The Estate Tax Is a Huge Giveaway in the Fiscal-Cliff Talks
When wealth aggregates too much it causes the economy to stagnate - one factor that keeps the Uber rich from just aggregating all wealth and passing it down in perpetuity are inheritance or estate taxes. If we don’t reasonably manage those, we just create perpetual familial dynasties and these new tyrants will eventually gather all that matters into a less than one percent solution while the rest of us fight just to survive at the edge of the cliff.
This latest cliff intersects with our two other unhappy certainties, death and taxes, when it comes to the estate tax. It’s been a rather bizarre decade for what Republicans call the “death tax,” but what should more properly be called the inheritance tax. Back when George W. Bush came into office, he slashed the estate tax, and gradually phased it out until 2010, when there was no estate tax. Since then, Congress has set it at a 35 percent rate, with a $5 million exemption, indexed to inflation — but that’s set to expire, along with everything else, in the new year, and revert back to its Clinton-era levels.
Those Clinton-era levels of a 55 percent rate and a $1 million exemption are much, much higher than what’s being talked about as part of a fiscal cliff deal. According to Sam Stein and Ryan Grim of the Huffington Post, the latest proposal that really, really might turn into an actual deal would set the estate tax at a 40 percent rate, with a $5 million exemption, indexed to inflation. In other words, the first $5 million of any estate would not be taxed, but the rest would be at a 40 percent rate, with that $5 million exemption growing each year with inflation. And remember, these are exemption levels for singles; the exemption level for surviving spouses is double this.
It’s a tax change that doesn’t affect many households, but it does affect the budget in a big way. The nonpartisan Tax Policy Center looked at four scenarios for the estate tax, and what they mean for revenues and rates. Here are the four scenarios, in brief:
— $5 million exemption, indexed to inflation, with 35 percent tax rate. This is current policy.
— $3.5 million exemption, indexed to inflation, with 45 percent tax rate. This was the Democrats’ preferred position during negotiations.
— $3.5 million exemption, not indexed to inflation, with 45 percent tax rate. This was policy in 2009, before the estate tax was phased out entirely in 2010.
— $1 million exemption, not indexed to inflation, with 55 percent tax rate. This was was policy under Bill Clinton, which is set to come back in 2013 in the absence of a deal.