Setting the Table for Tax Reform

by Reggie Oldak, Senior Counsel,
National Women's Law Center

The new, bipartisan National Commission on Fiscal Responsibility and Reform met for the first time yesterday. The Commission has until Dec. 1, 2010 to report to Congress on a plan that will balance the federal budget (excluding interest payments on the debt) by 2015 and "meaningfully improve the long-run fiscal outlook." In opening remarks, President Obama emphasized that "everything is on the table."

Just in time for dinner, the Congressional Research Service (CRS) has issued a report analyzing a very progressive source of revenue—the estate tax. The Economic Growth and Tax Relief Act of 2001, under the last Administration, provided for a gradual reduction in the estate tax and then elimination of the tax for one year. The House passed a bill last year that would have permanently extended the estate tax at 2009 levels—a complete exemption for estates valued at $3.5 million ($7 million for couples) or less, with the excess taxed at a top rate of 45 percent. A few super-wealthy families want an even bigger exemption and a lower rate. The Senate did not act to extend the estate tax last year, so there is no tax at all for 2010. In 2011, the estate tax reverts to 55 percent, with an exemption for estates valued at $1 million ($2 million for couples) . . . unless Congress reduces it again.

The estate tax has never affected more than a small fraction of estates. CRS concludes that with a $1 million exemption, less than 2 percent of estates will owe tax. Restoring the $3.5 million exemption results in only one quarter of one percent owing tax, and increasing the exemption to $5 million reduces that number by almost half. 

Because of various exemptions, exclusions, and deductions, the effective tax rate on the value of an estate as a whole is much smaller than the statutory rate. At 45 percent, the effective rate averages 16 percent for estates valued at more than $20 million. Concerns have been raised about the effects of the tax on small businesses and farmers, but CRS finds that "businesses pay a small fraction of the estate tax and a tiny fraction of total estates of businesses and farmers are liable for the tax." With a $3.5 million exemption, no more than 123 farm estates in the entire country would have any tax liability at all. 

The scheduled tax for 2011 ($1 million exemption, 55 percent rate) is estimated to raise revenues of $34.4 billion. Changing the tax to a $3.5 million exemption and a 45 percent rate would reduce that to $18.1 billion; at $5 million and 35 percent, revenue would be only $11.5 billion. The cost of reducing the tax grows over time, as the real and nominal value of wealth increases, so that, for example, moving to a $3.5 million exemption and 45 percent rate would lose $16.3 billion in 2011 and $30.7 billion in 2019.

Let’s hope that everything is indeed on the table and that the Commission will not just focus on cutting Social Security, Medicare, and Medicaid benefits for those who rely on them. Taxing multi-millionaires to pay for needed public services and control budget deficits seems like a much more responsible way to pay for dinner.