Estate Tax News



New CTJ Reports Explain Obama's Budget Tax Provisions



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New CTJ Reports Explain the Tax Provisions in President Obama’s Fiscal Year 2015 Budget Proposal

Two new reports from Citizens for Tax Justice break down the tax provisions in President Obama’s budget.

The first CTJ report explains the tax provisions that would benefit individuals, along with provisions that would raise revenue. The second CTJ report explains business loophole-closing provisions that the President proposes as part of an effort to reduce the corporate tax rate.

Both reports provide context that is not altogether apparent in the 300-page Treasury Department document explaining these proposals.

For example, the Treasury describes a “detailed set of proposals that close loopholes and provide incentives” that would be “enacted as part of long-run revenue-neutral tax reform” for businesses. What they actually mean is that the President, for some reason, has decided that the corporate tax rate should be dramatically lowered and he has come up with loophole-closing proposals that would offset about a fourth of the costs, so Congress is on its own to come up with the rest of the money.

To take another example, when the Treasury explains that the President proposes to “conform SECA taxes for professional service businesses,” what they actually mean is, “The President proposes to close the loophole that John Edwards and Newt Gingrich used to avoid paying the Medicare tax.”

And when the Treasury says the President proposes to “limit the total accrual of tax-favored retirement benefits,” what they really mean to say is, “We don’t know how Mitt Romney ended up with $87 million in a tax-subsidized retirement account, but we sure as hell don’t want to let that happen again.”

Read the CTJ reports:

The President’s FY 2015 Budget: Tax Provisions to Benefit Individuals and Raise Revenue

The President’s FY 2015 Budget: Tax Provisions Affecting Businesses



Ultra-Wealthy Dodge Billions in Taxes Using "GRAT" Loophole



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A new Bloomberg report describes how billionaires have dodged an estimated $100 billion in gift and estate taxes since 2000, according to the lawyer who perfected the practice.

The trick involves temporarily putting corporate stocks (or similar assets) into a “Grantor Retained Annuity Trust” (GRAT), where the grantor gets the stocks back after two years, plus a small amount of interest, while any appreciation of the stock goes to the grantor’s heirs tax-free.

Because the initial gift has no inherent value (it’s essentially a gift to oneself), there is no gift tax at the time the GRAT is set up. The loophole is that the appreciation of the stock that goes to the heirs is not subject to gift tax either. As a result, extremely wealthy individuals avoid billions of dollars in gift and estate tax.

This is what Sheldon Adelson did (to take just one example) when he put much of his Las Vegas Sands stock in GRATs when the stock had plummeted during the recession. Adelson knew that the stock was likely to rise significantly from that low point. If Adelson had simply given his heirs the stock, the gift tax would have  applied to the value of the stock at the time it was given. Or if he bequeathed the stock upon his death, the estate tax would apply.

But by using GRATS, neither the value of the stock at the time it was temporarily put into the GRAT nor the subsequent appreciation was subject to gift or estate tax. See the graphic below from Bloomberg for how the shelter works in practice.

Many well-known figures, such as Facebook CEO Mark Zuckerberg, Goldman Sachs CEO Lloyd Blankfein and fashion designer Ralph Lauren, have set up GRATs to shelter their assets from gift and estate tax. Bloomberg estimates that Adelson, whose net worth is more than $30 billion, has already avoided at least $2.8 billion in US gift taxes using at least 25 different GRATs over time.

For his part, Adelson has not just sought to follow (or exploit) whatever law is on the books, but has actually taken an active role in trying to shape the law and the government that enacts it. In 2012, Adelson spent an astonishing $150 million to support conservative candidates and has said that he’s ready to “double” his donations to candidates going forward. Considering the billions that Adelson has at stake, this exuberant campaign spending may actually be a prudent investment if it works to preserve the GRAT loophole and the plethora of other massive tax breaks for the wealthy individuals embedded in the tax code.

To their credit, the Obama Administration has proposed to curb (PDF) the use of GRATs by requiring that a GRAT have a minimum term of 10 years. As the Treasury explains (PDF, pg. 142), this would create some downside risk to using a GRAT because it increases the likelihood that the grantor will die before the GRATs paid out the appreciation to the heirs, at which point that appreciation would be subject to the estate tax. Unfortunately, this proposal has been brushed aside by Republicans who seek to eliminate the estate tax entirely and by some Democrats who are not enthusiastic about taking on a tax break used by the large campaign donor class.



What Are the Tax Implications of the Supreme Court Ruling on Marriage Equality?



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The Supreme Court’s decisions striking down the law banning federal recognition of gay marriages, as well as the Court’s decision to not rule on the California ban on gay marriage that the state government has decided not to enforce, make our nation’s tax system fairer and are expected to reduce the federal deficit.

Up until the Supreme Court's ruling, the Defense of Marriage Act (DOMA) prevented the recognition of same-sex marriage for the purposes of more than 1,100 different federal laws, including many tax provisions that consider marriage status when determining an individual’s rights and responsibilities. For example, the original petitioner in the Supreme Court case challenging DOMA, United States v. Windsor, Edith Windsor was forced to pay an additional $363,053 more in federal estate taxes because her same-sex marriage was not recognized for the “surviving spouse” estate tax exemption. Because of the Supreme Court ruling in her favor, however, the IRS will have to pay Windsor back the $363,053 taxes she paid originally, plus interest.

Windsor’s windfall notwithstanding, the overall effect of recognizing gay marriage is likely to reduce the federal deficit. A 2004 report from the Congressional Budget Office (CBO) concluded that if the federal government recognized gay marriages performed in all the states, revenues would increase by around $400 million a year and outlays would decrease by $100 million to $200 million a year. These are relatively small numbers in the context of the federal budget, and the effect of this week’s rulings will be smaller because the Court ruled that the federal government must recognize gay marriages only in the minority of jurisdictions that have legalized it. (Currently, only 31 percent of the US population lives in a state that allows the freedom to marry or honors out-of-state marriages between same-sex couples.)

Nonetheless, CBO’s findings provide an answer to critics like the chairman of the Alabama Republican Party, who complained on Wednesday that Alabama taxpayers would “be on the hook” for funding federal benefits for same-sex spouses.

The reason for the revenue increase is that same-sex spouses will now generally file jointly, whereas previously they were barred from doing so. While the effect of this will increase revenues overall, some same-sex spouses would actually see their tax rates go down, depending on how much each spouse makes.

On the state level, studies have similarly found that allowing same-sex marriage would increase revenue slightly. One think tank found, for instance, that allowing same-sex couples to marry will generate $7.9 million benefits to state coffers in Maine and $1.2 million in Rhode Island.




Senate Budget Debate Shows Support for Increased Revenue, Sales Taxes on Internet Purchases, and More



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On Saturday, the Senate approved the budget resolution that was crafted by Budget Chairman Patty Murray of Washington State, by 50 votes. (The resolution would have received 51 votes if New Jersey Senator Frank Lautenberg not been absent due to an illness.)

The most important implication of this vote is that a majority of Senators agreed that Congress should raise $975 billion over a decade and cut spending by the same amount, rather than attempt to achieve deficit-reduction entirely through spending cuts. Indeed,  the Senate rejected several amendments that would have reduced or eliminated the revenue increase.

The description of the plan from Murray’s budget committee staff explains that revenue would be raised by “closing loopholes and cutting wasteful spending in the tax code that benefits the wealthiest Americans and biggest corporations.” But a great deal is left to be determined because, as we explained earlier, this budget resolution offers no details on which loopholes or wasteful tax expenditures might be limited.

Murray Plan in the Senate a Stark Contrast to the Ryan Plan in the House

In any event, the Senate budget resolution is so different from the resolution approved by the House (the plan crafted by House Budget Chairman Paul Ryan) that it’s difficult to imagine how a Senate-House conference committee could ever “reconcile” or “merge” the two documents.  As CTJ has already demonstrated, the Ryan plan would provide millionaires an average net tax cut of at least $200,000, and possibly much more.

Senate Would Give States the Right to Require Online Retailers to Collect Sales Taxes

The Senate approved, by a vote of 75 to 24, an amendment to allow states to require out-of-state remote retailers (like Internet retailers) to collect sales taxes from their customers. This amendment has no binding effect but it shows that there are enough votes in the Senate to pass important legislation (the Marketplace Fairness Act) that would give states this authority.

Currently, a state is allowed to require a retailer to collect sales taxes from its customers only if the retailer is “physically present” in the state. This creates an unfair advantage for a company like Amazon, which is selling its products remotely, over a company like Target, which is physically present (because of its stores) almost everywhere it does business. Even worse, states are losing more and more revenue as more commerce happens online — a trend that can only increase with time.

It’s worth repeating (as CTJ has explained before) that this proposal would not actually increase taxes, but would only facilitate the collection of taxes that are due (but rarely paid) under current law.

Many Other Amendments Have Little Meaning

Votes taken on amendments during the Senate budget debate are generally not binding. Their greatest significance is that they show whether or not enough votes can be gathered to pass a given proposal in the Senate. For example, the vote on allowing states to require remote retailers to collect sales taxes demonstrates that there are more than the 60 votes needed in the Senate to approve that proposal when it comes to the floor as an actual bill.

But other amendments are not as helpful in determining support for actual legislation, and can be best described as posturing with little real meaning.

For example, the Senate rejected a Republican-sponsored amendment to repeal the estate tax, but then approved by 80-19 an amendment sponsored by Democratic Senator Mark Warner “to repeal or reduce the estate tax, but only if done in a fiscally responsible way.”

The Senate’s approval of this amendment does not indicate that an actual bill to reduce or repeal the estate tax would get 60 votes because an actual bill would either have to include specific provisions to offset the costs, or the bill would clearly increase the deficit. There have been votes on such bills in the Senate many times and they have never received the needed 60 votes, much less 80 votes.

To take another example, the Senate voted 79-20 to repeal a tax on medical device manufacturers that was enacted as part of health care reform. This was one of the taxes enacted with the idea that companies that would benefit from health care reform should share in its costs. The budget amendment says that legislation should be passed to repeal the tax “provided that such legislation would not increase the deficit.”

An actual bill to repeal this tax would require some sort of provisions to offset the cost, or it would increase the deficit, and Senators voting in favor would have to be ready to support those offsetting provisions or the increase in the deficit. It’s not obvious that any such bill would get 60 votes.

There are many other examples of amendments that were mostly about posturing, and many would be terrible policy if they were enacted as actual legislation. The estate tax, for example, has been gutted in recent years even though it’s the one tax that addresses concerns about income inequality and the richest one percent pulling away from everyone else. And the medical device tax was part of the intricate compromise that was necessary to enact virtually universal health coverage without increasing the budget deficit. It’s unfortunate that so many Senators feel a need to pander to the special interests who want to repeal these taxes.



Join George Soros, Abigail Disney and Jimmy Carter in Calling for a Strong Estate Tax



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United for a Fair Economy (UFE) invites everyone who supports fair taxes to join a petition to Congress to enact a robust estate tax.

The petition drive was launched on Tuesday as UFE’s Responsible Wealth project convened a group of well-known policy and political luminaries supporting a stronger estate tax and billionaires who believe that their estates should be taxed upon their deaths. The group includes George Soros, Abigail Disney, Robert Rubin, President Jimmy Carter and others.

Richard Rockefeller (one of the Rockefellers) spoke about how public investments funded by taxes will improve the quality of life for his heirs in a way that his own money alone cannot.

"If the world I leave behind is one of gated communities, growing inequality and misery among the have-nots, downward mobility for the middle class, a degraded environment and a rotting social and physical infrastructure -- then [my children's] inheritance will be a shabby one -- no matter how much money they get.”

The bill approved by Senate Democrats over the summer to extend most, but not all, of the Bush income tax cuts did not address the Bush estate tax cuts, which also expire at the end of this year. This is apparently because Senate Democrats themselves could not agree on how robust the estate tax should be.

The Bush tax cuts included the gradual reduction and eventual repeal (in 2010) of the estate tax. The “compromise” that President Obama signed that extended the Bush income tax cuts through 2012 does not repeal the estate tax altogether, but does set it at very low levels. Republicans and some Democrats in Congress want to extend these current rules, which exempt $5 million of an estate’s value per person, meaning a married couple can leave at least $10 million behind without triggering any estate tax. The taxable part of an estate is then taxed at a rate of 35 percent.

President Obama and many Democrats want to bring back the estate tax rules that were in place, for one year, in 2009, which exempted $3.5 million of an estate’s value per person (meaning $7 million for a married couple) and taxed the taxable part of an estate at 45 percent.

Citizens for Tax Justice has pointed out that even President Obama’s proposal (to reinstate the 2009 estate tax rules) would only tax an absurdly small number of estates. A 2011 report from CTJ shows that just 0.3 percent of deaths in 2009 resulted in estate tax liability. (The report also has figures for each state.)

