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Wednesday, December 12, 2012

Can the Estate Tax Solve the Fiscal Cliff?

Estate Tax LogoTime:  Can the Estate Tax Solve the Fiscal Cliff?:

Now that the fiscal cliff debates are (we hope!) coming to a conclusion, Responsible Wealth — a network of business leaders and other wealthy citizens, including Bill Gates Sr., Warren Buffett and George Soros — is speaking out in favor of returning to an estate-tax structure more reminiscent of that of the pre-Bush years.

The group is arguing for a much lower exemption — $4 million for a couple — than current law dictates. Its members also believe that the tax rate should begin at 45% and rise on a graduated basis in proportion to the size of the inheritance. This is actually a more liberal policy than President Obama is calling for; he has proposed a maximum estate-tax rate of 45%, with a combined exemption for couples up to $7.5 million.

But how much money would this tax actually raise, and could it help avert some of the other painful choices being made in the fiscal-cliff debate? The amount the estate tax could raise, of course, depends on the details of the reform. According to a recent analysis by the Wall Street Journal, current policy, which mandates a maximum estate tax of 35%, would raise $161 billion in revenue over the next 10 years. By contrast, reverting to a pre-2001 estate tax would raise $532 billion in the same time period, while the President’s proposal would raise $276 billion. 

These aren’t the kind of proposals that are going to solve America’s budget issues overnight. The U.S.’s yearly deficits have been topping $1 trillion per year. At the same time, every hundred billion counts, and the past several months (and perhaps the entire election cycle) have been centered on whether the Bush income-tax cuts on top earners should expire — a debate over a swing of just $110 billion (more or less) in taxes over the next decade, according to the Congressional Budget Office. And if an aggressive estate tax would raise almost $400 billion more in the next 10 years than current law allows, that’s $400 billion less we would have to cut from entitlement programs.

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Let's see.... President Obama's plan to raise taxes on the rich raises $1 trillion of the $2 trillion needed. Limit deductions at an extreme rate of $70,000 or so, (with a continued exemption on charitable contributions and thats another $400 billion. Restart the estate tax at $4 million and you are there.

Posted by: jimharper | Dec 12, 2012 12:34:57 PM

Ok, so you've got 1 trillion dollars in annual deficit, and this will make up 16-35 billion per year.

Meanwhile, this is probably the most hated tax that ever existed, just edging out the pre-revolutionary stamp tax. (For good reasons or bad, everyone hates it. Except populists who want to take money from rich people, and tax academics who like the fact that it has minimal incentive distortion.)

I'd say social utility is maximized by getting rid of it altogether--measured by overall human happiness.

Posted by: Dan | Dec 12, 2012 6:45:15 PM

Anything that decreases the power and utility of plutocrats like the Koch brothers and Sheldon Adelson has to be a positive. Eisenhower himself said it best -- their numbers are negligible and they are stupid.

Posted by: Anonymous123 | Dec 12, 2012 11:18:48 PM

It is frustrating to read this sort of attempted coverage in Time due to their inaccurate usage/application of words that mean something else to technical practitioners. For instance, he used "liberal" and "inheritance" and "aggressive" incorrectly. When the writer is drawing his comments from what other people have written, he's OK, but when he tries to write for himself, he just muddles the issues.

Posted by: Tax Accountant Reader | Dec 13, 2012 5:45:16 AM

It's such a fallacy to say that $530ish billion over 10 years would help. You write that our deficits top $1 trillion PER YEAR, but then you talk about revenue as a 10 year figure. If you're going to use the 10 year figure for revenue, you should use the 10 year figure for deficits in order to make it a fair comparison.

An no, raising $530 billion won't help us with our $10 trillion (over 10 years) deficit problem. Not even a blip on the radar screen.

Posted by: Joe R | Dec 16, 2012 5:10:01 PM

Well Joe, Simpson-Bowles proposed $2.2 trillion in new revenues over ten years, so yes, a $400 billion tax increase over that same time frame is significant.

Notice how the Republicans value deficit reduction through tax increases on the wealthy at about seven cents on the dollar. Yet, here's no end to the hyped up alarm when it comes to cutting social spending. But its not necessary, EVEN IF YOU PUT YOUR COMMENTS IN ALL CAPITAL LETTERS.

Posted by: jimharper | Dec 17, 2012 11:04:55 AM

I'm sorry, but is Simpson-Bowles supposed to be the standard? As if they proposed the correct solution and everything else is a deviation from perfect? As my initial comment indicates, even $2.2 billion in revenue pales in comparison to the >$10 trillion deficit.

It's like owing ten thousand dollars to your credit card company and then saying "well, I offered to give you $530- we're good, right?" "No? Fine, here's $2,200." Our politicians are playing a piecemeal game with the budget as if the next (tiny) revenue increase or spending cut will save us. The same can be seen with the proposal to increase rates on those earning >$250k. Add it all up and we're still more than $7 trillion short.

It's just sad when scholars and laypeople alike can't see where decades of unchecked deficits have place us as a nation. We're at the point where even enormous tax increases and large spending cuts won't save us. That's the point of my original comment- all of our discourse focuses on "deficit reduction"; however, unless a plan includes a surplus, we're going to need some wild inflation in order to make a dent in our now $16 trillion national debt. And I guess it's just sad that all of our greatest minds can only come up with plans that include wild inflation as a requirement for paying our bills.

Posted by: Joe R | Dec 17, 2012 3:26:55 PM

Simpson-Bowles like every other deficit reduction plan posits a recovery of economic growth to something like trend-line rates. After all, the Great Recession is by far the biggest cause of the deficits.

The second and third biggest causes are Republican policies, namely the Bush tax cuts and the decision to fight the wars entirely on credit. The Republican prescription drug benefit is nearly as expensive as Obamacare but unlike Obamacare, it was done entirely on credit.

May I suggest that its massively cynical and hypocritical for the Republicans to try and panic the public into social spending cuts to protect the spending and tax cuts for their own constituencies? Why don't they just admit that they prefer Social Security cuts to tax increases for their well-to-do constituents?

Posted by: jimharper | Dec 18, 2012 11:53:25 AM