Can the “Death Tax” Be Brought Back to Life?
June 9th, 2010 . by economistmom
When I wrote this op-ed in the San Francisco Chronicle more than four years ago (while I was working at the Brookings Institution), I honestly never thought we’d let the estate tax go to its outright repeal, no matter what the 2001 tax law said. I was arguing that we needed to “freeze” estate tax law while there was at least some estate tax to save and yet little substance to the claim that it was a “death tax.”
Instead, we are living to hear stories like this one that appeared in the New York Times today, because we let what I thought was highly improbable actually happen: we let the estate tax die…for heaven’s sake! And while the story talks of policymakers worrying about whether we can make the tax retroactive on estates of people that have already died this year, I’m more worried that now that the estate tax has died, it’s going to be really hard to revive it, even for the very rich people who haven’t yet died.
Economist Mom:
Great op-ed in the SF Chronicle. I think the estate tax distorts economic behavior in bad ways. However, from a sociological point of view, we minimize the pathological behaviors of the heirs of such fortunes that give wealth accumlation a bad name. Besides, we need the tax revenue right now.
Did you write any other op-eds warning about the dangers for increasing the debts born by our children by instituting Medicare Part D and Obamacare?
I’ve heard crickets chirping when it comes to spending restraints and/or cuts, but the chorus sings when it comes to enhancing tax revenues.
Obama arrives at a time when the economy will be running deficits as far as the eye can see, and the first things he promises to do is to create a huge new entitlement program supposedly paid for by tax increases that could have gone toward reducing the deficit. Didn’t hear much moaning from Mr. Bixby or you about that.
Then you wonder why there is concern about the Concord Coalition’s commitment toward deficit reduction versus enhancement of Democrat talking points for tax increases.
Here’s my question. Wouldn’t it be a lot more efficient to not give money in the form of SS and Medicare benefits to the very wealthy as opposed to trying to tax their accumulated wealth upon their death?
Diane - nice post - but I’m wondering why it would be more difficult to bring the tax back in 2011 than it was to let it expire in 2009. the same probable Congressional inaction that repealed the tax for 2010 will bring it back in 2011 because of current law. Should be a piece of cake, no?
The politics of dealing with tax law expiration at the end of 2010 are fascinating. I foresee yet another game of chicken, with deadlock until March 2011 or so when the weaker side will make the final move to compromise. It will be a comprehensive deal including AMT, estate tax, and regular income tax changes. All retroactive to January 2011, since nobody in Congress seems to mind passing retroactive tax laws.
If we don’t reduce the growth in medical expenses and Medicare, just cutting payments to 10 percent of folks won’t be enough. (Of course, if the growth can’t go on forever, it will stop).
The projected gap for SS is about the same as the receipts from the estate tax. Determining taxes on less than 1 percent of the people who die in any year is certainly more efficient than determing the wealth of every retiree to see if they qualify for SS benefits.
Actually Arne, if we means test the top 20% of seniors who have average net worth of almost $1 million, allow the Bush and Obama tax cuts to expire and make a few other small adjustments, we balance the budget in 5 years.
Plus, if you means test, you force people to prove they qualify (just like college tuition assistance). As to your contention on the estate tax, remember everyone has to file even if they ultimately have no liability. It’s like the income tax in that regard.
Let’s consider dynamic effects.
(Just under) $1M is enough for a lifetime annuity of $50K (current year dollars). SS and Medicare would provide a high income earning couple about another $50K per year. What is described will make having between $1M and $2M worth no more than having $1M. Within a couple years of implementation 80 to 90 percent of people with more than $1M will have figured out how to have less than $1M in a way that benefits them without being considered wealth.
On top of that, SS benefits are quite progressive and are also taxed for anyone with a moderately high income, so wealthy seniors are not gaming the system.
Medicare - unless the growth is controlled, a plan that balances things in 5 years will still go out of balance in the future.