The UFE petition recognizes this and calls for an estate tax that is more robust than what President Obama proposes, one that exempts $2 million of an estate’s value per person. The taxable part of an estate would be taxed at progressive rates, starting at 45 percent.



CTJ Joins Over 70 Organizations Endorsing Rep. McDermott's Sensible Estate Tax Act



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Given all the talk lately about the richest one percent and the other 99 percent, it’s surprising that more attention has not been focused on one federal tax that truly does target the richest one percent: the federal estate tax.

A coalition of organizations, including Citizens for Tax Justice, has sent a letter to Congress urging lawmakers to enact Congressman Jim McDermott’s Sensible Estate Tax Act, or, alternatively, to simply allow the estate tax cuts in effect now to expire at the end of this year.

The tax cuts enacted under President Bush included a provision that gradually reduced the estate tax over several years until repealing it entirely in 2010. As part of the “compromise” legislation that President Obama signed to extend the Bush tax cuts for two years, only a very scaled back version of the estate tax was allowed to come back for 2011 and 2012. If Congress does nothing, the estate tax cuts will expire at the end of this year and the pre-Bush estate tax rules will come back into effect.

And that would be just fine with us. Despite common misconceptions that the estate tax affects a lot of Americans, only the value of estates exceeding $1 million ($2 million for married couples) would be subject to the tax, and usually larger amounts can be passed on without tax because of breaks that reduce the tax (like deductions for charitable bequests and special breaks for family businesses and farms).

The other sensible option would be for Congress to enact Congressman McDermott’s bill, which would allow the overall structure of the pre-Bush estate tax rules to come back into effect, but would simplify the rules and make them a little more generous to families who might be affected by the tax. (For example, the McDermott bill would index for inflation the exemptions that keep the estate tax from affecting most of us.)

As the letter to Congress explains, under either approach, the estate tax would affect the richest one percent of Americans, those who have benefited more than anyone else from the public investments that create and sustain a prosperous society.

For more details, see the related press release.

Photo of Congressman Jim McDermott via SEIU Health Creative Commons Attribution License 2.0



State-by-State Estate Tax Figures Show that President's Plan Is Too Generous to Millionaires



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A new CTJ report shows that only 0.3 percent of deaths in the U.S. in 2009 resulted in federal estate tax liability. This provides a rough approximation of the impact that President Obama’s estate tax proposal would have, because the estate tax rules in effect in 2009 are the same rules that President Obama has proposed to make permanent. A more sensible alternative is the estate tax proposal announced yesterday by Congressman Jim McDermott.

Read the report.



Bizarre "Study" Claims Congress Can Raise Revenue by Repealing the Tax on Millionaires' Estates



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A “study” claiming Congress can raise revenue by repealing the estate tax, which was criticized at length by Citizens for Tax Justice in 2009, has been updated to provide a “solution” for the budget deficit.

Anyone who is not familiar with tax debates might be wondering, quite reasonably, how repealing a tax could increase revenue. The answer is, of course, that it can’t.

One claim made in these reports, which are commissioned by the American Family Business Foundation, is that extremely wealthy people will simply spend away their fortunes if they know they will be subject to the estate tax after they die, but they will invest those fortunes if they know they will be untaxed after they die. In the latter scenario, their argument goes, the increased investment will boost the economy and result in increased profits and incomes, which in turn would lead to increased tax payments.

The reports ignore the fact that extremely wealthy people will save and invest most of their money in any event because there’s not much else they can do with it. In our 2009 report, we put the question this way:

Can extremely wealthy people really spend away their millions on expensive dinners and cruises? That’s a lot of dinners and cruises. In 2004 (the last year before the amount of estates exempt from the tax was increased), 72 percent of estate taxes were paid on estates worth more than $3.5 million. And 61 percent of estate taxes were paid on estates worth over $5 million… Let’s say you had this sort of money and you wanted to keep your estate from being taxed by the federal government. What would you do? You can’t put it in stocks or bonds or even a savings account. You can’t buy fancy houses, because they would become part of your estate. Even if you buy expensive cars or yachts, those would be part of your estate as well (even if they lose some of their value before you die).

You would have to spend your entire estate on caviar or cruises or cocaine or something that won’t be around after you die. It’s unclear whether anyone can eat away, cruise away, or snort up their nose $5 million.

This is just one of the many bizarre conceptual problems with the claims that estate tax repeal would result in increased revenue. For more, read the CTJ report.



Grover Norquist Maneuvers Frantically to Avoid a Tiny Deviation from Anti-Tax Ideology



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The U.S. Senate voted last Thursday to repeal a tax break for the ethanol industry that cost $5.4 billion last year. Some observers interpret the vote as an indication that the grip of anti-tax ideologue Grover Norquist over Congress is loosening. However, Republican and Democratic lawmakers who have slavishly signed and followed Norquist’s so-called “Taxpayer Protection Pledge” will have to do far more to prove they can address our revenue shortfall in a serious and honest way.

The vote brought to a climax the months of sparring between Norquist and Senator Tom Coburn of Oklahoma over the idea of repealing tax expenditures as part of a compromise to reduce the deficit. 

Norquist’s Americans for Tax Reform (ATR) stated that even though it opposes ethanol subsidies, any repeal of the tax subsidy that was not offset with tax cuts represented a “a corporate income tax increase and therefore a pledge violation.”

The pledge in question is, or course, ATR’s so-called “Taxpayer Protection Pledge” which most Republicans and some Democrats in Congress have signed, swearing to forgo any tax increase until the end of time.

Once it was clear he was going to lose the vote on the subsidies (with 34 Republicans voting for the measure), Norquist tried to save face by claiming that a vote for repeal was not a pledge violation as long as it was coupled with a vote for South Carolina Senator Jim Demint’s amendment, which would eliminate the estate tax along with ethanol subsidies. This amendment, however, never even came up for a vote, forcing Norquist to shift again, saying that the defeat of the larger bill on which the ethanol language was attached means the pledge has not been violated.

South Dakota Senator John Thune of South Dakota, certainly no progressive on tax issues, described Norquist’s maneuvers as “a tremendous amount of gymnastics.”

One GOP aide opined in an interview with the National Review that 34 Republicans voted to tell Norquist to “take a hike” and “rejected his narrow and ridiculous interpretation of what the pledge means.”

But before anyone starts patting the pledge-signers on the back for being responsible, it’s worth remembering that an awful lot of them would have voted for the repeal of the estate tax, if that came up for a vote. The Tax Policy Center has projected that the estate tax will raise $487 billion over the coming decade, far more than was saved by repealing the tax subsidy for ethanol.

Of course no one can be blamed for being hopeful that lawmakers will realize that cutting government spending should include cutting government spending that is done through the tax code. Such a shift is long overdue. Tax expenditures have ballooned to over a trillion dollars annually and are not given the scrutiny that Congress applies to direct spending.

The vote may only be a fleeting setback for Norquist. As Washington Post commentator Ezra Klein notes, the fact that raising ANY revenue from repealing even the most egregious and minor tax breaks is considered a major concession shows just how influential Norquist and his anti-tax extremism have become. 

Photo via Gage Skidmore Creative Commons Attribution License 2.0



Senate Republicans & Five Democrats Block Full Tax Cut Extension for 98% of Taxpayers & UI Benefits



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A minority of Senators made clear on Saturday that if the Bush tax cuts cannot be extended for the very richest taxpayers in America, then they will allow the tax cuts to expire for everyone.

Senate Republicans successfully filibustered a bill based on President Obama's tax plan to permanently extend the Bush tax cuts for the first $250,000 of income for married couples and the first $200,000 of income for unmarried individuals. The two percent of taxpayers with incomes above $250,000/$200,000 would therefore continue to enjoy part of the Bush tax cuts while the other 98 percent would continue to enjoy all of them.

Throughout months of debate over President Obama's tax plan, lawmakers and reporters often seemed to think that a person making one dollar over the $250,000/$200,000 threshold would lose all of the Bush tax cuts. CTJ's recent report shows this is entirely untrue. For example, it explains that married couples with incomes between $250,000 and $300,000 would only lose 1 percent of the Bush tax cuts, on average, under the Democratic tax plan.

The bill, introduced by Finance Committee Chairman Max Baucus, would also have allowed the estate tax to come back into effect but only at the levels that existed in 2009, with an adjustment for inflation. The bill would also have made permanent expansions in refundable tax credits for low-income families that were included in the economic recovery act enacted last year. Emergency unemployment insurance (UI) benefits, which recently expired, would have been extended for one year under the bill.

Unlike nearly every democratic institution on Earth, the Senate cannot approve anything without a super-majority of three-fifths of the chamber's votes. Democratic leaders were able to muster 53 votes for the tax bill, seven short of the 60-vote threshold to overcome a filibuster.

Voting with the Republicans were Joe Lieberman (D-CT), Ben Nelson (D-NE), Joe Manchin (D-WV), Jim Webb (D-VA), and Russ Feingold (D-Wisconsin). Unlike the others, Feingold made it clear that he voted against because he believed that this bill to extend tax cuts entirely for the first $250,000/$200,000 of income is simply too expensive.

The Senate held a second vote on a proposal introduced by Senator Chuck Schumer (D-NY) that was the same plan except that the tax cuts would be made permanent for the first $1 million of income. Republicans and Senator Lieberman voted against this bill also, but were joined by some progressive Democrats who believed that the $1 million threshold was too high.

"A minority of Senators are saying that the chamber must extend tax cuts for the extremely rich, or else low-income and middle-income families will lose their tax cuts, and people who are jobless through no fault of their own will receive no more help," said Bob McIntyre, director of Citizens for Tax Justice. "Even a proposal to extend the tax cuts for the first $1 million of income is not enough to satisfy this minority of Senators. Their disregard for working class Americans and their blind loyalty to multi-millionaires would be hard to believe if they were not on full display this weekend."



CTJ Responds to Attack from Anti-Estate Tax Foundation



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The American Family Business Foundation, which was founded to promote repeal of the federal tax on the estates of millionaires, is at it again. AFBF, you may remember, commissioned two outrageous "studies" last year on the alleged economic benefits of repealing the estate tax, which provided the amusing subject of our report, Caviar, Cruises and Cocaine.

After the publication of our most recent estate tax report, which includes state-by-state figures, AFBF wrote in its blog that the "latest lies in the death tax debate comes disguised as a statistical study offered by a group called Citizens for Tax Justice."

"Research" that Assumes Government Collects Money and then Burns It

First off, AFBF says that it's misleading for us to say just how few deaths result in estate tax (just 0.6 percent in the most recent year for which data are available) while ignoring the broader economic impact of the estate tax, which AFBF says "reduced overall capital in the economy by $847 billion over a ten-year period."

Actually, the report they cite seems to say that $847 billion is the amount by which the estate tax has reduced capital during the entire time the tax has existed, since 1916. But putting that aside, keep in mind this figure came from the Congressional Joint Economic Committee (JEC) in 2006. Unlike the GAO, CBO, Congressional Research Service or the Joint Committee on Taxation, the JEC is not a non-partisan entity. It has a Democratic staff and a Republican staff who issue completely different (and conflicting) reports. This report was issued by the Republican staff when that party was in the majority.

The 2006 JEC study, using the methodology of a previous study but with updated data "estimates that the estate tax has reduced the stock of capital in the economy by approximately $847 billion, or 3.8 percent."

As is typical with "research" of this genre, it is assumed that the estate tax takes resources out of the economy and that those resources simply disappear. If you account for the economic cost of taxes but ignore that positive benefits of government spending in the economy, then obviously the only possible conclusion is that the tax in question shrank the economy.

In other words, these studies assume that the government collects taxes and does absolutely nothing with the revenue. In reality, tax revenue is pumped back into the economy as government spending, and most or much of it (and people will disagree on how much) is spent on investments that actually boost our economic growth. Education provides a productive workforce, roads make commerce possible, public safety and national defense ensure that your property in the U.S. won't be stolen or seized by anyone inside or outside this country. Even a federal program like Social Security that supports consumption at least pumps dollars back into the economy, which provides some benefit to businesses.

If the estate tax was repealed, some of these public services would have to be cut sooner or later to make up for the lost revenue, and the logical result could be less capital formation over time — perhaps a reduction much larger than the 3.8 percent reduction that the estate tax is claimed to produce.

Questionable Use of Data

AFBF argues that the broader economic impact is clear from research showing that repeal of the estate tax would "increase small business capital stock by $1.6 trillion and create 1.5 million jobs."

The study they cite is a February 2009 report from Douglas Holtz-Eakin and Cameron T. Smith, and it's one of the "studies" we felt compelled to refute in our Caviar, Cruises and Cocaine report. Here's what we said about this $1.6 trillion figure then:

There are more examples of how their analysis is extremely sloppy or just intentionally misleading. For example, Holtz-Eakin and Smith give us this gem:

"In 2004, individuals reported a total of $10.2 trillion in wealth on estate tax returns. Eliminating the estate tax would raise the wealth reported on estates by over $1.6 trillion."

