Posted: Apr 29, 2005 By: United for a Fair Economy and Responsible Wealth

Subject: Responsible Estate Tax Reform

Comment: Responsible Estate Tax Reform
By Chuck Collins and Lee Farris

I. Description of Proposal
United for a Fair Economy and its Responsible Wealth project support keeping a reformed estate tax in our national tax structure, along with a progressive income tax. The estate tax plays an important role in maintaining the progressivity of the tax system and brings in significant revenue. Responsible Wealth members are among the top 5% in wealth or income in the United States. Responsible Wealth has enlisted more than 2200 taxpayers who have paid or will pay the estate tax, and who support a responsible, reformed estate tax (see http://www.faireconomy.org/.)

The 2001 tax cut phases out the estate tax between now and 2009; the amount of wealth exempted rises from $1.5 million in 2005 to $3.5 million for individuals, double that for couples. In 2010, the tax will be completely repealed … for one year. If Congress takes no action, the 2001 tax law will sunset and the estate tax will return at its pre-2001 levels, including a $1 million individual wealth exemption and 55 percent rate structure. The reason for this sunset was to significantly reduce the cost of repealing the estate tax.

The push for repeal comes from a coalition of anti-tax groups, business trade associations, newspaper owners, and lobbying firms like Patton Boggs, representing some of America's wealthiest families, including the Mars and Walton clans. But the fiscal, moral, and political case for complete estate tax abolition is weak.

In the context of prolonged large budget deficits, abolishing a tax that will generate almost $1 trillion in revenue from 2010-2021 is fiscally irresponsible, according to Senator George Voinovich (R-OH) and other moderates in both parties who abhor the prospect of red ink for decades to come. (Revenue estimate from “Estate Tax Reform Could Raise Much-Needed Revenue: Some Reform Options With Low Tax Rates Raise Very Little Revenue,” Joel Friedman and Ruth Carlitz, Center on Budget and Policy Priorities, March 16, 2005.)

In fact, the estate tax could play a vital role in saving Social Security. According to the Center on Budget and Policy Priorities, “The Chief Actuary of the Social Security Administration has estimated that maintaining the estate tax at the 2009 levels — with a $3.5 million exemption and a 45 percent top rate — would raise enough revenue to cover more than one-quarter of the shortfall in the Social Security Trust Fund over the next 75 years, as measured by the Social Security Trustees. The trustees estimate the shortfall to be 0.65 percent of GDP, while the revenue raised by this reform would equal 0.2 percent of GDP. The Congressional Budget Office projects a smaller shortfall (0.36 percent of GDP). Under CBO assumptions, the estate tax revenues collected under this reform would close about half of the 75-year shortfall. A reform with a $2 million exemption and a 45 percent rate (the law in 2008) would close an even great portion of the Social Security shortfall.” (“House To Vote On Permanent Repeal Of Estate Tax: Estate Tax Reform, Rather Than Repeal, Could Preserve Much Needed Revenues And Help Restore Social Security Solvency,” Joel Friedman and Arloc Sherman, CBPP, April 12, 2005.)

Meanwhile, states are voting with their feet to preserve revenue from taxing wealthy estates. This year, the "state credit" portion of the federal estate tax expired, leaving states that previously "piggy-backed" on the federal law bereft of hundreds of millions of dollars. As a result, seventeen states have voted to retain their own state-level estate taxes, a pragmatic response in the face of tight state budgets. In April, legislative leaders in Washington state instituted a new Washington estate tax at the initiative of recently elected Governor Christine Gregoire.

The current wartime context also raises moral questions about the timeliness of abolishing the estate tax. A number of commentators and politicians have pointed out how unseemly it is for Congress to zealously protect every dime of Paris Hilton's inheritance while other families are holding bake sales to buy body armor for their children serving in Iraq. This grotesque inequality of sacrifice is not lost on some veterans groups. "During the Civil War, rich people could buy their way out of the draft," said Charlie Richardson, co-founder of Military Families Speak Out. "Now the wealthy don't have to pay anything to avoid military service - and they get big tax cuts on top."

Senator John McCain (R-AZ) recently observed that cutting taxes for the very wealthy during a time of war is historically unprecedented. "In the last year we have approved legislation containing billions and billions of dollars … in pork barrel projects, huge tax breaks for the wealthy, and a corporate tax bill estimated to cost $180 billion. This is a far cry from sacrifice." Historically, wealth has been "conscripted" to pay for war costs and debts.

