle class taxpayers. The estate tax was implicitly a temporary measure -- enacted in 1916 to compensate wartime tariff shortfall. The Kaiser may be long gone, but the revenue raiser remains.
Both even have their defenders. For purists, the AMT is a comparatively flat, low, and broad system many reformers seek. For those anxious of wealth's concentration, if not its redistribution, the estate tax works against large legacies.
Yet there is a fundamental public perception difference between the two. The AMT is largely unknown to its potential victims. Its annual "patching" mutes its impact on taxpayers. It is hard to demonstrate the non-calamity of a non-event. Most potential victims are neither fearful, nor grateful.
The estate tax is just the opposite. It is viscerally known and universally reviled -- even by those who may never face it! It strikes not only at estates, but at the American dream: the Jeffersonian ideal of the small farmer and business person seeing their life's work wrested from their family's hands. It smacks of unfairness -- resources having passed through the tax thresher repeatedly over a lifetime being gleaned again when the Grim Reaper visits. Death and taxes may be inevitable, but most believe that taxes at death should not be.
The result seems counterintuitive: while the estate tax may reach far fewer, it may be even more politically potent than the AMT. The AMT's impact is concentrated -- particularly in areas with high state and local taxes because these are not exempt from it as they are under the regular income tax. The estate tax's impact is dispersed all across the country, particularly in the country -- i.e., on farms. This gives opponents a broad swath in which to seek Congressional support.
The estate tax assures Washington will not miss its annual contentious tax fight. Both taxes also underscore an important reality behind taxes in America. The AMT shows, it is difficult enough to raise taxes in general. And the estate tax demonstrates, the more real the tax becomes to the public, the more it offends their sense of fairness and the more adamant their opposition to it.
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Rick Josey| 3.26.09 @ 9:55AM
The whole tax debate usually misses the point. Whether Congress is taxing us being born, living, or in death, the real question is "Why?"
Why the ever-present heavy taxation?
TO FUND BIG GOVERNMENT.
The solution to the tax mess is to ...
1. CUT the bloated monster we call the federal government. GOVERNMENT IS WAY TOO BIG. Eliminate entire "departments" which take power away from the states and generally meddle in Americans' lives.
2. Implement the FairTax. Eliminate the taxation of productivity. Only tax purchases, at a fair rate for all Americans.
This will ELIMINATE THE NEED for heavy taxation and will STREAMLINE THE PROCESS and make it more fair and palatable for every citizen.
Sure, the liberal lunatics in Washington (both parties) will not go for this simple, common-sense solution. But there is a first-step solution for that...
Vote 'em out.
www.PatriotHangout.com
mark| 3.26.09 @ 10:19AM
Actually as a conservative I find the estate tax to be the least unjust of all taxes. I would cut all other taxes except a sales tax before I would cut the estate tax. Why should someone receive benefit for something that they had nothing to do with. People who pay it won't care as they will be dead and those that would have received the inheritance will have to work a little harder. The estate tax can be totally avoided by either the gifting, transfer, or sale of assets. The more I think about it I would like to know what the net effect on revenues would be if the rate on estate taxes were raised to 100% and all others federal taxes were eliminated. I would then cut off all Federal spending for any purpose not enumerated in the Constitution. Rebate to all Americans all past individual FICA contributions. If any revenue shortage then existed I would then install a Fair Tax (Federal sales tax) at a percentage rate sufficient to cover the shortfall. The result would be more jobs as companies rush to locate in the US, more investment and savings, and more revenue as the underground economy would begin to pay taxes. Three side benefits would be the elimination of the IRS, $500B saved from the cost of figuring out who owned whom what, and reducing the role of politicians in tax policy. There problem solved in ten minutes...Mr. Geitner please send my check for $782B to the following Swiss account...
Pingback| 3.26.09 @ 12:21PM
The American Spectator : A Tale of Two Taxes | Money Blog : 10 Dollars : Money Articl links to this page. Here’s an excerpt:
Shamus| 3.26.09 @ 1:04PM
The estate tax is not so much a levy on inherited wealth as it is on lack of financial planning. If you hire the right lawyers and accountants, then you'll retain your wealth.
Al Adab| 3.26.09 @ 2:14PM
What a great country. We tax the dead to prevent the living from enjoying a better life through the love of their parents. What a wonderful sense of justice our rulers have to know how much is enough. People should be allowed the use of their earnings, the fruit of their labor, while alive and should be encouraged to provide for their heirs as they see fit. When Government began to decide who was worthy and what was too much we began a long slide toward what Hayek rightly called "serfdom".
pete the mediocre| 3.26.09 @ 2:29PM
The death tax is a particularly onerous tax that causes the loss of family farms and businesses. All of the wealth that has been amassed over generations has already been taxed at every level. To tax someone because they die is grossly unfair.
Shamus's point is excellent and is exactly why the estate tax should be done away with.
CarlH| 3.26.09 @ 4:57PM
There is a lot of misinformation in the posts above. Here are the facts from a tax attorney (me):
The death tax is really three taxes that work together: gift tax, estate tax, and GST (generation skipping tax). All three taxes work together to tax high net worth people who transfer their assets to their relatives or friends during life or at death.
A person cannot just give away their assets (unless it is to a charity) before death and escape the estate tax. If you do this, you will be hit with the gift tax and the GST tax.
A person cannot escape the death tax by just having estate planing done. If you have a large enough estate, you will pay a very high tax on it if you try to pass it to your relatives or friends, even with estate tax planning. The planning only lessens the tax to a certain point.
The death tax hits lots of people and breaks up family farms, businesses, etc. The liberals lie and make it sound like it only hits a small amount of people. Go to any city in America and you will find many law firms who have big practice groups with thousands of clients who need estate tax planning.
Every conservative should be against the death tax because it is a Marxist wealth redistribution device.
alphadoc| 3.26.09 @ 10:30PM
If the estate tax comes back suddenly in 2011 as planned, expect to see a a massive die-off ( suicide or homicide) in Dec 2010 as bgger than any deadly epidemic. Wealthy families can have a big holiday "going away" party for their elderly progenitors to say goodbye and thanks for everything!
Granddad| 3.27.09 @ 12:30PM
The estate tax (and gift tax, and GST) are simply theft.
There is no moral - or legitimate legal - right for the State to confiscate the property of its citizens. To do this at death, because that citizen has accumulated through work, thrift, and investment "too much" property, is still theft.
Its not different than walking up to a person on the street sticking a pistol in their face, and taking their wallet.
Mark| 3.27.09 @ 1:51PM
My question to Carl H. is if all Federal taxes other than the estate tax were eliminated could not one avoid the negative consequences of the estate tax ? Thank you for your response and I think your answer will reveal my intentions.
Adheeb| 3.30.09 @ 11:41AM
The 'Death Tax' proves beyond doubt that what you think is yours, is not. It's merely the fodder you feed upon while you're being milked. When you die, the fodder you leave behind is used to feed a more productive animal but at least they stop milking you.
Rick V.| 5.13.09 @ 12:17PM
Okay, everyone, a show of hands please. Everyone who thinks that an across-the-board tax increase for all Americans will produce benefits for everyone, please raise your hands. Hmmm, interesting. Now, everybody who is ready to pay more taxes to produce this benefit, please raise your hands. Anybody? Well, what if you think other people should pay more taxes, raise your hands. Wow, quite a crowd. Okay, last question. Let’s see a show of hands of everyone who would like to pay less in taxes so they can take care of their own families and their own needs. Well, well, well.
Not that any elected kleptocrat asked, of course. They never do.
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