First of all, if the estate tax is repealed, there will be no reason for anyone to report any estate value to the IRS so the “wealth reported on estates” will drop to zero.

But putting that aside, individuals did not report a total of $10.2 trillion on their estate tax returns in 2004. Actually, in 2004 individuals reported a total of less than $0.2 trillion in net wealth on estate tax returns. The amount of wealth reported on taxable estate tax returns was only $0.1 trillion.

The $10.2 trillion figure is actually an IRS estimate of the total value of the net worth of Americans with assets of more than $1.5 million in 2004.  Almost all of these people were obviously alive in 2004, and their estates were not going to be taxed in any one single year.

Thus, the $10.2 trillion is more like an estimate of the value of wealth that existed in 2004 and that might, one day, be subject to the estate tax.

So when the authors go on to say that eliminating the estate tax would increase this wealth by $1.6 trillion, they presumably mean over a span of fifty years or longer, or however long it takes those who were millionaires in 2004 to die out.

It’s a little weird to speak about economic impacts in terms of half-centuries, but it’s certainly a way to avoid being called out when your predictions don’t pan out.

Compliance Cost for the Estate Tax Are Not Greater than the Revenue It Collects

Our recent report with state-by-state estate tax figures mentions that the effective estate tax rate for those 0.6 percent of estates that were taxable was 20.4 percent. AFBF takes issue with this because, they say, the only way wealthy people can use the deductions and credits that reduce or eliminate their estate tax is by "paying the bills for high-priced attorneys and estate planners." In fact, AFBF even claims that a former Clinton economic adviser found that the estate tax's compliance cost exceeds the revenue it collects.

A report from the Center on Budget and Policy Priorities discusses research finding that the total compliance costs of the estate tax, including collection efforts by the federal government and planning costs for individuals and families, comes to about seven percent of the total estate tax revenue collected, which is comparable to the compliance costs of other taxes.

One reason for misunderstanding about the compliance costs of the estate tax is that most of the costs associated with estate planning have nothing to do with the estate tax, and yet many people assume that avoiding the tax is the only purpose of estate planning. Anyone with any assets and who has any interest at all in controlling what will happen to those assets in the future and who will inherit them will do some estate planning. No one has suggested that the estate planning profession will disappear if the estate tax is repealed.

Misunderstanding Capital Gains Taxation

There seems to be some confusion about how capital gains are taxed on inherited assets. In our recent estate tax report, we pointed out that more than half of the value of taxable estates is capital gains income that has never been taxed. As we explained,

Most large estates include assets such as real estate, stocks or bonds. Any increase in the value of these assets is capital gain income that would be subject to the income tax if they were sold during the owner’s lifetime. However, this type of income is not subject to the income tax if the owner dies and leaves it to an heir. In other words, without the estate tax, a huge amount of income would never be taxed. Over half the value of inherited estates is capital gains income that has never been taxed.

AFBF responds in a way that seems to misunderstand tax law or simply miss the point:

This formulation is not true. Under capital gains tax law, assets which increase in value are taxed whenever they are sold. If an asset is not sold, it is not taxed – but neither does it provide a tangible reward to the owner.

For example, consider a family that passes a piece of expensive artwork between 4 generations, during which time the artwork substantially increases in value.

Is the art taxed?

Of course not. The family paid taxes on the income that purchased the art. If and when they choose to sell the art and realize their profit, they will once again pay taxes.

Our point was that if your grandfather bought that art in 1920 (to stick with the art example) for $1,000 and then left it to you when he died in 2009 when it was worth $20,000, you would not have to pay income taxes on that gain of $19,000. But if your grandfather sold the art the day before he died, he would have to pay the income taxes on that gain of $19,000. By leaving it to you, your family avoids the income taxes on that capital gain. The estate tax is therefore not double-taxation on this income — which is most of the value of taxable estates.

The Estate Tax and "Small" Businesses

Our recent report also cited figures from the Tax Policy Center (TPC) on small businesses.

Late last year, the Tax Policy Center provided estimates that defined small business estates as those in which farm and business assets represent at least half of the gross estate and total no more than $5 million. Using this definition, it was estimated that only 100 farms and small business estates would have owed any estate tax this year if the 2009 exemption levels had been in effect.

AFBF cites its work that allegedly "refutes" this. First, AFBF simply disagrees about the definition of a small business.

The standard small business definition is 500 employees, though some small businesses can be as large as $175 million in gross assets and have over 1,500 employees, according to the Small Business Administration.

For people who have a business with, say, five employees, it probably comes as a shock to learn that when conservatives talk about "small business" they actually mean companies with 500 or even 1,500 employees. So much for the owner of an auto shop or corner grocery store.

Then AFBF again cites the JEC (Republican staff) report to claim that 115,000 small businesses paid the estate tax between 1996 and 2005. This is based on the number of estates with any amount of assets in any business that is not a "C corporation." That means that if a person has a stake in a company that is huge but not a business that pays the corporate income tax (say, the Tribune Company) and only has a tiny stake so that it makes up small portion of the estate, this person's estate is counted as a small business estate.

And of course, AFBF does not bother here to mention that the estate tax has been drastically cut back since the 1990s and that no one in Congress is considering allowing it to revert fully to the pre-Bush rules.

Misleading Use of Figures and One-Sides Analyses Hide Philosophical Opposition to Estate Tax

We could go on about the ways that AFBF has produced countless distortions about the estate tax but this is really beside the point. The only rationale for opposition to the estate tax is simply a deep-seated belief that society has no right to ask for more from the rich than it does from everyone else. We believe that the rich could not have made their fortunes if not for the protection of property, the facilitation of commerce and the countless other public services that taxes make possible, so it's reasonable for the rich to pay a little more in taxes. Others simply disagree.

It would be much easier to have this philosophical debate if our opponents did not hide behind supposedly complicated economic models that mystify the lay audiences who are unaware of their one-sidedness and their convoluted logic. It would be much simpler if our opponents simply told us why they think the rich should not pay more in taxes than anyone else.

 

 

 

Citizens for Tax Justice has updated its reports on the competing approaches to the Bush tax cuts to reflect the differences between S. 3773, the proposal introduced by Senate Republican Leader Mitch McConnell to make the Bush tax cuts permanent, and President Obama's proposal to make them permanent for all but the richest 2 percent of taxpayers.

CTJ has also, for the first time, added tables showing the percentage of taxpayers in each Congressional district who are rich enough to lose some portion of the Bush tax cuts under Obama's plan. The tables also show the percentage of taxpayers in each district who have adjusted gross income in excess of $1 million. About 80 percent of the revenue savings from Obama's plan would come from these taxpayers.

In case you don't have time to wade through all of these tables and figures, we'll give you the bottom line right now. In every Congressional district, only a small minority of taxpayers are rich enough to lose some portion of the Bush tax cuts under Obama's plan. The figure is less than 2% for a large majority of districts. It's over 5% in just 30 districts out of 436. Of course, the percentage of millionaires in each district is much smaller.

Read the report.



Citizens for Tax Justice Joins Over 70 Organizations in Support of the Responsible Estate Tax Act



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On Monday, Americans for a Fair Estate Tax, a coalition of faith-based groups, labor unions and progressive organizations that support a robust federal estate tax, sent to Senate offices a letter signed by seventy organizations, including CTJ, in support of the Responsible Estate Tax Act. This bill, which was introduced on June 24 by Senators Bernie Sanders, Sheldon Whitehouse, and Tom Harkin, would allow the estate tax to come back into effect with higher rates on the very biggest estates, which makes it a more progressive proposal than the one President Obama has put forward.

The 2001 tax legislation signed into law by President Bush gradually reduced the estate tax over several years until eliminating it entirely in 2010. Like all the Bush tax cuts, this repeal of the estate tax expires at the end of 2010, meaning the estate tax will return at pre-Bush levels if Congress does nothing. President Obama has proposed to make permanent the estate tax rules that were in effect in 2009, which would cut the estate tax in half (meaning it would cost half as much as full repeal). The Responsible Estate Tax Act would lose less revenue than Obama's proposal.

As we reported last week, United for a Fair Economy recently sponsored a teleconference in which several very wealthy Americans, including former Treasury Secretary Robert Rubin and Disney heiress Abigail Disney, urged Congress to restore the estate tax.



Wealthy Americans Come Out in Favor of a Robust Estate Tax



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Several extremely wealthy Americans — those whose estates would likely be subject to the estate tax — have spoken out against Congress's failure to prevent the estate tax from disappearing this year. During a Wednesday teleconference sponsored by United for a Fair Economy, some very wealthy folks, including former Treasury Secretary Robert Rubin and Disney heiress Abigail Disney, urged Congress to restore the estate tax.

In his remarks, Rubin noted that "our country is on an unsustainable fiscal path" and that estate tax revenues could be used "to fund deficit reduction, additional public investment, or added assistance to those affected by the economic crisis." Billionaire hedge fund manager Julian Robertson said the economic and moral case for an estate tax was simple, calling on Congress to get the country's "house in order" and bringing the deficit down, which means tax increases. The fairest way to do that, Robertson said, is to tax "the least deserving recipients of wealth, which are the inheritors."

Following the death July 13 of Yankees owner George Steinbrenner, media reports have commented on the fact that the billionaire's heirs would be able to inherit the team free of estate tax. (The federal tax on the estates of millionaires has been repealed for one year in 2010.) Several stories have contrasted that result with the heirs of Miami Dolphins owner Joe Robbie and Chicago Cubs owner P.K. Wrigley, whose heirs reportedly sold the teams in order to pay the estate tax.

Those media reports say that the Robbie and Wrigley heirs had to sell the teams in order to pay the estate tax. But that isn't the real story.

To start, the sale of the Miami Dolphins had more to do with family infighting than taxes. Owner Joe Robbie left control of his estate (and the team) to three of his nine children. Not surprisingly, the other six didn't like how things were being run and filed a multi-million dollar lawsuit against the the executors. They reached a settlement designed to keep the team in the family "well into the 21st century," but the agreement soon fell apart and the heirs agreed to sell the team and split the proceeds.

The sale of the Cubs was not something that the heirs of owner P.K. Wrigley had to do. Four years after he died in 1977, the heirs sold the team, and this is usually reported as something they had to do to pay the estate tax. But there were any number of ways they could have paid the tax. The sale of the team raised only $20.5 million. The estate tax liability was estimated at $40 million which means that there was a net taxable estate of at least about $75 million. There were obviously other assets that could have been sold to pay the estate tax. The heirs chose to sell the team rather than any of the other estate assets, including any of their stock in the W. R. Wrigley, Jr. Company, the famous maker of chewing gum. (The company was acquired by Mars, Inc. for $23 billion in 2008, so we can bet the Wrigleys did pretty well.)

Remember that if a closely-held company (i.e., a company owned and run by members of the same family) makes up more than 35 percent of an estate, the tax code allows the related estate tax to be paid over 14 years. No heirs need ever sell the family business to pay the estate tax. In both of these cases, while the estate tax was a consideration, the teams were sold primarily for other reasons. The Wrigley and Robbie stories keep being trotted out mostly as a way for estate planners to scare their potential customers.

News reports that the Steinbrenner family has narrowly escaped a possible sale of the team to pay the estate tax are greatly exaggerated. The Steinbrenner estate, valued at $1.1 billion obviously has lots of assets with which to pay any tax. The estate probably also has the option of paying the tax over 14 years. So even if the estate tax is reinstated retroactively, we think it's safe to say the Steinbrenner family can keep the team if it wants to. Yankee fans can breathe a sigh of relief (or regret).

A Washington Post editorial earlier this week declared, "Senate Republicans, committed as they are to preventing the debt from mounting further, can't approve an extension of unemployment benefits because it would cost $35 billion. But they are untroubled by the notion of digging the hole $678 billion deeper by extending President Bush's tax cuts for the wealthiest Americans."

Well, that's a little unfair, because Congressional Republicans actually want to increase the deficit by a full trillion dollars by extending the Bush tax cuts for the wealthy.

The $678 billion is just the cost of making the Bush income tax cuts for the richest two percent of taxpayers permanent. (President Obama and Republicans agree that they should be made permanent for the other 98 percent.) Republicans have also been pushing for years to make permanent Bush's repeal of the federal tax on the estates of millionaires. This would add over $300 billion during the first decade when its costs would be fully felt, compared to Obama's more restrained (but still awfully generous) proposal to cut the estate tax.

As the Post explains, Senate Republican Whip Jon Kyl recently said that the cost of new spending should be offset, but the revenue loss from tax cuts should not. According to Talking Points Memo, Republican Senator Judd Gregg explained that new government spending is "growing the government" and therefore should be offset, presumably with cuts in spending, but tax cuts should not be offset.

Of course, deficit-financed tax cuts have to be paid for one day, and that could be done through tax hikes. Congressional Republicans might believe that Congress will be forced to shrink government when revenues decline, but that obviously didn't happen after the Bush tax cuts were enacted.

