Reconsidering the Death Tax Debate

by: Diane Lim Rogers

sfchron-death-tax-birth-tax-graphic

First we heard that estate tax legislation would be considered by the House as early as next week, but Tuesday night Majority Leader Hoyer suggested it could be put off until the very last minute -- up to six weeks from now. That's just before the estate tax is scheduled, under current law, to -- well, to put it in really technical terms -- “go poof!

Under current law (as dictated by the 2001 Bush tax cuts) the estate tax is fully repealed starting on January 1, 2010. It then comes back with a vengeance -- back to pre-2001 levels -- on January 1, 2011. Of course, that’s totally crazy, and we’ve known all along that however far we let ourselves get with estate tax relief, we’d probably end up permanently staying there. That’s how it always seems to work with tax cuts that start out as “temporary” but were never really meant to be temporary except to make them appear less costly.

I’ve never been a fan of estate tax relief because it’s hard to find a tax cut more skewed to the rich and yet as ineffective at improving either short-term economic activity or longer-term economic growth. Back in the middle of the Bush Administration even as the expiration of estate tax relief was several years away, Congress kept bringing up proposals to permanently repeal the estate tax. I would have thought that proposal a bad idea even if Congress would have proposed raising other taxes to offset the cost, because it’s hard to imagine finding another tax to raise that would do less economic harm than the estate tax in the first place. But when the “offsetting tax” is not a current tax, but instead the adding to the debt that creates a “birth tax” on future generations, permanent estate tax relief is an especially bad idea.

In this longer follow-up story in CongressDaily, Ways and Means Chairman Charlie Rangel (D-NY) seems to suggest that deficit-financed estate tax relief could qualify as additional “stimulus” spending (emphasis added):

The House will not vote to extend the estate tax until after the chamber tackles health care and a package of initiatives to create jobs and jump-start the economy, Ways and Means Chairman Charles Rangel said Tuesday.

It will be after health care and after jobs,” Rangel said after a meeting of his panel’s Democrats. “I don’t know how fast a legislative agenda we’re going to be on … it’s just we’re going to do health care first, and jobs, and then we’re going to do estate tax.”

Rangel and other panel members said there have been no decisions on how to jump-start the economy, and he and others plan to meet with National Economic Council Chairman Lawrence Summers. Rangel said members have many — and expensive — ideas.

“It’s hard really to do what the members want and find the pay-fors to do it; you know, you raise the taxes at the same time you’re trying to create jobs, so there’s a whole lot of thinking that’s going on,” Rangel told reporters. “Some of us will be meeting with Summers to see what the White House is thinking about in terms of a big jobs bill and whether or not there’s any feeling about this being enough of an emergency” that a package may not require offsets.

What is the world coming to when we are willing to deficit-finance a tax cut that is so heavily tilted to the very richest Americans and has so little economic benefit -- and yet declare it an “emergency” measure?

So I’m dusting off my old “death tax”/”birth tax” writings -- like this piece I wrote in May 2006 while at Brookings, published by the San Francisco Chronicle (which also created, especially for my op-ed, the cool graphic above of the “dead person” snatching money from a baby’s hand) -- because it’s the same old issue now, just from a starting point of a much higher “birth tax” already in place. My “old” point that is new again:

The problem is that there is no such thing as a free tax cut, unless — ironically in this case — you die before the bill comes due. It is those born into our current fiscal quagmire who can’t avoid the burden…By adding to the debt, estate-tax repeal would eventually raise this per-person burden — the “birth tax” — by thousands of dollars over their lifetime (including more than $3,000 from just the first 10 years after it would take effect).

This “birth tax” is a true cost imposed on all American babies. It cannot be repealed, no matter how upset Americans eventually get about it. Through the harmful effects of deficits on national saving, these future adults will be less likely to have the means to pay off these debts and are in danger of facing a lower standard of living than adult Americans today.

So repealing the estate tax would swap a “death tax,” which affects hardly anyone and has been found to have little effect on economic decisions, for a higher “birth tax,” which would be universal and seriously detrimental to future economic growth.

Of course, the new “twists” to this year’s estate tax debate are that: (i) we have to fit it in between the big debates on health care reform, and (ii) we’re debating it under the Obama Administration now. In my opinion these twists make the idea of deficit-financed estate tax relief all the more repulsive now. On the first twist, it’s hard enough for policymakers to prove they can be fiscally responsible with health care reform without the blatant display of irresponsibility in not wanting to pay for estate tax relief (on top of the displays over the deficit-financed “doc fix” or the deficit-financed make-up-for-no-COLA checks to seniors). On the second twist: again, why is the Obama Administration willing to handicap its own policies by requiring offsets while continuing to bless the deficit financing of the Bush tax cuts by exempting the tax cuts from their PAYGO standard?

More to write on this issue over the next few weeks, particularly as we get closer and closer to the “backed into the corner” date of year’s end when Congress is forced to do something or else see the estate tax completely disappear (die!) and likely never get it back.

***UPDATE (11:15 am 10/28): CQ’s Richard Rubin pointed out to me this morning that Chairman Rangel didn’t mean to call deficit-financed estate tax relief a “stimulus” measure; Rangel was referring to any elements of any new “jobs bill” that might need to be deficit-financed in order to have a stimulative effect. I do know what Rangel meant but, as I replied to Richard, there is at least the suggestion that there’s no other economic/policy justification for not paying for estate tax relief it other than stimulus (or not wanting anti-stimulus). And I’m sure we’ll be hearing the ol’ economic justifications for estate tax relief from Republicans (hence my “dusting off” of the ol’ counterarguments and “myths” pieces) and that this time around those Republican arguments will sound strangely compelling to the Democrats, too.