The U.S. House of Reps has voted to extend the only federal tax levy on grand accumulations of private wealth. But that extension essentially keeps in place all of George W.’s tax rate cuts on billionaire bequests.
Congress flipped another page in the estate tax story last week, with a 225-200 House vote to make the embattled tax levy permanent. But we still don’t know how this story will end. In fact, we still don’t even know how to interpret what has happened so far.
Does the House vote represent a victory over plutocracy — or a capitulation to it? Advocates for limiting grand concentrations of private wealth can make a convincing case either way.
Let’s review how we ended up at this point.
Our current estate tax first appeared in 1916, in an epoch not unlike our own. Then, as now, huge private fortunes dominated the U.S. economy, and many Americans considered those pools of privilege a direct threat to democracy.
The initial estate tax kicked in at a mere 1 percent — on wealth left behind at death equal to $50,000 — and capped off at 10 percent on wealth over $5 million. But this rather minor tax, over the next quarter century, would become a significant leveling force in American life. By 1941, the top estate tax rate — on estate value over $10 million — had jumped to 77 percent.
By the 1950s, thanks in part to the estate tax, America’s once fearsome plutocracy had deflated considerably. The mansions of the early 20th century had become, by mid century, hospitals and housing developments.
America’s rich didn’t much appreciate this turn of events, and they railed against the estate tax at every opportunity. But the wealthy lacked the political clout to challenge the estate tax head-on. So they nibbled around the edges and worked with tax lawyers and lobbyists to drill the estate tax with loopholes.
By the early 1990s, after a dozen years of Reagan-era tax cuts, a small handful of wealthy families felt confident enough to finally launch a direct challenge to estate taxation. Their campaign to demonize the estate tax would succeed.
The estate tax, in short order, became the “death tax,” and millions of average Americans started believing that estate taxes were going to gobble up their life-savings. In reality, only a handful of American households, no more than one in 50 throughout the 1990s, would ever face any estate tax liability.
No matter. By the late 1990s, Congress was passing bills to end the estate tax. Vetoes by Bill Clinton stalled this legislation — until George W. Bush entered the White House. In 2001, Bush’s first tax cut more than tripled the wealth that wealthy families could exempt from the estate tax — to $7 million for a couple in 2009 — and lowered the estate tax top rate, from 55 to 45 percent.
The Bush tax cut also mandated a total estate tax repeal, for one year, in 2010.
But this entire Bush estate tax cut package will expire, under current law, at the end of 2010. In 2011, the estate tax will revert back to the pre-Bush status quo — unless Congress acts to change what current law mandates.
The House vote last week seeks to make that change. Under the House bill, the estate tax will not disappear in 2010. Instead, the current estate tax rate — 45 percent on estate value over $7 million for couples — will become permanent.
The Senate still needs to act, and observers expect the Senate to extend the 2009 estate tax status quo into 2010. The estate tax now appears likely not to disappear in 2010 — or any time in the near future.
Does that mean the wealthy have lost a major political battle? In one sense, yes. The super rich who have been bankrolling the anti-estate tax campaign didn’t want to see the estate tax “reformed.” They wanted to see it eliminated.
To gain that repeal, as a United for a Fair Economy and Public Citizen report three years ago revealed, 18 super rich families that stand to save over $70 billion if the estate tax goes extinct have spent tens of millions of dollars on estate tax repeal. Those dollars have not bought exactly what the rich wanted.
Those dollars, on the other hand, have bought America’s wealthiest households enormous tax relief. For every $100 million in estate tax liability, wealthy families will pay, if the 2009 estate tax rate does become permanent, $10 million less in taxes than they would have at year 2001 rates.
Overall, the House move to fix the estate tax at 2009 rates will cost the federal treasury $234 billion from 2010 through 2019. But this total understates how drastically 2009 rates will eventually reduce federal revenues. The reason: The wealthy who’ll be passing away a decade from now and more will be fabulously richer than the wealthy who’ve been passing away over recent years.
One example: The most celebrated CEO of the 1970s, G.E.’s Reginald Jones, only took home $500,000 in 1975. Jones retired in 1981 and died in 2003. His successor at G.E., Jack Welch, retired in 2001 after averaging $65 million annually over the previous five years. Welch is still going strong.
So are most of his generational deep-pocket peers. Their huge fortunes won’t face estate tax liability for years down the road. Their heirs will reap enormous windfalls should the estate tax wind up sticking at 2009 levels.
Just how enormous? Figures from the congressional joint tax committee offer a glimpse at how rapidly the estates of the wealthy are escalating.
In 2012, the panel estimates, an estate tax at 2009 levels will bring in $18.3 billion less to the federal treasury than the treasury would collect if the estate tax reverts back to 2001 levels, as current law now mandates. In 2015, this revenue loss will total $28.7 billion.
By 2019, the annual loss to the treasury — from taxing wealthy estates at the lower 2009 rates — will hit $38.3 billion.
To limit that revenue loss, some House Democrats, led by Rep. Jim McDermott of Washington State, have wanted to set the estate tax rate, on wealth over $10 million, at the 55 percent top rate in effect in 2001. But House Democratic leaders nixed that move. They felt they couldn’t round up the votes to make the estate tax permanent at anything less than 2009’s watered-down level.
In that sense, the plutocrats have won. They have a large congressional majority ostensibly convinced that any estate tax stiffer than the 2009 version threatens the financial well-being of small businesspeople, family farmers, and other eminently average American households.
In reality, the 2009 rates will let mega millionaires pass on hefty sums, tax-free, to their heirs, as Center for Budget and Policy Priorities analyst Chuck Marr detailed last week.
“Consider a wealthy couple with two children,” asks Marr. “Each child could inherit a trust fund of $3.5 million tax free when the couple dies. This is more money than a middle-class family making $70,000 a year would make in a lifetime, and the middle-class family would pay taxes on that income.”
But isn’t an estate tax at 2009 rates, given all this, still better than having no estate tax at all in 2010, the state of affairs we would have if Congress doesn’t accept the 2009 rate bill now on the table? Most advocacy groups that champion the estate tax have come to that conclusion — and reluctantly supported last week’s leadership House bill.
“Estate taxes,” Rep. Jared Polis, a Colorado Democrat, noted last Thursday, “help prevent a permanent aristocracy from arising in this country.”
Stiff estate taxes certainly do. But weak estate taxes offer no such protection. Maybe that’s why the new House estate tax legislation has advocates for a more equal America so deeply unsettled.
Sam Pizzigati edits Too Much, the online weekly on excess and inequality.