Senate Republicans Bring Back Supply-Side Economics

But the real prize for articulating their position goes to Senate Republican Leader Mitch McConnell. When asked about this, he replied, "That's been the majority Republican view for some time, that there's no evidence whatsoever that the Bush tax cuts actually diminished revenue. They increased revenue, because of the vibrancy of these tax cuts in the economy."

That's right. The most powerful Republican alive believes that when Congress cuts taxes, the result is that revenues increase.

This is the extreme version of "supply-side economics." The basic idea behind this school of thought is that tax cuts can change incentives to invest so much that they result in huge economic growth, which results in increased incomes and therefore increased income tax payments that more than make up for the loss of tax revenue resulting directly from the tax cuts.

CTJ has already explored in great detail the empirical evidence against this idea, the people who promote it anyway, and the fiscal disasters that have resulted.

But don't take our word for it. President George W. Bush's own Treasury also concluded that tax cuts do not increase revenue or come close to paying for themselves.

Douglas Holtz-Eakin Contradicts McConnell

So have the Republicans obtained some new support for supply-side economics since then? Apparently not, since the Republican witness at Wednesday's Finance Committee hearing on the Bush tax cuts conceded that they did not pay for themselves.

Douglas Holtz-Eakin, former director of the Congressional Budget Office and an adviser to the presidential campaign of John McCain testified at the hearing in favor of making permanent all the Bush tax cuts (including those for the richest taxpayers). According to his written testimony (which he paraphrased during the hearing), making the tax cuts permanent would have a positive economic effect that would reduce the direct cost of the tax cuts by 22 percent.

We have no idea how he came to that figure. But Holtz-Eakin is the closest thing the Republicans have to a reasonable and credible economist who will promote their views. (Even though we think he's wrong about most of what he says, as we explained in the previous article.) Since Holtz-Eakin is the best economist the Republicans have on their side, one would think that Senator McConnell would get on the same page.

 



The Only Sure Thing Is Death (But Not Taxes)



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Yankees owner George Steinbrenner died last week, leaving a fortune estimated at $1.1 billion. He is the fourth billionaire to die this year — the only year since 1916 when there has not been a federal estate tax (it's currently scheduled to return in 2011). So even if the Yankees don't repeat as World Series champs, it's a very profitable year for the Steinbrenner family.

The opportunity to die without one's estate being taxed may disappear soon, however, as Congress appears finally ready to address the issue. On June 24, Senators Sanders (I-VT), Harkin (D-IA) and Whitehouse (D-RI) introduced estate tax legislation that would make permanent the $3.5 million exemption that was effective in 2009, with a progressive rate structure that would tax the taxable portion of estates over $10 million at 50 percent, over $50 million at 55 percent, and over $500 million at 65 percent. Yesterday, Congresswoman Linda Sanchez (D-CA) introduced the House version of this bill.

Earlier this week Senators Lincoln (D-AR) and Kyl (R-AZ) introduced their own estate tax legislation, which would reduce the rate to 35 percent and raise the exemption to $5 million ($10 million for couples).

Meanwhile, in the House, Representatives Thompson (D-CA) and Salazar (D-CO) have introduced estate tax legislation that would completely exempt farmland and would raise the exclusion for conservation easements to $5 million from its current $500,000. (See a report on all the reasons why this is a terrible idea.) One of the most alarming results would be that wealthy people start investing in farmland as never before, which could drive up prices for land and hurt genuine family farmers.

The Lincoln-Kyl proposal has been referred to the Senate Finance Committee with the pending small business jobs bill. Finance would need to find $80 billion in revenue offsets to cover the increased cost of their proposal compared to extending the rules in effect in 2009 (which is what President Obama proposes). Senators Lincoln and Kyl mask the true cost of their proposal by phasing in the cut in the estate tax over several years, meaning the $80 billion figure is misleadingly small.

With all the competing proposals and the lack of any clear consensus, it's anybody's guess where the estate tax will finally end up. But the estate tax holiday will soon be over.



Progressive Organizations Blast Attempt by Senators to Slash the Federal Tax on the Estates of Millionaires



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On Wednesday, CTJ joined Americans for a Fair Estate Tax to voice opposition to an estate tax proposal that would benefit only the families with the largest 1 in 400 estates. In a strongly-worded letter, AFET said a reduction in the estate tax should not even be on Congress's agenda, much less be a priority.

News began to leak last week that a bipartisan group of Senators, including Senate Finance Committee Chairman Max Baucus (D-MT), Ranking Member Charles Grassley (R-Iowa), Blanche Lincoln (D-AR), and Jon Kyl (R-AZ) were negotiating a deal to weaken the estate tax even beyond the 2009 parameters that the president wants to make permanent. The deal would have eventually exempted up to $10 million per couple from the estate tax.

The proposed estate tax rules would cost the country billions of dollars per year, but a phase-in of the changes and other budget gimmicks, such as a prepayment option, would have masked the cost in the ten-year budget window that is counted when lawmakers consider legislation. A detailed report of the proposal can be found here.

News reports on Thursday indicated that the deal had begun to unravel. We hope the Senate will now turn its attention back to legislation creating jobs and helping ordinary Americans who are still struggling in this economic downturn.

National Organizations Urged to Join Statement

Americans for a Fair Estate Tax, a coalition of public interest organizations, has released a new statement calling on Congress to preserve a robust estate tax to help ensure that the federal government has the revenue to fund public services that working people depend on.

The statement calls upon Congress to exempt no more than $2 million per-spouse from the estate tax, and tax the taxable portion of estates (the portion in excess of the exemptions and deductions) at no less than 45 percent. It also calls for an additional 10 percent tax on the taxable portion of estates exceeding $10 million.

The tax cut law signed by President Bush in 2001 gradually shrank the estate tax over the course of several years before making it disappear altogether in 2010. But, like all the Bush tax cuts, this cut in the estate tax expires at the end of 2010, meaning the pre-Bush rules would come back into effect if Congress does nothing.

The intention of President Bush and his supporters was to avoid discussion of the true costs of permanent repeal of the estate tax at the time the law was voted on, and to set up a situation in 2010 in which some lawmakers could be pressured into making the repeal permanent.

Last year, the House of Representatives approved a bill that would meet Bush halfway, meaning it would lose about half as much revenue as permanent, full repeal. The House bill would permanently set the per-spouse exemption at $3.5 million and the top estate tax rate at 45 percent. Americans for a Fair Estate Tax (AFET) is calling on Congress to preserve more of the estate tax by setting the per-spouse exemption at $2 million and applying an additional ten percent tax to particularly massive estates.

As the Bush estate tax cut phased in over several years, there was a period of years in which the exemption was temporarily set at $2 million per-spouse. Fewer than 1 percent of deaths resulted in estate tax liability during those years.

The AFET statement also calls on Congress to reinstate the credit for state estate and inheritance taxes, which was repealed in the 2001 law. This has been a blow to states with taxes tied to that credit at a time when their budgets are already in crisis.

If you are authorized to sign the statement on behalf of a national organization and wish to do so, please contact Steve Wamhoff at swamhoff (at) ctj.org.



Senate Passes 30-Day Extension of Help for Unemployed; Paris Hilton Tax Break on Hold



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The Senate finally passed a 30-day extension of unemployment insurance and health care benefits for the unemployed, but not before benefits had expired for hundreds of thousands of jobless Americans and thousands of others were furloughed from construction jobs as federal funding expired.  The legislation had been held up by Senator Jim Bunning (R-KY) who wanted to offset the costs of the bill, while other Republican Senators threatened to block the bill if they were not promised a vote on a measure to reduce the estate tax for millionaires. 
 
The President signed the 30-day extension into law on Tuesday evening, just hours after the bill had passed.

Senators then returned to legislation extending jobless benefits, as well as many expiring tax provisions, through the end of the year. The Senate took up a substitute amendment (S. Amdt 3336) for the House  "tax extenders" bill that was passed in December. The Senate version was expected to contain a reinstatement of the estate tax (which is temporarily repealed for 2010), but it was not included. However, many amendments to the bill are being offered and it's still unclear whether any will address the estate tax. President Obama and Democratic leaders want to reinstate the estate tax at the level in effect in 2009 (which was cut down about 50 percent from the pre-Bush level) while Senate Republicans and a few Senate Democrats wish to cut the estate tax even further.



Senate Republicans: No Aid for Unemployed Unless Millionaires Get Break on Estate Tax



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Senate Republicans blocked action on aid for millions of unemployed Americans this week, and threatened to continue to do so unless Congress acts on a completely unrelated matter: the federal tax on the estates of millionaires.

The Need for Help for the Unemployed

Congress has an opportunity to help families hardest hit by the recession while at the same time increasing consumer demand, which in turn will increase the number of businesses that are hiring. The Congressional Budget Office has found that extending unemployment benefits is one of the most effective ways to increase consumer demand (i.e., create jobs), making it attractive from the standpoint of economic policy as well as compassion for struggling Americans. (There are 6 job-seekers for every open position right now.)

By the end of February, 1.1 million people are scheduled to lose their UI benefits, and another 2.7 million are scheduled to lose them by the end of March. Senate Democrats hoped to move by unanimous consent to extend UI benefits and COBRA health care benefits for out-of-work Americans for 30 days, to tide them over until a longer-term extension can make its way through Congress.

Help for the Unemployed Held Hostage for Tax Cuts for Millionaires

Senate Republicans denied the unanimous consent request to pass an extension of UI and COBRA. The objection was raised by Senator Jim Bunning (R-KY) over the source of funding. But the measure is apparently also being held hostage by Senators wanting to give multi-millionaires a break on the estate tax.

The tax law passed under President Bush in 2001 gradually repealed the estate tax over several years until making it completely disappear this year. But, since the Bush tax cuts expire at the end of 2010, the estate tax will return in 2011 in its pre-Bush form (with the tax exempting the first $1 million in assets, per spouse, and a top estate tax rate of 55 percent).

House Democrats decided last year that a million dollars just isn't what it used to be, and passed a bill that would permanently increase the exemption and lower the rate, but not let the estate tax disappear in 2010. (Technically, they passed a permanent extension of the estate tax rules in effect in 2009, with a $3.5 million per-spouse exemption and a top rate of 45 percent.) But the Senate failed to act on the measure.
 
Under the proposal approved by the House, fewer than one percent of deaths would result in estate tax liability. Apparently that's too many for Senators Jon Kyl (R-AZ) and Senator Chuck Grassley (R-Iowa), who have wanted to repeal the estate tax for years and now hope that they can at least reduce it much further than the Democrats want. They have indicated that, until a deal is reached on the estate tax, they will block passage of the UI and COBRA extension. On Feb 24, Kyl, a long-time leader against the estate tax, said that Republicans will block consideration of the legislation unless they get "a path forward fairly soon" to voting on a measure to permanently weaken the estate tax.

Bizarrely, Senator Bunning blocked the unanimous consent motion for the $10.3 billion, 30-day UI and COBRA extension, saying he wanted the costs somehow offset, even while his Republican colleagues press for an estate tax measure that will cost hundreds of billions of dollars, with no hope of being offset.

Kyl and Grassley tried to cut a deal earlier this month with Senate Finance Committee Chairman Max Baucus (D-MT) to get a fast track for the estate tax vote in exchange for votes on a jobs bill, but Majority Leader Harry Reid (D-NV) rejected the package and put together a jobs bill of his own. That pared-down bill passed the Senate on Wednesday, including $16 billion in tax cuts for employers who hire new workers.
 
Another wrinkle is that Grassley and Kyl have reportedly been in discussions with Senator Maria Cantwell (D-WA) who has proposed to allow multi-millionaires to prepay their estate tax at a lower rate. This is clearly a accounting gimmick designed to mask the true cost of the estate tax change. It would bring some money into the Treasury during the 10-year budget window that Congress focuses on, but lose huge amounts of revenue in years after that. United for a Fair Economy has objected to the proposal in a letter to Senator Cantwell. Washington residents are urged to sign on to the letter.

Coalition Calls for More Robust Estate Tax than Approved by House Democrats

Congress needs to move in a different direction on the estate tax. Americans for a Fair Estate Tax, a coalition of organizations including Citizens for Tax Justice, has issued a call for an estate tax that exempts no more than $2 million in assets per spouse, and taxes the taxable portion of estates at a rate of at least 45 percent, with an additional 10 percent on assets in excess of $10 million. Only about 0.7 percent of deaths resulted in estate tax liability in recent years when the per-spouse exemption was set at $2 million.

Cutting the estate tax any more than this — particularly when Congress seems to have so much trouble helping the Americans who are struggling the most — would prove that Congress really does have its priorities completely backwards.

A new report from Citizens for Tax Justice explores the tax proposals included in the federal budget outline that President Obama submitted to Congress on February 1. Like the budget he submitted last year, it is a vast improvement over the policies of the Bush years and continues to outline a progressive reform agenda.

