Estate tax deal: worst part of a bad tax compromise

Estate tax provision would exempt first $5 million and charge only 35 percent on the rest of wealthy estates.

Alex Brandon/AP
Sen. Claire McCaskill (D) of Missouri (right) accompanied by Democratic senators, from left, Dianne Feinstein of California, Robert Menendez of New Jersey, Charles Schumer of New York, Jeff Merkley of Oregon, and Debbie Stabenow of Michigan, gestures during a news conference on Capitol Hill in Washington Dec. 3, criticizing extending tax cuts for the wealthy. On Dec. 6, the White House announced a compromise with Republicans extending those cuts and including an estate tax rate that is lower than it was in 2009.

The tax deal reached by President Obama and congressional Republicans (but not Hill Democrats) includes a bit of good, some bad, and some really ugly.

To summarize, this package would make nearly the entire individual revenue code permanently temporary, which is horrible tax policy. It gives the lie to the pious talk about deficit reduction we’ve heard recently. And much of it will do nothing to stimulate the economy, fervent claims by supporters to the contrary. As George W. Bush might have said, “heckuva job, guys.”

Let’s start with the allegedly temporary aspect of a plan to continue the 2001 and 2003 tax cuts for two more years. Like the dozens of special interest tax breaks that get extended a year or two at a time, we now seem on the way to doing the same for the basic structure of the income tax. It is the worst of all worlds, combining the uncertainty of temporary tax law with the massive (but hidden) cost of never-ending tax breaks.

No-one can seriously think Congress will let any of these tax cuts expire on the cusp of the 2012 election, as they are scheduled to do under this deal. If the economy is still soft, pols will tell us it is not the time to let the tax cuts expire. If it is strengthening, they’ll claim low taxes were the reason and insist they should be continued. Either way, the 2001 rate structure will go on, a year or two at a time, until Congress finally agrees to enact major tax reform. And they will add trillions of dollars to the national debt, notwithstanding all the recent cries for fiscal responsibility.

It would be nice if Congress did what former Budget Director Peter Orszag, my Tax Policy Center colleague Len Burman, and others have suggested, which is to use the next couple of years to enact serious tax reform. It would be nice. But it won’t happen.

Remember the virtuous talk of fiscal prudence that washed over Washington for, oh, three days last week. Forget it. Forget as well the promises of change that Republicans (and Obama before them) brought to Washington. This is business as usual and at its worst: You have a bad and expensive idea. I have a bad and expensive idea. Let’s compromise and pass both of our bad ideas.

As of this morning, I have not seen any revenue estimates, but the leaks suggest the price-tag will be $700 billion to $900 billion. And while the package is being spun as much-needed stimulus, it contains an awful lot that will do little or nothing to boost the economy. Among those provisions that are a waste of money if you are interested in short-term economic growth: extending the patch on the Alternative Minimum Tax, continuing the high-bracket tax cuts, extending dozens of expiring tax provisions, and restoring the estate tax at extremely generous levels. Add it up, and one-third or more of this new “stimulus” will do little if anything to boost growth.

The best that can be said for this collection of tax breaks is that they are not contractionary, which is why they, or something very much like them, will pass. And the package does include some provisions that may provide short-term help, such as extensions of the expanded child credit and earned income credit, the low- and middle-income rate cuts, and the extension of long-term unemployment benefits. Replacing the Making Work Pay Credit with a bigger but more poorly targeted payroll tax holiday may increase consumer spending a bit. The, ahem, temporary new incentives for business investment may accelerate some equipment purchases, but they will also open the door to massive sheltering opportunities.

The worst element of the deal is the proposal to resurrect the estate tax, but at a rate of 35 percent. This is unconscionable given the nation’s fiscal mess. Never mind the proposed exemption of $5 million, which is bad enough. If you are among the mega-rich, that is merely a bauble on your Christmas tree of life. The real gift here is the proposal to let the richest of the rich pass on estates to their heirs at an even lower rate than in 2009. Obama now gets to explain to GS-3 federal clerks why they get to take one for the team while those estates of up to $10 million pay no tax and estates of $100 million pass on nearly $70 million free and clear. Restoring the estate tax to 2009 law would increase the national debt by $265 billion over 10 years. This version will cost lots more than that.

I suppose this package could have been worse. But offhand, it’s hard to see how.

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