Although the tax affects only about 5,500 estates a year, it is such an incendiary issue that when Congress unexpectedly let it lapse at the end of 2009, financial advisers warned that it might play a macabre factor in the end-of-life decisions being weighed by heirs of elderly Americans. Some estate lawyers worried that tax considerations might prompt their clients to keep an ill relative on life support through the end of 2009 to get the favorable treatment — or worse, resist life-prolonging measures to hasten a relative’s demise before the end of 2010.
It’s also possible that some clients will resist doing what they think is best so as to avoid the appearance of doing it for purely financial reasons. Given all of the above, the law to repeal the estate tax one year and bring it back full force the next year has got to be one of the most blatantly idiotic, if not evil, laws that our government has passed. Some blame may go to the Congress for letting it lapse but I think that most of the blame goes to every Congress person who voted for this bill to begin with. I suspect that many of its supporters thought the law terribly clever in that they judged that it would be impossible not to continue the repeal once it had started.
The most charitable that I can be to those who passed the law would be to think that they really didn’t understand the consequences. One way that I think that they can redeem themselves is to support some compromise like reinstating the estate tax at its 2009 level. A second way that they can redeem themselves is to publicly admit that the law was a mistake and vow to never again resort to such dangerous accounting gimmicks.
By the way, not only does the law have the consequences listed above but it also essentially turns our estate tax into a lottery. If your benefactor dies in 2010, congratulations! You win the estate tax lottery!
Arne,
You miss my point. You wouldn’t be disqualified forever, just until you crossed the threshhold so the incentive to lower your net worth declines dramatically since you don’t gain by it.
As to the long term affects of Medicare, wouldn’t you rather give us 15 years of balance to solve the problem?
Giving someone something and taxing it back is massively inefficient relative to not giving it to them in the first place.
It will be very difficult to make it retroactive beyond the date a bill about it is introduced that eventually passes. Nothing has been introduced yet.
I noticed some reports saying the monthly tax receipts of SS are now smaller than the benefits paid out. Only temporary it’s claimed…
Steve,
Medicare and Social Security are different programs with different issues. I do not care how SS recipients spend their benefits. SS just needs to take in enough to pay its costs (which it does).
Medicare does not take in as much as it spends and the growth rate of health care expenses defines the problem.
No, I do not think getting 15 more years to solve Medicare at the expense of screwing up SS is a good idea.
Arne,
You still haven’t answered the fundamental question. Why should the (relatively) poor give money to the (relatively) rich? That’s what a non-means-tested SS system is.
As to your contention separating the programs, it’s just flat wrong. If the government goes through an inflationary crisis, it won’t matter is the SS program as accounted for is “in balance.”
Since the organization giving and the organization taking are not the same and since adding a whole new step of determining wealth on an annual basis would be far more complicated than continuing to send out checks, I see that the “massively inefficient” label is backwards.
That’s because you aren’t thinking about it right. The simple fact is it would be exactly comparable to applying for financial aid. You want money or benefits, you submit an application to prove you qualify. Since we can deputize the IRS to enforce the new health care mandate and review income taxes, I don’t see the inefficiency.
The IRS receives information about income from employers. It does not have similar information about wealth.
The IRS also receives information about income from taxpayers. It’s that form you file every year.
Just add wealth in asset classes to it and you’re all done.
The IRS does not receive info about whether you have health insurance but we’re comfortable with them tracking that ; )
Arne writes “SS just needs to take in enough to pay its costs (which it does).”
Goodness, to think I’ve explained to him several times how nonsensical such a statement is and yet he presents it again. Man oh man.
What matters is the overall balance of revenue and expenditures. It is obviously, completely absurd to think that Social Security spending doesn’t contribute to the problem of deficits and debt (just like any other spending) simply because internal bookkeeping makes it seem like Social Security is “self-funded” (well, even if that were the case with even the meaningless internal bookkeeping). Unbelievable how impenetrable some skulls are.