But, also similar to last year, the President’s budget could be greatly improved with more aggressive policies to raise revenue. Over the coming decade, the President proposes to cut taxes by $3.5 trillion. We include in this figure the cost of extending most of the Bush tax cuts and relief from the Alternative Minimum Tax (AMT) as well as additional tax cuts that President Obama proposes.

His budget would offset a portion of this cost with provisions that would raise $760 billion over a decade by limiting the benefits of itemized deductions for the wealthy, reforming the U.S. international tax system and enacting other reforms and loophole-closing measures.

The report concludes that the federal government should collect at least as much revenue as the President proposes in order to avoid larger budget deficits. There are two bare minimum requirements for Congress to achieve this. First, Congress must not extend any more of the Bush tax cuts than President Obama proposes to extend. Second, Congress must raise at least as much revenue as President Obama has proposed ($760 billion over ten years) through loophole-closers and new revenue measures.

Read the full report.

 



President's State of the Union Address Acknowledges - Partially - the Problems with the Bush Tax Cuts



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"From some on the right, I expect we'll hear a different argument -– that if we just make fewer investments in our people, extend tax cuts including those for the wealthier Americans, eliminate more regulations, maintain the status quo on health care, our deficits will go away.  The problem is that's what we did for eight years."  (Applause.)  "That's what helped us into this crisis.  It's what helped lead to these deficits.  We can't do it again."

President Obama spoke these words in his State of the Union address on Wednesday night, after pledging to enact an agenda that will create jobs and tackle our long-term budget deficit. He did a good job of explaining that the budget deficits that exist today are the result of deficit-financed tax cuts, two deficit-financed wars, and a major recession all occurring before he entered the White House.

But one has to wonder if President Obama is gently bearing left at a time when any sensible directions would call for a sharp left turn.

The Bush Tax Cuts

He remains committed to extending the Bush income tax cuts for the 98 percent of taxpayers who have adjusted gross income (AGI) below $250,000 (or below $200,000 for an unmarried taxpayer). The budget document released by the administration last year showed, in a convoluted way, that this would cost $1.88 trillion between now and 2019. His proposal to partially extend the Bush cut in the estate tax (making permanent the estate tax rules in effect in 2009) would cost another $576 billion over the same period, for a total of about $2.45 trillion.

The estimated costs of these proposals may be different in the budget to be released next week (since all the projections change at least somewhat in response to developments in the economy). But make no mistake, the cost of extending most of the Bush tax cuts far exceeds the savings the President hopes to achieve with his proposed spending freeze (which will actually cut spending if one accounts for inflation and other factors).

Cutting Non-Security Discretionary Programs

The administration is reported to believe $250 billion can be saved from the spending freeze, which would last three years but would not apply to national security, Medicare, Medicaid, or Social Security. The first problem is that these exempt categories of spending, along with interest payments on the national debt that cannot be avoided, make up 70 percent of the federal budget. Americans love to complain about wasteful government spending, but few realize that, once you eliminate those categories of spending that are very popular with the public, there's not a whole lot left to cut. The non-security discretionary spending that is left has come under increasing pressure in recent years since it's the only part of the budget lawmakers feel comfortable attacking.

The second problem is that cutting back spending when the economy may still be weak could prolong our downturn. Progressive observers have warned that the Roosevelt administration's decision to stop stimulating the economy and focus on deficit-reduction plunged the country back into a deeper depression in 1937.

For their part, administration officials have explained that they are not proposing an across-the-board freeze. Rather, they will identify particular types of spending that represent wasteful giveaways to special interests rather than public services that people depend upon.

Even if that's true (and the jury is still out on that), it's still peculiar that taxes aren't getting more attention. This is the third problem with the President's approach. The need for higher taxes is like an 800 pound elephant in the room that everyone is trying to ignore, even if they vaguely acknowledge that Bush's tax cuts got us into this mess. Does a family with an income of $190,000 really need every cent of their Bush tax cuts? Do families with $7 million in assets really need to be fully exempt from the estate tax? The President's tax proposals would have us believe so.

Steps in the Right Direction

The President certainly wants to move in the right direction, as was evident in various parts of his speech. He reiterated his proposal to charge a fee on risk-taking by the largest banks, which would raise $90 billion over a decade according to the administration. We've argued before that this is entirely reasonable. The institutions affected know they have an implicit guarantee from the government and are prone to put the entire economy at risk as a result. It makes sense to demand that they pay up in proportion to their risk-taking.

The President also reaffirmed his desire to do something about offshore profit-shifting by corporations. The proposals he made last year along these lines would raise $200 billion over a decade and would be extremely important, as we have explained in detail, in preventing U.S. corporations from shifting their profits to other countries.

Sometimes this shifting means companies actually move jobs and operations offshore, but other times it involves accounting gimmicks and transactions that exist only on paper. Either way, Americans lose tax revenue for no good reason other than that Congress is afraid to take on the lobbying power of multinational corporations.

America has a budget problem that is long-term in nature. The money we spend this year or next year to stimulate the economy has little impact on the long-term deficit. Reforming our tax system permanently, however, is an important part of the long-term solution.



Urge Congress to Reinstate the Estate Tax



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With all the talk about federal budget deficits and families hit hard by unemployment during this recession, you would think the last thing Congress would want is a tax cut for millionaires. So, it seemed a sure bet that Congress would prevent a massive one that was scheduled under the Bush administration from taking effect this year.

The 2001 tax cut law enacted by President George W. Bush and his allies in Congress gradually shrank the estate tax each year until eliminating it altogether in 2010. Like almost all the Bush tax cuts, this change expires at the end of 2010, meaning the estate tax will come back at pre-Bush levels in 2011 if Congress does nothing. But allowing the estate tax to disappear even for a year sets a terrible precedent.

Only a tiny fraction of families, those with gigantic fortunes, are impacted by the estate tax. They have benefited more than any other Americans from the educated workforce, infrastructure and stability that government provides and that taxes make possible. So it's entirely reasonable that these families pay a tax on the transfer of their enormous estates from one generation to the next, particularly since the majority of the value in these estates is capital gains income that has never been taxed.

Democratic leaders always supported the estate tax and obviously had plenty of time to plan to repeal (or at least modify) Bush's estate tax break. The House did exactly that late last year when they passed a bill that would make permanent the estate tax rules in effect in 2009 (which is still a big break for families with big estates, compared to the pre-Bush rules).

Pathetically, the Senate failed to act.

That's right. There is no federal estate tax in effect right now. Some pundits have wondered if there will be an uptick this year in unexplained deaths of elderly wealthy people coinciding with visits from their children. We think an early death is more likely for the public services that will have to be cut to make up the lost revenue if repeal (or any proposal close to repeal) is made permanent. 

Call Congress Now!

United for a Fair Economy is providing a toll-free number and information that people can use to call their members of Congress and urge them to reinstate the estate tax. Every member of the House and Senate -- particularly those who claim to care about budget deficits -- needs to hear this message. Click here for information from UFE.



Major Federal Tax Issues Left to Be Resolved as 2009 Ends



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The U.S. House of Representatives adjourned for the year on Wednesday while the Senate hustles to finish legislation on health care. As of this writing, an array of major tax issues are still to be resolved in the next several days or when Congress returns in 2010:

Health Care Reform

On November 7, the House passed its health care bill, (H.R. 3962), which includes a public option. The largest revenue-raising provision in the House health bill is a surcharge of 5.4 percent on adjusted gross incomes over $1 million (or over $500,000 for unmarried individuals).

(See CTJ's previous analysis and state-by-state estimates of the surcharge in the House health care bill.)

The Senate is still working to pass a health care bill, and some reports claim that the chamber could be working on Christmas Eve to accomplish it. While there is a clear majority of Senators willing to support a public option, the rules allowing 41 Senators to filibuster legislation have encouraged a few conservative Democrats to join Republicans in blocking a public option.

While some details remain to be worked out, a majority of Senators seems to have settled on certain revenue-raising provisions to help pay for health care reform. The largest revenue-raiser in the still-developing Senate bill is an excise tax on high-cost health insurance plans. This excise tax is controversial because many analysts conclude that these plans are not particularly generous in the benefits they provide and they are not necessarily enjoyed by high-income workers. Rather, the high costs are often the result of insurers charging more to cover a work force that is older than average or that has high health risks.

(See CTJ's previous analysis concluding that the Senate's proposed excise tax on high-cost health insurance is less progressive than the surcharge in the House health care bill.)

One revenue-raiser in the Senate proposal that is progressive is an increase in the Medicare payroll tax rate on earnings over $250,000 (or over $200,000 for an unmarried individual).

While this tax increase would only affect those who can afford to pay more, an even better proposal would reform the Medicare tax so that it no longer exempts investment income. This idea was included in an amendment that was filed by Senator Debbie Stabenow during the Finance Committee markup, but was not acted on. Such an amendment may be offered when health care reform is debated on the Senate floor.

Job Creation

On December 8, President Obama announced several proposals to create jobs. His best ideas involve direct spending by the federal government (including extending aid to unemployed and low-income people and aid to state and local governments, among other things). His worst ideas involve tax cuts (including eliminating capital gains taxes on small business investment and providing a tax credit for payroll expansion).

(See CTJ's previous discussion of President Obama's job creation proposals and ways to stimulate the economy.)

The House approved a $154 billion jobs bill, as part of a regular appropriations bill (H.R. 2847), before adjourning this week, and thankfully, it focuses on direct spending. One of the few tax cuts included is a provision to remove the earnings requirement (currently set at $3,000) for the refundable portion of the Child Tax Credit, ensuring that low-income families with children can benefit from it. The Senate is not expected to take up jobs legislation until sometime next year.

Estate Tax

The tax cut legislation enacted by President Bush and his allies in Congress in 2001 set the estate tax to gradually shrink until disappearing altogether in 2010. But, like all the Bush tax cuts, this estate tax cut expires at the end of 2010, meaning the estate tax will reappear in 2011 at the pre-Bush levels if Congress simply does nothing.

Families who have several million dollars to leave to the next generation have benefited the most from the infrastructure, educated workforce, stability and other public goods that taxes make possible. So it's entirely reasonable that these families pay a tax on the transfer of their enormous estates from one generation to the next, particularly since the majority of the value in these estates is capital gains income that has never been taxed.

One might be tempted to think that allowing the estate tax to disappear would be fine if it reappears at the pre-Bush levels in 2010. Unfortunately, the one-year repeal of the estate tax could tempt some lawmakers to make that repeal permanent, or might tempt them to allow only a very scaled back version of the estate tax to reappear in 2011.

So the House of Representatives approved a compromise that would make permanent the estate tax rules in effect in 2009. This would partially preserve the Bush cut in the estate tax, but prevent the tax from disappearing in 2010.

(See CTJ's previous analysis of the estate tax legislation, along with state-by-state figures showing how few estates are actually subject to the tax.)

Key Democratic Senators indicated that they did not want to make permanent the 2009 rules because -- incredibly -- they were interested in reducing the estate tax even more. Democratic leaders in the Senate attempted but failed to get agreement in the chamber to pass a one-year extension of the 2009 rules, which would prevent the estate tax from disappearing in 2010 and allow Congress to debate a permanent solution as part of the broader tax debate that must happen before the Bush tax cuts expire at the end of next year.

Pathetically, the Senate failed last week to prevent the one-year repeal, which they had known was coming ever since the Bush cut in the estate tax was enacted back in 2001. Democratic leaders in the Senate say they will enact the one-year extension of the 2009 estate tax rules retroactively in 2010. While retroactive tax increases may not be the ideal way to do things, this approach should not cause any problems since tax planners have known for years that Congress was likely to act to prevent this one-year disappearance of the estate tax.

Corporate Tax Breaks (aka "Tax Extenders")

On December 9, the House approved H.R. 4213, which would extend a series of tax cuts (mostly breaks for business) but would offset the costs by closing the infamous "carried interest" loophole for buyout fund managers and by cracking down on offshore tax cheats.

The bill would also require the Joint Committee on Taxation (JCT) to issue reports evaluating these tax cuts before the end of next year, when Congress is likely to act on them again.

CTJ joined the AFL-CIO, SEIU, AFSCME and eight national non-profits in signing a letter in support of H.R. 4213 for these reasons.

The provisions extending the tax cuts (often called the "tax extenders") are enacted by Congress every year or so. CTJ and other analysts have often criticized the tax extenders as corporate pork routed through the tax code.

But H.R. 4213 is a major step in the right direction for the reasons spelled out in the letter to Congress.

(See our previous article on H.R. 4213 explaining the points made in the letter.)

Democratic leaders in the Senate want to pass the tax extenders retroactively early in 2010. One problem is that the chairman of the Senate tax-writing committee, Max Baucus (D-MT) believes that the carried interest issue is “best dealt with in the context of an overall tax reform,” according to a spokesman. As we've explained before, this is an all-purpose excuse for legislators who want to avoid closing even the most unfair and outrageous loopholes.



The House Estate Tax Bill: Could Be Better, Could Be a Lot Worse



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(Read CTJ's recent report on the House estate tax bill.)

