The Moral Imperative of Maintaining Inheritance Taxes

The tax issue that most definitely was not addressed in yesterday’s action in the Senate was the future of federal estate taxes, for the simple reason that Democrats probably didn’t have to votes to win on it. In a Bloomberg column, Richard Rubin has the sad, sad story:

Lobbied by business owners and billionaires, Democrats including Mark Pryor of Arkansas and Mary Landrieu of Louisiana resisted a proposal from President Barack Obama to tax individual estates of more than $3.5 million — roughly three in 1,000 — at a top rate of 45 percent. The split among Democrats, who control the Senate, will give Republicans more influence on the issue after the Nov. 6 election….

Republicans favor the $5.12 million exemption, which means a compromise on the issue would be more generous to estates than Obama’s plan.

One other reason, said Paul Caron, a law professor at the University of Cincinnati, is the “brilliant” public-relations move by estate tax opponents, who rebranded the issue as the “death tax,” making it unpopular even among those who will never have enough wealth to pay it.

Yep. Given how many Democrats during the last decade succumbed to the whole “abolish the death tax” campaign, it’s a minor miracle the estate tax still exists to be fought over. In fact, the only reason it remains is that the authors of the Bush tax cuts had to disguise its ultimate costs and thus could not enact any permanent cuts.

So the current battle is not over abolition of estate taxes, but over how much to gut them lest they return to the pre-2001 levels, as Rubin explains:

The politics of the estate tax center on two numbers: the per-person exemption and the top tax rate. The exemption matters most to business owners, farmers and ranchers who can use it to avoid estate tax liability. For billionaires, the rate is the priority.

This year, the per-person exemption is $5.12 million and the top rate is 35 percent. Obama agreed to those parameters as part of a December 2010 deal with Senate Republicans that also extended expiring tax cuts and created a payroll tax cut.

Obama proposed a $3.5 million per-person exemption and a 45 percent top rate, returning to parameters that were in effect in 2009. That would require 7,200 estates, or about 0.3 percent, to pay taxes.

If Congress does nothing, as would be the case if the Democratic bill and no others became law, the exemption would drop to $1 million and the rate would rise to 55 percent. Under that regime, the tax would affect about 2 percent of estates, or 55,200, according to the JCT.

The U.S. is expected to collect $11 billion in estate and gift taxes in fiscal 2012, according to the Congressional Budget Office. Obama’s plan would raise $9 billion more, and allowing the $1 million exemption and 55 percent rate to take effect would raise an additional $22 billion beyond Obama’s proposal, according to JCT.

So why wasn’t Obama’s estate tax proposal in the Senate bill dealing with other aspects of the Bush tax cuts?

Senate Majority leader Harry Reid, a Nevada Democrat, included Obama’s estate-tax proposal in the first draft of his bill. He then backed off after hearing objections from some Democrats, including Pryor and Kay Hagan of North Carolina.

Southern and western Democrats are forever being told, and a few themselves say, that this is all about “farmers and ranchers and small businesses.” But it’s not really:

Under current rules, the tax would affect about 200 small businesses and 100 farmers, according to the Joint Committee on Taxation. That would jump to 2,700 and 2,400, respectively, if Congress doesn’t act. The numbers under Obama’s proposal would be 400 and 300, respectively.

Looking beyond all the legislative maneuvering or the advisability of this or that “compromise,” it should be clear that if progressives don’t find a way to regain the moral high ground on federal inheritance taxes, they will eventually go away, probably sooner rather than later. As the first great champion of the estate tax, Republican President Theodore Roosevelt, observed in 1907:

No advantage comes either to the country as a whole or to the individuals inheriting the money by permitting the transmission in their entirety of the enormous fortunes which would be affected by such a tax; and as an incident to its function of revenue raising, such a tax would help to preserve a measurable equality of opportunity for the people of the generations growing to manhood.

Absolutely nothing has changed in the last century that requires an abandonment of TR’s perspective on the issue of untaxed inherited wealth, the great enemy of equal opportunity. While I admire those Democrats who are fighting a difficult rearguard action against the destruction of the estate tax via small but steady measures, at some point it will be necessary to get out of the weeds and make the broad moral arguments very loudly, even if it discomfits some Democrats who have drunk the hemlock of “death tax” rhetoric.

Ed Kilgore

Ed Kilgore, a Monthly contributing editor, is a columnist for the Daily Intelligencer, New York magazine’s politics blog, and the managing editor for the Democratic Strategist.