Fight Is On For A Better Tax Deal

Democrats in the House of Representatives today opted not to settle for the deal on tax cuts handed to them by President Obama and congressional Republicans, and that opens the door for us to fight to fix its worst features.

Democratic House members who voted to scuttle the deal in their party caucus meeting said that their main objection was its estate tax terms. After an estate tax rate of zero this year, the estate tax was scheduled to snap its 2000 level of a 55 percent rate on inheritances above $1 million exemption for individuals and $2 million for couples. A plausible compromise, which some Democrats on Capitol Hill would have been willing to accept, would have been a return to the 2009 estate tax rates instead, which was a 45 percent on estates greater than $3.5 million for individuals and $7 million for couples. At that rate, less than one-quarter of one percent of estates in the country would have faced any tax liability.

But, of course, the super-rich howled at the pain they would feel. Here's an account from today's Wall Street Journal with the jaw-dropping headline "Super-Wealthy Lose Estate-Tax Battle" [1]:

The inevitable return of the estate tax – after a one year, throw-momma-off-the-train hiatus in 2010 – had pitted the really, really rich against folks with, oh, nine million bucks. The debate was over how much income to exempt from the estate tax and how high the tax rate should be for the value of the estate ultimately subject to the tax. Each side had their lobbyists and coalitions, each side their water carriers on Capitol Hill.

For the billionaires in the super-rich category, the exemption didn’t matter much. Who cares if $10 million is exempt from taxation if the next $10 billion is going to be hit? What they wanted is a very low tax rate, 15%, or the same as the current capital gains rate. The merely rich – mostly business owners, doctors and the like – didn’t care about the rate so long as their estates wouldn’t be touched by any tax.

When Sen. Jon Kyl (R-Ariz.) asked what threshold would hold small businesses and family farms completely safe, the small business and farm lobbyists came back with an answer — $10 million.

The deal struck between Sen. Kyl and President Barack Obama clearly sides with the merely wealthy. The exemption is $5 million, but with some simple estate planning, a couple can shield $10 million of estate value from any taxation. The rate was set at 35%, equal to the highest income tax rate. So instead of treating inherited wealth as capital gains, like the fabulously rich wanted, it will be treated as income for the next two years, if the deal passes Congress.

Gary D. Bass, the executive director of OMB Watch, wrote this week [2] that President Obama "inexplicably gave away the store to Paris Hilton and other heirs to vast fortunes through the evisceration of the estate tax." Under the deal, crafted by Sens. Jon Kyl and Blanche Lincoln, that Obama sent to Congress, "only 0.15 percent of estates would pay any tax at all. That's about half of the number of estates that would have owed tax at 2009 exemption levels. Additionally, compared to keeping the 2009 levels, it adds another $90 billion to the deficit. Basically, the Lincoln-Kyl proposal, now endorsed by Obama, eviscerates the estate tax. "

Bass's numbers are confirmed by the Tax Policy Center, which this week issued a chart [3] showing that by embracing the Kyl-Lincoln estate tax rates rather than the 2009 rates, the Obama administration cut the number of estates subject to the tax nearly in half: from 6,400 to 3,600. The total number of small farms and small businesses that would have been hit by the estate tax was cut by the Obama tax compromise from a whopping 110 down to 50.

(That's right. All that rage you heard about small businesses and family farmers being hurt by the "death tax" that is being routinely swallowed whole by the mainstream media? It's all about 110 "small" businesses and 520 businesses total that would be covered by the 2009 rates.)

The larger principle at stake, however, is that, as Rep. Maxine Waters, D-Calif., writes today in The Huffington Post [4], the entire tax-cut deal reflects "a continuation of tax policies favoring the nation's wealthiest Americans [that] will have devastating socioeconomic impacts as well as grow the deficit." She goes on to write:

The past several years have disproved the notion that tax cuts for multimillionaires trickle down to create jobs for all Americans. While U.S. workers across all demographics have contributed to significant productivity gains, the middle class and poor remain on a treadmill of debt and stagnant wages as most of the nation's wealth flows to the richest top 1 percent. Public policies have and continue to play a critical role in sustaining the wealth gap and income disparities, and they must play a role in closing them.

The charts in Dave Johnson's post on the estate tax [5] reinforce Waters' message. As the estate tax has declined, there has been a coincident increase in income inequality as wealth has shifted upward.

A real deal for the American people would have focused on ensuring that every private sector and government resource possible was devoted to producing jobs and making sure that unemployed workers received the support they needed until they got those jobs.

Robert Borosage noted Wednesday [6] that a major problem with the Obama deal is that "the White House is bolstering the conservative tax cut mantra in selling it, even as it weakens the president’s own vital case for the need to invest in America." Fortunately, House Democrats have decided to force a conversation that could at least tilt this package closer to the right direction.