On Thursday, the U.S. House of Representatives approved a bill (H.R. 4154) that would partially extend the Bush cut in the estate tax. H.R. 4154, introduced by Rep. Earl Pomeroy (D-ND), would make permanent the estate tax rules in effect in 2009, which would prevent the estate tax from disappearing in 2010 but which would still constitute a massive tax cut for millionaires in years after that.

The tax cut legislation enacted by President Bush and his allies in Congress in 2001 included a gradual reduction in the estate tax over several years followed by repeal of the estate tax in 2010. Like almost all of the Bush tax cuts, this one expires at the end of 2010, meaning the estate tax will reappear at pre-Bush levels if Congress does nothing.

Unfortunately, many observers believe Congress is not likely to simply allow the pre-Bush estate tax rules to come back into effect in 2011 (despite the obvious need for revenue). In fact, if the estate tax is allowed to disappear in 2010, lawmakers could be more tempted to make repeal permanent or to enact legislation that would allow only a very scaled back version of the estate tax to reappear in 2011.

In other words, the good thing about H.R. 4154 is that it could prevent a situation in which Congress would be tempted to enact an even more ludicrous tax cut for families with enormous estates.

The bad thing about H.R. 4154 is that it's a massive tax cut for the richest families in America. As CTJ's recent report points out, only 0.7 percent of the Americans who died in 2007 left an estate that was taxable. In 2009 that number will be far lower because the amount exempt from the estate tax has grown significantly under the changes scheduled in the 2001 law.

The 2009 estate tax rules, which the Pomeroy bill would make permanent, significantly reduce taxes for extremely wealthy families. These are the very families who benefit the most from the infrastructure, education, stability and other things that taxes pay for and which make it possible for some Americans to accumulate massive fortunes.

Congress must prevent the estate tax from disappearing in 2010 and also must set estate tax rules as close as possible to the pre-Bush estate tax rules. Many progressive lawmakers in the House decided that the Pomeroy bill is the best that can be hoped for. Now attention turns to the Senate, which must find time to enact legislation that will prevent the estate tax from disappearing and must overcome any temptation to cut the estate tax even more.



Anti-Estate Tax Groups to Promote Near-Repeal Instead of Repeal



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In a major tactical retreat, the U.S. Chamber of Commerce, the National Federation of Independent Businesses and several other organizations that claim to represent the interests of business have announced that they will no longer push for repeal of the estate tax. They will, however, push for a plan that will gut the estate tax and that has received some support in the Senate.

The tax cuts enacted under President Bush in 2001 scheduled a gradual repeal of the estate tax, with the amount of assets exempted from the tax gradually increasing over a decade and the tax rate on estates gradually dropping until the estate tax will disappear entirely in 2010. Like almost all of the Bush tax cuts, this cut in the estate tax expires at the end of 2010, meaning that rules scheduled under President Clinton will come back into effect in 2011. Many Republicans and some Democrats in the Senate have, in the past, supported permanently repealing the estate tax. 

President Obama and Democratic leaders in the House and Senate support a compromise that would prevent the estate tax from disappearing in 2010, but which would also unnecessarily cut the estate tax below the level it would reach in years after 2010 if Congress simply does nothing. This compromise would essentially freeze in place the estate tax rules in effect in 2009, which exempt the first $3.5 million in estate assets (or $7 million in the case of a married couple) and tax the rest at a rate of 45 percent.

Citizens for Tax Justice has argued that even this policy amounts to an unwarranted cut in the estate tax. State-by-state figures from CTJ show that only 0.7 percent of the deaths that occurred in 2006 resulted in any estate tax liability in 2007. (Estate taxes are usually paid in the year after the year in which an individual dies.) 2006 was a year in which the estate tax exempted the first $2 million in estate assets (or $4 million in the case of a married couple). (A proposal put forward by Congressman Jim McDermott in April would make permanent adjustments to the estate tax without giving away as much revenue.)

The coalition of business groups that has been trying for years to permanently repeal the estate tax now says it supports a permanent estate tax that exempts the first $5 million in estate assets (or $10 million in the case of a married couple) and taxes the rest at a rate of 35 percent.

A budget amendment with these basic parameters was approved by 51 Senators in April, but was not included in the final budget resolution adopted by Congress. It's difficult to know if a majority of Senators would ever really support the enactment of such a policy. The budget amendment was to be deficit-neutral (which would be difficult to achieve) and several of the 51 Senators who voted in favor would likely oppose a cut in the estate tax if it increased the budget deficit.

Any legislation to change the estate tax would require 60 votes. Democratic leaders are hoping to round up that many votes to pass a bill that at least extends the 2009 estate tax rules for one year, through the end of 2010, to prevent the estate tax from disappearing for a year. Then, sometime during 2010, Congress could take up the question of what the estate tax should look like in the long-run while they take up the larger debate over which components of the Bush tax cuts to extend.

At least one anti-estate tax group, the American Family Business Institute, refused to change its position and still backs full repeal of the estate tax. The organization is apparently linked to the American Family Business Foundation, which issued two studies earlier this year that claimed to show how repeal of the estate tax was vital to economic growth. CTJ released a report in May that examined the methodological flaws and illogical assumptions that underpin these two studies.



New Report from CTJ: Caviar, Cruises, and Cocaine



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Two New "Studies" from a Right-Wing Foundation Say the Estate Tax Causes the Rich to Stop Working and Spend Away Their Millions

Read the Report

Read the Two-Page Summary

A new report from CTJ examines a duo of new "studies" claiming that repeal of the estate tax is crucial to our economy. The studies, which were commissioned by a foundation established to promote repeal of the estate tax, use one-sided analysis to produce the conclusions that their funders desire.

One study, released a few months ago by Douglas Holtz-Eakin and Cameron Smith, claims that repealing the federal estate tax would create 1.5 million jobs. The other, by Stephen Entin, claims that repealing the estate tax would actually result in increased federal revenue, not to mention higher gross domestic product (GDP).

The CTJ report finds that the "studies" have several fatal flaws. For example, the authors model the impact of taxes on the economy by considering the alleged costs of taxes but ignore the benefits. The benefits of taxes - the public services like roads, schools, law enforcement, national defense and other services that taxes make possible - are simply ignored. Since the authors assume that tax dollars are collected and then simply disappear, of course they can come to no other conclusion but that taxes (including the estate tax) are a drain on the economy!

Other flaws in these studies involve the illogical assumptions they make about how people respond to the estate tax. At one point Holtz-Eakin and Smith explain that the estate tax might cause a wealthy entrepreneur to "buy an around-the-world cruise" instead of investing his money.

But most estate taxes are paid on estates worth over $5 million, and 40 percent of estate taxes are paid on estate worth over $10 million. Let's say you had this sort of money and you wanted to keep your wealth from being taxed by the federal government. What would you do? You can't put it in stocks or bonds or even a savings account. You can't buy fancy houses, because they would become part of your estate. Even if you buy expensive cars or yachts, those would be part of your estate as well (even if they lose some of their value before you die).

You would have to spend your entire estate on caviar or cruises or cocaine or something that won't be around after you die. It's unclear whether anyone can eat away, cruise away, or snort up their nose $5 million. (We won't go so far as to say it's impossible.)

Read the Report

Read the Two-Page Summary



New CTJ Report on President Obama's Revenue Proposals



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On May 11, the Treasury Department released its "Green Book" containing new details of the tax changes included in the President's fiscal year 2010 budget proposal. In addition to extending the Bush tax cuts for all but the richest Americans and making permanent many of the tax cuts in the recently enacted economic recovery act, the President would also make many changes that would raise revenue by closing loopholes, blocking tax avoidance schemes and making the tax code more progressive.

A new report from Citizens for Tax Justice examines and describes the significant revenue-raising provisions that are sure to be debated fiercely in the months to come.


Read the report.



House and Senate Approve Final Budget Resolution



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Approval Marks a Major Step Towards Enacting President's Agenda

On Wednesday, both the House and Senate approved a Congressional budget resolution for fiscal year 2010 that paves the way for several of the President's major initiatives. The resolution allows Congress to make new investments in education and clean energy and puts in place procedures that will make it easier for Congress to enact comprehensive health care reform. It also allows Congress to extend the Bush tax cuts for all but the richest Americans.

The budget resolution allows for about $3.5 trillion in federal spending in fiscal year 2010 and includes important tax and spending provisions related to years after that. It is not a law and is not binding, but puts in place caps on the spending that Congress appropriates each year, sets targets for tax and spending changes and includes certain procedural changes that make it more likely Congress will meet these goals.

Tax Cuts Extended for All but the Rich

For example, the budget resolution allows Congress to reduce revenues by a certain amount by extending the Bush income tax cuts. It is understood that the amount of revenue-reduction allowed would be sufficient to extend the Bush tax cuts for those with incomes below $250,000. It also allows for Congress to reduce revenues by preventing the Alternative Minimum Tax (AMT) from expanding as it is scheduled to under current law. Similarly, it allows Congress to extend the estate tax rules in effect in 2009 instead of allowing the estate tax to revert to the rules put in place during the Clinton years, before Bush's cuts in the estate tax were enacted.

The resolution allows for Congress to enact these tax cuts without finding new revenue to pay for them -- on one condition, which is that Congress enacts a statutory pay-as-you-go (PAYGO) rule that will (in theory) prevent Congress from enacting any more legislation that will increase the deficit. That means that any additional tax cuts (say, an extension of the Making Work Pay Credit that was enacted for two years as part of the economic stimulus package) would have to be combined with revenue-raising provisions to offset the costs.

Predictably, allies of former President George W. Bush have expressed horror that Democratic leaders and President Obama wish to extend the Bush tax cuts for 97.5 percent of Americans rather than 100 percent. The Democrats and the President would allow the Bush tax cuts to expire for singles with incomes over $200,000 and married couples with incomes over $250,000 (which make up roughly the richest 2.5 percent of taxpayers).

For their part, House Republicans used the budget debate to demonstrate to the public just how lopsided the tax code would be if their goals were ever realized and just how much government would have to shrink because of the revenue losses that would result. Earlier this month, the ranking Republican on the House Budget Committee presented his tax and spending plan which would cut and privatize Medicare, convert Medicaid into limited block grants to states, repeal the recently enacted economic stimulus law and deeply cut the relatively small amount of government spending devoted to non-military, non-mandatory programs.

Citizens for Tax Justice published a report concluding that under this GOP plan, over a third of taxpayers, mostly low- and middle-income families, would pay more in taxes than they would under the House Democratic plan in 2010, while the richest one percent of taxpayers would pay $75,000 less, on average.

Final Budget Leaves Out the Senate's Outrageous Estate Tax Cut

Progressives scored a victory when Democratic leaders agreed to exclude from the final budget an amendment adopted by the Senate during its budget debate on April 2 which would slash the estate tax to benefit multi-millionaires. Before the Senate approved this amendment, Majority Leader Harry Reid (D-NV) said, "It is so stunning, so outrageous that some would choose this hour of national crisis to push for an amendment to slash the estate tax for the super wealthy." His common sense view carried the day as negotiators hammered out the final resolution.

The tax cuts enacted under President Bush in 2001 scheduled a gradual repeal of the estate tax, with the amount of assets exempted from the tax gradually increasing over a decade and the tax rate on estates gradually dropping until the estate tax would disappear entirely in 2010. Like almost all of the Bush tax cuts, this cut in the estate tax expires at the end of 2010, meaning that rules scheduled under President Clinton would come back into effect in 2011.

The budget resolutions passed out of the House and Senate budget committees in March both assumed that the estate tax rules in place in 2009 would be made permanent, meaning the Bush estate tax cut would be partially made permanent but the estate tax would not disappear entirely in 2010. The Center on Budget and Policy Priorities released a report finding that about 99.7 percent of estates would be untouched by the tax under this proposal.

Incredibly, 51 Senators voted in favor of the amendment offered by Senators Blanche Lincoln (D-AR) and Jon Kyl (R-AZ) to cut the estate tax even more than this. The 2009 estate tax rules exempt the first $7 million of assets passed on by a married couple (as well as assets they leave to charity) and tax the rest at a rate of 45 percent. The Kyl-Lincoln amendment called for a $10 million exemption for married couples and a 35 percent rate.

Taking Steps Towards Enacting the President's Priorities

Progressives scored another victory in the area of health care. House and Senate leaders decided to include in the final budget resolution a mechanism known as "reconciliation" which will allow the Senate to enact health care reform and higher education loan changes with a simple majority vote.

The practice of filibustering legislation in the Senate has, over the years, turned into a default rule that three fifths the Senate's members must agree to pass a bill. This means that legislation supported by Senators representing a majority of Americans is often blocked. Many advocates fear that this is exactly what could happen to health care reform and many other of the President's important initiatives.

Reconciliation is a way around this obstacle. A budget resolution can include reconciliation instructions specifying that committees will pass legislation that can then pass the full House and Senate under a streamlined process. In the Senate, that streamlined process means that the bill can be passed with just 51 votes.

