A widely overlooked provision in last month’s tax cut deal is going to speed even more wealth to America’s Paris Hilton set.
Brace yourselves, young people. In 2011, you figure to face a real stinker of a year. Those of you attending America’s budget-strapped public schools are going to find yourselves packed into many more overcrowded classrooms. If you’re matriculating at the higher ed level, you’ll be laying out much more for tuition.
And if you’re entering the workforce, good luck. You’ll be competing with 15 million older — and more experienced — jobless for the fewer than 100,000 new jobs our “recovering” economy has, of late, been adding every month.
Your parents, as young people, never confronted an economic landscape this dreary. And neither did their parents. Hell of a century we have going here.
But wait, things might not actually be all that bleak. Some young people figure to do quite nicely in 2011. Indeed, some young people this year will be getting richer quicker than they could have ever imagined.
To what will these youngsters owe their sudden good fortune? Give that credit to the tax cut deal that the White House and GOP leaders bargained last month. This tax deal, as finalized just before the holidays, includes a little-noticed provision that’s going to quickly enrich the young loved ones of America’s already rich.
This obscure new provision comes above and beyond the tax deal’s extension of the Bush tax cuts for the rich enacted back in 2001 and 2003. That extension keeps the tax rate on income in America’s top tax bracket at 35 percent and locks the tax on profits from trading stocks and other assets at just 15 percent.
Last month’s tax deal also drops the estate tax due from wealthy families down below the bargain-basement estate tax rates in place during the Bush years. In 2011 and 2012, wealthy couples will be able to exempt from estate tax the entire first $10 million of their fortunes — and pay a tax no higher than 35 percent on what, after various allowable deductions, remains.
In January 2009, George Bush’s last month as President, couples could only exempt $7 million of their fortunes from estate tax and faced a 45 percent rate on what remained after other deductions.
All these income and estate tax benefits in the tax deal — for the rich — have received fairly widespread media attention. But the tax deal’s ample generosity to America’s most financially favored goes even further. The deal guts a federal tax levy on wealth most Americans don’t even know exists: the “gift tax.”
Wealthy Americans, ever since 1932, have been paying taxes on any substantial gifts they pass on to family and flunkies. Why a “gift tax”? Without a gift tax in effect, the wealthy could easily sidestep the estate tax by giving away the bulk of their fortunes before they die.
With a gift tax in effect, the wealthy can still give away whatever they want, whenever they want. But if they try to pass a huge chunk of change to junior before they die, they have to pay Uncle Sam a tax on that chunk.
This gift tax has always come with exemptions. Gifts to charities have never been subject to gift tax. And deep pockets have also enjoyed both a “lifetime” and annual exemption on the gifts they make to individuals. Since 2002, the “lifetime” exemption has stood at $1 million.
The annual gift tax exemption rises with inflation. Over the last two years, deep pockets have been able to give away up to $13,000 per person without having to report this outlay on their tax return — and without having the outlay count against their $1 million lifetime gift tax exemption.
In other words, a wealthy married couple with two kids can gift $52,000 a year and not have their lifetime gift tax exemption reduced one dime.
How does last month’s tax cut deal impact all this? In 2010 and 2011, the tax deal fine print stipulates, the lifetime gift tax exemption jumps from $2 million per couple to $10 million a couple.
Even better, the tax cut deal fine print lets stand a complicated estate planning technique known as the “Walton grantor retained annuity trust” — named after the heirs of the Wal-Mart fortune — that allows America’s wealthy to undervalue the actual worth of the assets they give away.
With a higher new lifetime gift tax exemption and a wide-open Walton loophole, estate tax expert Stephan Leimberg recently explained to Forbes, the rich will be able to shift “an unbelievable amount of wealth” beyond the reach of the IRS.
“You have just witnessed a great bank robbery,” an amazed Leimberg gushes. “The doors of the Treasury have been thrown open.”
The only saving grace: This happy state of affairs — for the Paris Hilton set — rates as temporary. In two years time, under the tax deal, the entire new tax giveaway to the wealthy will end unless Congress votes another extension.
Tax advisers to the awesomely affluent are already advising their clients to make the most of their temporary good fortune. Grand gifts to juniors will no doubt proliferate this year and next. The wealthy have no reason to wait.
How much will all this “giving” cost the federal government in lost revenue? We have no real way of knowing. We do know that the rich have already — even before the new tax deal— been stashing staggering amounts of wealth in “trusts,” a gift category that minimizes “estate tax exposure.”
One new estimate of this stash, from a leading financial planning trade journal editor, places the total value of assets currently sitting in personal trusts at $1.1 trillion.
And that brings us to the ultimate irony facing young people today. Those extra new billions now speeding to the youthful offspring of America’s rich, if taxed at the higher gift and estate tax rates once considered routine and appropriate, could help bankroll the programs we desperately need to keep classrooms manageable, college affordable, and jobs available for all America’s young.
But those programs remain nowhere in sight. With a super-sized “gift tax” exemption in effect, we simply can’t afford them.
Sam Pizzigati edits Too Much, the online weekly on excess and inequality published by the Washington, D.C.-based Institute for Policy Studies. Read the current issue or sign up to receive Too Much in your email inbox.