Commentary: The Case for a Strong Estate Tax

On Capitol Hill, there exists a debate about the future of the Bush tax cuts and the federal estate tax. While President Bush's 2001 tax policy eliminated the estate tax for 2010, it is set to return to pre-Bush tax cut levels in 2011 unless Congress intervenes. How Congress chooses to address the estate tax will have significant implications for the federal budget deficit and the fair distribution of the nation’s prosperity.

The estate tax is the country’s most progressive tax, and it affects only the super-wealthy. In 2009, the first $3.5 million ($7 million for a couple) of a family’s wealth was exempt from the estate tax. For amounts over that exemption, the tax rate was 45 percent after first allowing the family to reduce the size of the estate through various means, such as giving money to a charitable cause. Should the tax return at pre-tax cut levels, the exemption will drop to $1 million ($2 million for a couple), and the taxable rate will be higher than in 2009.

Conservatives are pushing to kill the estate tax outright, but the chances of full repeal are low. However, Congress might reach a compromise between repeal advocates and estate tax supporters that severely weakens the tax. Both short- and long-term economic considerations, however, argue for a robust estate tax that brings in vital revenue and prevents an extreme concentration of wealth in the hands of a few.

At the end of 2009, when Congress was debating permanently extending the estate tax, the range of policy solutions within the debate was defined by two proposals. One proposal, sponsored by Sens. Blanche Lincoln (D-AR) and Jon Kyl (R-AZ), which would have raised the exemption level to $5 million for individuals ($10 million for couples) and lowered the taxation rate to 35 percent, would have essentially gutted the estate tax. Compared to current law, the Lincoln-Kyl bill would have reduced revenues by some $500 billion over ten years.

Another proposal, put forward by President Obama in his FY 2011 budget request, would extend the 2009 estate tax rates and index them for inflation. Although the Obama proposal would raise significantly more revenue than the Lincoln-Kyl proposal, it would cost the Treasury about $250 billion over ten years. Congress eventually incorporated the president's proposal into a bill introduced by Rep. Earl Pomeroy (D-ND), which the House adopted before the winter recess. The Senate, however, could not come to an agreement on the bill, and the estate tax disappeared on Jan. 1.

In June, Sens. Bernard Sanders (I-VT), Tom Harkin (D-IA), and Sheldon Whitehouse (D-RI) pushed the spectrum of available policy options slightly to the left by introducing a more progressive estate tax bill. The Responsible Estate Tax Act, which OMB Watch, along with over 70 national and state organizations, recently called on senators to co-sponsor, would keep the 2009 estate tax exemption level of $3.5 million but would institute a more progressive rate structure. The tax rate would range between 45 percent for estates just above the exemption threshold to 65 percent for billionaires.

With Washington consumed by fears of high deficits, Congress is scaling back annual budgets when federal programs in education, health, infrastructure, nutrition, and other priorities still lack full investments. A strong, progressive estate tax could help fund these priorities. Conversely, a weak estate tax would only further hinder the government's ability to make important investments in the nation. The White House forecasts that without an estate tax, the government will lose close to $15 billion in 2010 alone.

Beyond the immediate financial needs of the country, though, there is another very important reason to have a robust estate tax: to help break up extreme concentrations of wealth. When the federal government enacted the estate tax in 1916, it did so with the recent memory of the robber barons and with the explicit intention of keeping the country from turning into an oligarchy.

Concerns about the U.S. slipping into an oligarchy are cropping up once more. Sanders, writing in The Nation, examined the specifics:

The 400 richest families in America, who saw their wealth increase by some $400 billion during the Bush years, have now accumulated $1.27 trillion in wealth. Four hundred families! During the last fifteen years, while these enormously rich people became much richer their effective tax rates were slashed almost in half. While the highest-paid 400 Americans had an average income of $345 million in 2007, as a result of Bush tax policy they now pay an effective tax rate of 16.6 percent, the lowest on record.

At the same time, middle- and lower-class families have been decimated by stagnant wages, higher costs for necessities, and an historic loss of wealth due to the financial markets collapse spurred on by the bursting of the housing bubble. These details bear out in research conducted by the Center on Budget and Policy Priorities in June, represented most clearly by this shocking graph:

Center on Budget and Policy Priorities

Much of this is due to the Bush tax cuts of 2001 and 2003 and the associated whittling away of the estate tax.

Beyond preventing an oligarchic concentration of wealth, the estate tax also has implications for addressing unmet needs. For example, a family can make contributions to charity to reduce the taxable size of an estate. This incentive has helped to create foundations and has provided needed resources to charities and churches throughout the United States. These contributions supplement needed revenue at the federal and state levels and provide another key reason why the estate tax is of vital importance to communities across the country.

Without a strong estate tax, which must have a progressive rate structure to capture the wealthiest of the wealthy, this country will continue to slip toward the very few controlling most of the wealth, undermining the basis of an egalitarian society envisioned by its founders.

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