The particular version of reconciliation included in this budget is optional, meaning Democratic leaders will resort to using it only if bipartisan consensus proves elusive.

Several Republican Senators, and some Democratic Senators, have taken the view that majority rule is undemocratic, and have called reconciliation a partisan ploy to "ram through" the President's agenda. (The idea of the Senate moving too quickly is a little hard for any Hill observer to understand.) More importantly, enacting health care reform will require Congress to raise a great deal of revenue, and finding a large bipartisan majority for that might be a challenge.

Finally, some have complained that reconciliation is only to be used for deficit-reduction, but this is entirely unconvincing because these are largely the same members who voted in favor of reconciliation bills during the Bush years that actually increased the deficit by cutting taxes.



Congressman McDermott Proposes a More Progressive Approach to the Estate Tax



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On Wednesday, Rep. Jim McDermott (D-WA), Chairman of the House Ways and Means Subcommittee on Income Security and Family Support, introduced the Sensible Estate Tax Act of 2009. The bill would result in an estate tax that is more progressive than what either the Obama administration or Republican leaders have proposed. It would exempt the first $2 million in assets in an estate per person, or $4 million for a married couple. It would impose a 45 percent estate tax on the taxable amount of an estate up to $5 million, 50 percent on the taxable amount between $5 and $10 million and 55 percent on the taxable amount in excess of $10 million.

Under current law, the estate tax is scheduled to disappear in 2010 and then reappear in 2011 at pre-2001 levels (meaning a $1 million per-spouse exemption and a top rate of 55 percent). President Obama's budget blueprint proposed to make permanent the 2009 rules which include an exemption of $3.5 million per spouse and a top rate of 45 percent.

The McDermott bill would index the exemptions for inflation and includes other significant changes. It would make the exemption portable (meaning that one spouse could also use the other spouse's exemption), and it would reunify the gift and estate taxes. (Under current law and the administration's proposal, the gift tax exemption would remain at $1 million.) The McDermott proposal would, importantly, bring back the credit for state estate taxes, which is a source of revenue for the states.

The Joint Committee on Taxation estimates that the McDermott proposal would cost $202.8 billion over ten years (compared to current law), about 20 percent less than the President's estate tax proposal, which is estimated to cost $256 billion over ten years.

Estate taxes affect less than one percent of Americans. In 2007, when the estate tax exemption was at the $2 million level that McDermott proposes to make permanent, only 0.7 percent of estates were liable for the tax.



Budget Resolutions Approved by House and Senate



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The U.S. House of Representatives and the U.S. Senate both approved budget resolutions on Thursday that move Congress a step closer to enacting President Obama's agenda, without being quite as bold or explicit as the budget outline released by the President in late February. Both resolutions would spend about $3.5 trillion in 2010 and include non-binding, but important, provisions affecting spending and revenues in years after that. As lawmakers from both chambers leave Washington for their spring recess, behind-the-scenes negotiations will likely pave the way for a House-Senate conference to take place upon their return to iron out the differences between the two resolutions. On some key issues like estate tax and health care, the House has made wiser choices that will hopefully be maintained in the final budget resolution.

The basic thrust of many of the tax policies embodied in the budget resolutions mirror the President's proposals. Both assume the extension of the Bush income tax cuts for everyone except taxpayers with incomes above $200,000 (or $250,000 for married couples). Taxpayers above these thresholds are affected by the top two income tax rates, which would revert to 36 and 39.6 percent. Both resolutions would extend the "AMT patch," a measure that increases the exemptions from the Alternative Minimum Tax to ensure that most taxpayers are not affected by it. (The chambers differ on the extent to which the costs of the AMT patch will have to be offset with revenue-raising measures in the future.)

The resolutions do not follow the President's proposals on certain issues. For example, President Obama proposed that the income tax cuts aimed at working families and included in the recently-enacted stimulus bill be made permanent. The resolutions would make some of these permanent, like the expansion in the child tax credit and the American Opportunity Tax Credit for higher education.

But they would not make permanent the Making Work Pay Credit, one of Obama's signature tax policies. Neither do they include any specific language to create a "cap and trade" program to reduce greenhouse gas emissions, which, in the President's proposal, would produce the revenue needed to offset the costs of the Making Work Pay Credit and other energy initiatives.

Similarly, the resolutions do not include language laying out how Congress will pay for health care reform. (The President's budget outline included a reduction in the benefits of itemized deductions for the rich to partially fund health care reform.)

None of this means that Congress will not act on these proposals of the President's. The resolution includes language allowing for deficit-neutral legislation in these areas without specifying how money will be spent or how it will be raised.

Congress's next important test involves settling the differences between the House and Senate resolutions. When it comes to revenues raised to pay for health care or revenues raised from the estate tax, hopefully the choices made by the House will be maintained in the final budget resolution. See the following Digest articles for more.

Estate Tax: Senate Approves a Break for Millionaires that Leader Reid Calls "So Stunning, So Outrageous"

 

 

Reconciliation for Health Care Reform: House Moves to Stop Senators' Obstruction of Measures with Majority Support

 

 

House GOP's Alternative Budget: Poor Pay More, Rich Pay Less, Stimulus Repealed and Government Shrinks

 

 

 

 

 

 

 

 



Estate Tax: Senate Approves a Break for Millionaires that Leader Reid Calls "So Stunning, So Outrageous"



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The tax cuts enacted under President Bush in 2001 scheduled a gradual repeal of the estate tax, with the amount of assets exempted from the tax gradually increasing over a decade and the tax rate on estates gradually dropping until the estate tax would disappear entirely in 2010. Like almost all of the Bush tax cuts, this cut in the estate tax expires at the end of 2010, meaning that rules scheduled under President Clinton would come back into effect in 2011.

The budget resolutions passed out of the House and Senate budget committees last week both assumed that the estate tax rules in place in 2009 would be made permanent, meaning the Bush estate tax cut would be partially made permanent but the estate tax would not disappear entirely. The Center on Budget and Policy Priorities released a report this week finding that about 99.7 percent of estates would be untouched by the tax under this proposal.

Incredibly, 51 Senators voted to approve an amendment offered by Senators Blanche Lincoln (D-AR) and Jon Kyl (R-AZ) to cut the estate tax even more than this. The 2009 estate tax rules exempt the first $7 million of assets passed on by a married couple (as well as assets they leave to charity) and tax the rest at a rate of 45 percent. The Kyl-Lincoln amendment puts the Senate on record as supporting a $10 million exemption for married couples and a 35 percent rate.

Before the Senate approved this amendment, Majority Leader Harry Reid (D-NV) said, "It is so stunning, so outrageous that some would choose this hour of national crisis to push for an amendment to slash the estate tax for the super wealthy."

Remarkably, both the Republican Senators and the "moderate" Democratic Senators who voted for this expanded break for families with millions of dollars to pass on to their heirs were largely the same Senators who claim to be concerned about budget deficits and the costs of the President's proposals to help working families.

The actual consequence of the amendment is unclear for several reasons. First, the amendment was written to be "deficit-neutral," meaning that if Congress wants to pass actual legislation to cut the estate tax, they would have to find a way to raise enough revenue to replace those billions lost. Some of the Senators who voted for the amendment would oppose a cut in the estate tax if it is deficit-financed (which any estate tax cut is likely to be). Second, the Senate then adopted (by a vote of 56 to 43) a confusing amendment creating a point of order AGAINST any estate tax cut if the Senate did not also provide some new tax cut, costing the same amount of money, for people earning less than $100,000. Whether that condition could be met is an open question.

Sorting through this confusing jumble of stated intentions and caveats will hopefully become unnecessary. The conferees crafting the final budget resolution should leave out the Senate's ludicrous cut in the estate tax.



House GOP's Alternative Budget: Poor Pay More, Rich Pay Less, Stimulus Repealed and Government Shrinks



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When anti-tax activists and lawmakers complain that Congress and the President are pursuing policies that will cause taxes to be too high, the first question anyone should ask is: Compared to what? What exactly is the alternative to allowing the Bush tax cuts to end (at least for the rich) and finding new ways to raise revenue?

This week the House GOP showed us what the alternative is and it's frightening. On Wednesday, the ranking Republican on the U.S. House of Representatives' Budget Committee, Congressman Paul Ryan (R-Wisc.), released a budget plan which he argues is a more fiscally responsible alternative to the budget outline proposed by President Obama and the similar budget resolutions approved by both chambers last night. His proposal is apparently an update of the plan that House GOP leaders introduced last week and is different in some key respects.

The revised House GOP budget plan would move towards cutting and privatizing Medicare, convert Medicaid into limited block grants to states, and even cut Social Security benefits for some retirees. The plan would deeply cut the relatively small amount of government spending devoted to non-military, non-mandatory programs by refusing to adjust the budgets of these programs for inflation and population growth for five years. The House GOP plan would repeal the recently enacted economic stimulus law (the American Recovery and Reinvestment Act of 2009, or ARRA) a year before its expiration at the end of 2010.

A report from Citizens for Tax Justice compares the income tax proposals in the House GOP plan to the income tax proposals in the House Democratic plan in 2010, and finds that:

  • Over a third of taxpayers, mostly low- and middle-income families, would pay more in taxes under the House GOP plan than they would under the House Democratic plan in 2010.
  • The richest one percent of taxpayers would pay $75,000 less, on average, in income taxes under the House GOP plan than they would under the Democratic plan in 2010.
  • The income tax proposals in the House GOP plan, which is presented as a fiscally responsible alternative to the Democratic plan, would cost over $225 billion more than the Democratic plan's income tax policies in 2010 alone.

Read the report.



New Report from CTJ: Update on House GOP Budget Plan



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Yesterday, the ranking Republican on the U.S. House of Representatives' Budget Committee, Congressman Paul Ryan (R-Wisc.), released a budget plan which he argues is a more fiscally responsible alternative to the budget outline proposed by President Obama and the similar budget resolutions working their way through the House and Senate right now. His proposal is apparently an update on the plan that House GOP leaders introduced last week and is different in some key respects.

A new report from Citizens for Tax Justice compares the income tax proposals in the House GOP plan to the income tax proposals in the House Democratic plan in 2010, and finds that:

  • Over a third of taxpayers, mostly low- and middle-income families, would pay more in taxes under the House GOP plan than they would under the House Democratic plan in 2010.
  • The richest one percent of taxpayers would pay $75,000 less, on average, in income taxes under the House GOP plan than they would under the Democratic plan in 2010.
  • The income tax proposals in the House GOP plan, which is presented as a fiscally responsible alternative to the Democratic plan, would cost over $225 billion more than the Democratic plan's income tax policies in 2010 alone.

Read the report.



New State-by-State Figures on Tax Proposals in President's Budget from Citizens for Tax Justice



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This week, Citizens for Tax Justice updated its recent report on the tax proposals in the President's budget outline to include estimates of the proposals' impacts on different income groups in every state. The new state figures examine the proposed cuts compared to current law and also compared to the baseline that the Obama administration uses in presenting its budget figures. The figures show that, whichever baseline is used, the vast majority of families in every state will get a significant tax break.

Read the report. (State-by-state figures are in the final appendix.



New Report from Citizens for Tax Justice: President Obama's First Budget Proposal



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On February 26, President Obama sent to Congress the blueprint for what could be one of the most progressive federal budgets in generations. The budget calls for national health care reform, expanded education funding, a program to reduce global warming, and several improvements in human needs programs. As a new report from Citizens for Tax Justice explains, it would make the tax code considerably more progressive, and close a number of egregious tax loopholes.

There is, however, a flaw in the budget proposal: It does not raise enough revenue to pay for public services. Instead, its net effect is to cut taxes dramatically.

Opponents of the President have attempted to argue that the budget proposal calls for tax increases that could sink the economy, but this complaint is plainly unfounded. President Bush and his allies in Congress were adamant that lower taxes would lead to an explosion of prosperity, and they enacted tax cuts in 2001, 2002, 2003, 2004 and 2006. Some allies of the former President argue that Congress is now insufficiently focused on tax cuts, but this view seems bizarre and incredible given the sad economic facts all around us.

Indeed, one might reasonably conclude that we could safely allow most of the Bush tax cuts to expire at the end of 2010, as they are scheduled to under current law, without any concern about how this will impact the economy. But President Obama actually proposes to keep most of the Bush tax cuts. Obama's largest proposed tax cut is to re-enact 80 percent of the Bush tax cuts that are scheduled to expire at the end of 2010. Most of this reflects re-enacting the Bush income tax cuts for married couples with incomes below $250,000 and others with incomes below $200,000 (or put another way, for about 98 percent of taxpayers), and permanently reducing the Alternative Minimum Tax (AMT). In addition, Obama proposes to re-enact close to half of the Bush estate tax cut.

On top of re-enacting most of the Bush tax cuts, the Obama budget includes a number of additional tax cuts for families and individuals. (These would be extensions of temporary tax cuts included in the recently passed stimulus law.) It also proposes some questionable business tax cuts.

