DMI Blog

Harry Moroz

The Middle Estate

At the beginning of the month, Senator Blanche Lincoln, Democrat of Arkansas, sponsored an amendment to the Senate’s budget plan that was designed to provide “estate tax relief”. In essence, the amendment would increase the exemption from the estate tax to $5 million (it is currently $3.5 million) and lower the maximum rate to 35% (it is currently 45%). President Obama proposes to maintain the current estate tax structure, but index the exemption for inflation.

As others have documented quite well – see Mark Thoma's chronicling and Michael Kinsley’s Washington Post piece – the decision of ten Democratic senators to lend their support to the amendment’s passage is mystifying. After all, about 80% of the estate tax is currently paid by households in the top 1% of earners and 99.7% is paid by households in the top 20%. Only 550 small businesses and farms likely owe estate tax in 2008 and will benefit from leniency in the tax code so that the actual amount owed will be relatively small. Indeed, only 0.28% of estates would experience any “relief” because of Lincoln’s amendment.

For a tax that opponents claim raises little revenue – though the Congressional Budget Office has calculated massive revenue losses from past attempts to pare down the tax – and that affects very few individuals, the estate tax is always a contentious issue. Perversely, House Republicans used “estate tax relief” to torpedo a minimum wage increase in 2006. Last year, it was former Senator Ken Salazar of Colorado who led the estate tax reform charge for the Democrats.

Perhaps the reason why “estate tax relief” legislation consistently reappears and high numbers of Americans claim to support its abolition – the anti-tax Tax Foundation says 66% favor complete elimination – is because the tax is always presented as a tax on getting or being rich. The focus is all about income status, not wellbeing.

But the estate tax is not about confiscating wealth for redistribution, but about encouraging spending during a wealthy individual’s lifetime and limiting the intergenerational transfer of wealth. This is something that all middle-class Americans should support simply because the concentration of wealth makes it more difficult for them to obtain a middle-class standard of living.

Indeed, being “wealthy” requires a certain income or ownership of a certain number of properties or stock or whatever. In contrast, being middle class involves a slew of non-income-related characteristics: access to health care, access to higher education, a stable home. Even if the estate tax does not generate gobs of revenue, the tax effectively rewards public policy efforts to create the conditions for higher standards of living – the conditions of both middle-class living and of wealthy living – over the vagaries of family inheritance.

Arthur Laffer might mock the estate tax for reducing the economy’s capital stock by $850 billion, but the fact remains that this $850 billion is left not only to private investment decisions, but the private investment decisions of a few wealthy families (The $850 billion merely results from estate tax payments that would instead be passed from one generation to the next.). Indeed, the goal of estate tax opponents is to allow wealthy individuals to leave more money to their heirs: why should we believe that lowering the estate tax will then encourage more productive uses of the funds, beyond those that will accrue mostly to already wealthy heirs? And pointing out that the wealthy use tax shelters to avoid estate tax payments, anyway, is about as significant as pointing out that basketball players sometimes foul on purpose to stop a dwindling clock. Against the spirit of the game, sure. A reason to get rid of the rules altogether, certainly not.

The Center on Budget and Policy Priorities notes that the Lincoln amendment would cost the government about $440 billion between 2012 and 2021. The negative effects of the amendment, which is designed to be deficit-neutral, are apparent: middle-class Americans would be burdened with more of the cost of public services. Those who work for their money would be forced either to pick up a bigger share of the tax bill or to suffer cuts in services essential to middle-class families and communities.

But the estate tax functions in a positive way, as well, recapturing some of the taxes that the wealthy have avoided throughout their lives and reaffirming the role of public policy in creating the environment in which the middle-class and the wealthy can both thrive.

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Posted at 1:46 PM, Apr 15, 2009 in Economy
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