Before America had state sales taxes or a federal income tax, this sentiment echoed through the halls of Congress: Hit the "bloodsuckers of Wall Street." The federal estate tax was born – in 1913.
In the recent debate on the fate of that tax in the House, the language was usually tamer. The sentiment, though, was often similar: How can the United States tax more substantially the billionaires and multimillionaires of the financial industry, people often blamed for the market crisis and the "great recession"?
Britain is levying a one-time "supertax" on large bonuses for bankers. Other nations may follow. But these moves may not raise much revenue. A steadier, slower way would be to tax the heirs of the very rich with a solid estate tax.
On Dec. 3, the House voted to make permanent this year’s rates – 45 percent on estates over $3.5 million for individuals and $7 million for couples. Now the future of the estate tax lies with the Senate. Its members need to act quickly. Under the 2001 Bush tax cuts the estate tax will disappear entirely for 2010, and then reappear in 2011 at a higher rate – 55 percent for estates of more than $1 million.
But with 46 to 68 millionaires in the Senate (the count hangs on whether one uses minimum or maximum net-worth numbers), will the chamber vote to maintain a tax that could damage its members’ own estates? Because 22 senators own at least $3.5 million and 14 own at least $7 million, should they recuse themselves from a vote that so directly affects their interests? The Center for Responsive Politics calculates the average wealth of US senators in 2008 at $13.9 million.
Possibly the Senate will extend the 2009 rate a year by amending an urgent bill soon. Then the issue could be deliberated more leisurely in 2010. At stake are hundreds of billions of tax revenues that might shrink looming budget deficits over the next 10 years.There are faster ways to tax Wall Street’s rich:
1. Raise the tax rate on capital gains and dividends.
Instead of the 15 percent put in place in 2003, it could rise to the 28 percent rate in 1986 under President Reagan or the 20 percent rate in 1997 under President Clinton. A middle-income person typically pays 25 percent plus payroll taxes.
"If you go out and sweat" to earn income, you pay normal income tax rates, says Robert McIntyre, director of the liberal Citizens for Tax Justice. "If you sit around and wait for the dividend checks to come in," you pay the low capital-gains rate.
2. Apply the Medicare tax to investment income.
Now, it only applies to wages and salary.
3. Close a carried interest loophole.
Successful managers of hedge funds and private equity funds currently cut their taxes by classifying income as capital gains rather than regular income.
As for the estate tax, it is expected to raise $27 billion for Uncle Sam this year. The House bill would raise a similar amount in 2010. But if the pre-Bush tax rate was restored, the federal government would raise another $230 billion over the next 10 years.
The House bill "is more than generous" to the wealthy, complains Chuck Marr, an expert at the Center on Budget and Policy Priorities in Washington. The 1 in 500 estates subject to the tax will pay 18.9 percent of the estate’s value on average, he notes.