Partially offsetting its tax-cut proposals, the Obama budget proposes some significant revenue-raising provisions. These include a cap-and-trade program to reduce carbon emissions, a limit on the benefits of itemized deductions for high-bracket taxpayers, and a number of corporate and high-income loophole-closing measures.

Read the Report



Estate Tax Proposal Would Partially Extend One of Bush's Tax Cuts for the Wealthy



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On January 9th, Congressman Earl Pomeroy (D-ND) introduced a bill (H.R. 436) to retain the estate tax with a per-spouse exemption of $3.5 million, essentially freezing in place the estate tax rules in effect this year. The Obama campaign has favored a similar approach to dealing with the estate tax.

Under the first tax cut enacted by President Bush in 2001, the estate tax is being phased out gradually. Under current law, if a wealthy person dies in 2009, the first $3.5 million of their estate is not subject to the tax. That exemption was scheduled to increase gradually under the 2001 law, until 2010 when the estate tax is scheduled to disappear completely. Like almost all of the Bush tax cuts, these rules expire at the end of 2010, meaning that the estate tax will return in 2011 and the pre-Bush rules will apply (including a $1 million per-spouse exemption). Congressman Pomeroy's bill would therefore prevent the estate tax from disappearing in 2010, but would constitute a significant tax cut for millionaires in years after that.

In December, Citizens for Tax Justice issued a report using the latest estate tax data from the IRS showing why the Obama/Pomeroy approach would be a huge and unnecessary tax cut for extremely wealthy families. The report found that only 0.7 percent of deaths that occurred in the United States in 2006 resulted in estate tax liability. The per-spouse exemption that year was only $2 million, which means that the estate tax will affect even fewer families with the $3.5 million per-spouse exemption in place.

Rep. Pomeroy's bill would also repeal new "carryover basis" rules scheduled to be effective next year. Under current law, when you inherit property from an estate, the "basis" of that asset for income tax purposes is stepped up to its fair market value (FMV) on the date of death. When the estate tax is fully repealed in 2010, the stepped-up basis rules are also scheduled to be repealed. The new general rule will be that the basis of the property will carry over from the decedent. (An exception to this rule allows $1.3 million of property to be stepped up to FMV, and an additional $3 million is stepped up if the property is left to a surviving spouse.) H.R. 436 would repeal the new rules prior to their effective date.

It's true that the new carryover basis rules scheduled to come into effect in 2010 under current law are difficult for taxpayers and administrators. How can we figure out what Aunt Sarah paid for her G.E. stock that she's had for at least 30 years when we don't even know when she bought it (or if she received it as a gift or inheritance)? And what if she's been reinvesting dividends all these years (which increase the basis)? A similar rule was enacted by the Tax Reform Act of 1976, but was repealed before its effective date in 1980 because of the outcry from taxpayers and practitioners about the impossibility of complying with the statute.

The phase-out of the federal estate tax also continues to hurt state treasuries. Most states base their state inheritance tax on the federal system and many have lost significant revenues because of the federal changes, including the loss of the credit for state estate taxes. In his budget proposal last week, Gov. Baldacci of Maine included changes to Maine law that would impose a Maine estate tax computed under the pre-2001 federal and state rules. Gov. Sibelius of Kansas has proposed delaying the state's scheduled elimination of estate taxes.



Latest State-by-State Data Show Why Obama Should Scale Back His Proposal to Cut the Federal Estate Tax



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Citizens for Tax Justice issued a new report this week showing that the percentage of deaths resulting in federal estate tax liability is less than one percent nationally -- and in most states -- and continues to fall. The report points out that President-elect Barack Obama's proposal to reduce the estate tax even further is therefore unnecessary.

Under the tax cut enacted by President Bush in 2001, the estate tax is being gradually reduced each year until it disappears entirely in 2010. But, like almost all of the Bush tax cuts, the gradual changes in the estate tax expire at the end of 2010. This means that if Congress simply does nothing, the estate tax will be repealed for one year in 2010 and then will return in 2011 in a form much closer to what existed at the end of the Clinton years.

President-elect Obama proposes to make permanent the estate tax rules that will be in effect in 2009 under current law, which includes a larger exemption than the one in effect today. Obama's proposal would be an improvement in the sense that it would prevent the estate tax from disappearing in 2010. But it would be a regressive and costly giveaway to the very wealthiest families in America, because it would mean that the tax would affect even fewer estates than it does now.



House GOP Pins Comeback Hopes on Social Security Privatization, Dismantling Medicare, and Slashing Public Services



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On Wednesday, Paul Ryan (R-WI), the ranking Republican on the House Budget Committee, presented a comprehensive tax and entitlement plan that would cut Social Security benefits, end Medicare as it's currently structured and attempt to simplify taxes by creating an optional income tax that one could choose in lieu of the current system. The plan follows a string of losses of formerly Republican-held House seats in special elections and a general sense that Republican members of Congress want to improve their message.

One part of the plan would replace Medicare benefits with a "payment of up to $9,500 - adjusted for inflation and based on income, with low-income individuals receiving greater support." Another part of the plan copies a Bush proposal to offer tax credits - $2,500 for individuals and $5,000 for families - to purchases health insurance. Perhaps most surprising is the part of the plan that essentially revives the prospect of diverting money out of Social Security to fund private accounts.

The tax reform part of the plan would go much further -- and cost much more -- than the Bush tax cuts. The estate tax would be abolished (at a cost of a trillion dollars over a decade) and the AMT would be eliminated (which would cost $1.5 trillion over a decade), and taxpayers would get to choose to file under either the current income tax or a "simplified" income tax with rates of 10% on income up to $100,000 for joint filers, and $50,000 for single filers; and 25% on taxable income above these amounts. The standard deduction and personal exemptions would be larger, totaling $39,000 for a family of four.

While many anti-tax lawmakers have suggested an optional simplified tax, it's not obvious how having two income taxes can be simpler than having just one. The most likely result is that people would calculate their taxes twice to see which system offers them less tax liability. And of course, the reason why the simplified version must be "optional" is that all lawmakers claim to support simplification but can't bring themselves to really close down the various loopholes that benefit certain pockets of voters (and campaign contributors) and which actually cause the complexity in the tax code.

Interest, capital gains and dividends would no longer be taxed. (Most of the benefits of the current capital gains and dividends tax breaks go to the richest one percent.) The corporate tax would be replaced by business consumption tax of 8.5 percent.

The plan would allegedly eliminate the federal budget deficit, in part with a provision that would require the OMB to make across-the-board reductions in discretionary and mandatory programs if spending rises above a certain percentage of GDP "but applies the reduction only to fast-growing programs, and is limited to no more than 1 percent of a program's spending." But given the magnitude of the tax cuts included in this plan, it's difficult to imagine Congress ever paying for them by reducing spending, which did not occur even when Rep. Ryan's party controlled the House, Senate and White House.



New CTJ Report: House Budget Plan Deals with Tax Policy More Responsibly than the Senate Plan



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Citizens for Tax Justice has released a new report explaining that the budget resolution approved by the House of Representatives last week deals with tax policy in a more responsible way than the version approved by the Senate. The differences between the two resolutions must be ironed out by a House-Senate conference committee that will negotiate a final version to be approved by both chambers.

The resolution approved by the House offers more responsible tax provisions in a number of areas.

First, the House budget plan uses "reconciliation instructions" that would make it easier to pass a bill to provide relief from the Alternative Minimum Tax (AMT) without increasing the deficit. Any further increase in the national debt is likely to be borne, in the long-run, by the middle-class, so it would be unfair to take on debt to provide AMT relief, which mostly benefits families that are relatively wealthy. The Senate plan, unfortunately, does not use this approach because the Senate assumes that an AMT patch will be deficit-financed.

Second, the House plan does not emphasize cutting the estate tax the way the Senate plan does. CTJ's data shows that the estate tax now affects fewer than 1 percent of estates. The Senate decided, however, to cut the estate tax for these few, wealthy families and to finance this tax cut with surpluses that may never materialize.

Third, the House plan would not cut taxes on better-off Social Security recipients. Such a tax cut, which the Senate plan includes, would only benefit those seniors who are well-off.

The House-Senate conference committee that takes up the budget resolutions should reject the choices that the Senate has made with regard to taxes and choose the more responsible path set by the House of Representatives.



CTJ Releases Most Recent State-by-State Data on the Estate Tax



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A new report from Citizens for Tax Justice shows that the federal estate tax continues to reach less than one percent of estates, despite the complaints of anti-tax activists that middle-class people are crushed by the so-called "death tax." In most of the states that are home to Senators who want to abolish the estate tax, the percentage of estates affected is particularly low.

Under the Bush tax cuts, the estate tax is scheduled to change to allow even more estates to escape federal taxation. In 2004 and 2005 estates worth up to $1.5 million (or $3 million for estates owned by a married couple) were exempt from the estate tax. (Most of the estates listed in the new report were subject to that exemption.) Since then, the exemption has increased to $2 million ($4 million for married couples) and in 2009 the exemption will increase to $3.5 million ($7 million for married couples). In 2010 the estate tax will disappear entirely. After 2010 all the Bush tax breaks expire, including this generous treatment of estates.

Some lawmakers want to make permanent the complete repeal of the estate tax, which would cost over a trillion dollars over a decade. As this data makes clear, that would benefit very few families with the biggest estates.



House Finally Gets It Right on Estate Tax, But Trouble Is Brewing in the Senate



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Before the House passed the bill ending the private debt collection program, Republican members used procedural rules to force a vote on a complete, unpaid for repeal of the estate tax. The measure was defeated 212-196, a major setback for the handful of super-rich families that have been funding a repeal campaign for several years. The House has voted several times during the Bush years to repeal the estate tax. According to a statement from Republican Whip Roy Blunt (R-MO) 42 Democrats voted to repeal the estate tax the last time it came up for a vote while this time only ten did, indicating that several have decided for the first time to stand up to the extreme anti-tax rhetoric used by opponents of the estate tax.

Supporters of a fair estate tax needed this news after developments in the Senate last week. As the Senate Finance Committee marked up its tax package for the agriculture bill reported on last week, Senator Jon Kyl (R-AZ) offered an amendment to significantly reduce the estate tax without paying for it. Senator Kyl only withdrew his amendment after Senate Finance Chairman Baucus agreed to hold a hearing on the estate tax sometime this year and mark up a bill in the spring.

Fewer Than One Percent of Estates Subject to Tax

The most recent data released from CTJ show that the percentage of estates subject to the tax was less than 1 percent in most states in 2005. Even fewer estates are likely to be taxable this year because the exemption is larger ($2 million for a single taxpayer vs. $1.5 million in 2005). Under the estate tax cut enacted by the Bush and the Republican-led Congress, the estate tax is gradually reduced until it disappears in 2010, but then returns in 2011.

Some lawmakers want to compromise and essentially freeze in place the estate tax rules that will be in effect in 2009, including a $3.5 million exemption for single taxpayers and a 45 percent rate. The budget resolution Congress adopted for fiscal year 2008 assumes that this compromise will be enacted. The amendment offered by Kyl last week would have gone much farther because it would increase the exemption to $5 million, tax the value of the estate between $5 million and $25 million at 15 percent and then tax the rest at 30 percent.

In Search of the Elusive Family Farm Threatened by the Estate Tax

Much of the rhetoric used by estate tax opponents revolves around family-owned small businesses, especially farms, that they claim are endangered because of the estate tax. Contrary to what the anti-tax advocates claim, very few farms or small businesses, if any, would ever have to be sold because of estate taxes.

According to the Congressional Budget Office, there were only 1,659 farm estates that were taxable in 2000 (when the estate tax was steeper because the exemptions were smaller and the rate was a little higher) and of these, only 138 did not have enough liquid assets to pay their estate taxes immediately, meaning some part of the estate could conceivably be sold in order to pay the tax. The CBO also found that if the exemption level was as high as it is today only 15 farm estates would have been both taxable and lacking the liquid assets to pay the tax.

Those 15 farm estates would likely weather the estate tax just fine. This CTJ paper describes the extra breaks that family farms get from the estate tax (in addition to the exemptions all estates get) including a provision that allows the tax to be paid off over a period of 14 years. The American Farm Bureau Federation famously admitted to the New York Times in 2001 that they could not cite a single example of a farm that had to be sold due to the estate tax.



Democratic Congressmen Propose Estate Tax Break for Farms



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Last week U.S. Representatives John Salazar and Tim Mahoney introduced the "Save the Family Farm and Ranch Act of 2007," which would exempt family farms that provide 50 percent or more of a family's income. This seems unnecessary. The American Farm Bureau Federation famously admitted to the New York Times in 2001 that they could not cite a single example of a farm that was lost due to the estate tax. Moreover, as a Citizens for Tax Justice paper explained last summer, family farms receive several additional breaks (beyond the $2 million dollar exemption in effect this year) from the estate tax and can pay off estate taxes over a period of 14 years.

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