The estate tax encourages charitable giving by exempting donations to charities. According to a recent study by the Congressional Budget Office, in 2000, repeal would have reduced giving by $13 to $25 billion. This amount exceeds the total amount of all corporate charitable donations in the United States, which equaled $11 billion in 2000. It approaches the $25 billion that foundations contributed for charitable causes in 2000. (Congressional Budget Office, "The Estate Tax and Charitable Giving," July 2004. See also David Kamin, "New CBO Study Finds That Estate Tax Repeal Would Substantially Reduce Charitable Giving," CBPP, July 31, 2004.)

Contrary to popular thought, the estate tax does not threaten small farms and businesses. According to the Tax Policy Center, in 2004, of almost 19,000 taxable estates, only about 440 were primarily made up of farm and business assets. Some legislators have proposed keeping the estate tax with an unlimited exemption for qualified family-owned farms and businesses (QFOBI). However, as Tax Policy Center noted, an unlimited QFOBI exemption would be very costly, and would give the wealthy huge incentives to buy farms and businesses, thus bidding up prices and hurting family farms and businesses. In addition, an unlimited QFOBI exemption would exempt some of the largest businesses in the world, such as Mars and Cargill. (Leonard Burman, William Gale, and Jeffrey Rohaly, "Options to Reform the Estate Tax," Tax Policy Center, March 2005.)

When there is no estate tax in 2010, inheritances will be subject to capital gains tax using carryover basis, rather than the step-up in basis now used with the estate tax. This change will impact ten times the number of estates. According to the recent article by John Buckley (Chief Democratic Tax Counsel, House Ways and Means Committee), “Estate Tax Repeal: More Losers Than Winners”, 106 Tax Notes 833 (2005), “Repeal will benefit an extraordinarily small number of estates. Of the 7,500 estates that would have estate tax liability with the 2009 exemption level, many would face tax increases because the potential capital gains taxes from carryover basis could exceed their estate tax liability. In contrast, the new carryover basis rules will impose substantial compliance burdens on more than 71,000 estates per year. A significant number of those estates also will suffer tax increases from carryover basis, even though they would receive no benefit from repeal.” Buckley also noted that long held assets such as farms are particularly impacted by the change in basis.

The case for responsible estate tax reform is compelling.

United for a Fair Economy and its project Responsible Wealth advocate reforming the estate tax by:
- Raising the exemption to $2 million for individuals and $4 million for couples
- Indexing the exemption for inflation
- Keeping the step-up in basis
- Simplifying and liberalizing provisions to ease the transfer of the few closely held businesses subject to the tax, and retaining the existing ability of businesses and farms to pay any tax over 14 years
- Creating an automatic exemption for married couples that is double that for single people
- Ending the loopholes, such as valuation discounts, especially those for multiple owners, and special trust arrangements
- Reinstating the state credit, so states do not create a mismatching patchwork of state laws, but can simply piggyback on a reformed federal law
- Returning to a progressive rate structure, lowering the rate on estates smaller than $5 million to 40 percent, with incremental steps to a top rate of 65 percent on estates over $20 million.

This progressive rate structure invokes the historical intent of the tax, as articulated by Teddy Roosevelt and Andrew Carnegie, to thwart the build-up of "wealth dynasties" that threaten to undermine democracy. During the Depression and World War II, President Franklin D. Roosevelt won approval of a top rate of 70 percent on dynastic fortunes over $50 million, ensuring that even the wealthiest shared in the wartime sacrifice.

II. Impact of Proposal Relative to Current System
Relative to the current tax system, the responsible estate tax reform we propose would:
- Maintain the revenue generated by the estate tax from 2010-2011
- Continue to encourage charitable giving
- Simplify estate tax provisions regarding married couples, businesses, and farms
- Reduce compliance and administration costs by simplifying the tax code and reducing loopholes
- Make the estate tax more progressive and thus fairer
- Enhance economic growth and competitiveness by encouraging the wider dispersion of wealth, rather than its accretion in fewer and fewer hands.

We encourage the President's Advisory Panel on Federal Tax Reform to include a reformed estate tax in its recommendations to the President. We would welcome the opportunity to testify before the Advisory Panel on this proposal.

Chuck Collins is Senior Fellow at United for a Fair Economy and its project Responsible Wealth, which advocates for estate tax reform (See: http://www.faireconomy.org/estatetax/index.html). He is coauthor with Bill Gates Sr. of Wealth and Our Commonwealth: Why America Should Tax Accumulated Fortunes (Beacon).

Lee Farris is Senior Organizer on Estate Tax Policy at United for a Fair Economy.