Friday, August 12, 2005

Other People's Money

Former Secretary of Labor Robert Reich proposes a compromise in the debate over the estate tax, which Democrats seek to increase and Republicans seek to repeal.

Reich begins:
Before . . . 2001, the estate tax allowed a couple to pass up to a million dollars to their heirs, tax free. Not a bad deal, considering that only the wealthiest 2 percent of American couples had a million to pass on.
This hostility towards the interests of the wealthy is not uncommon. For example: "Repealing the estate tax . . . would provide a massive windfall for some of the country's wealthiest families . . . The estates of a tiny fraction of the people who die each year — those with very large amounts of wealth — pay the bulk of all estate taxes." The sound-bite version of this argument, employed against many types of legislation, is that the legislation "benefits the rich." Yet, repeal of the estate tax only "benefits" the rich because the estate tax, itself, only burdens the rich.

Reich and Co. defend the estate tax on the grounds that it applies to a small minority of the country. Is this defense sound? Few people would make the following argument: "We should not repeal Tax X because Tax X only impacts the 2% of the country who are Native Americans." Yet, replace the term "Native Americans" with "rich" and you have one of the most common arguments against repealing the estate tax, or against any tax cut.

There are good arguments against repeal of the estate tax. Notwithstanding its popularity, this is not one of them.

Reich goes on:
The 2001 tax law was an even better deal for the wealthy. It steadily raised that ceiling. This year, a couple can pass up to $3 million. By 2009, they can pass up to $7 million without being grazed by an estate tax. And in 2010, when the ceiling is lifted entirely, they can pass on a zillion dollars without paying estate taxes.
Stated another way: this year, a couple with an estate valued up to $3M can join the 99% of the country that pays no estate tax. By 2009, a few more couples will join the privileged majority. And, by 2010, everyone will be free of the tax that 99% of the country currently does not pay. To couch the 2001 law, as Reich does, as "an even better deal for the wealthy" is to poison an important debate with a tortured attempt at class warfare.

Reich goes on:

. . . [Yet], in 2011, the estate tax is scheduled to go back to what it was in 2001, kicking in at a million dollars per couple. Let's admit it. This oddity is crazy. If you're the heir of a very rich person who's on his or her death bed as midnight approaches on December 31, 2010, there could be a moment of­ shall we say­ eager anticipation.

I admit it. This oddity is crazy. The source of the oddity is the arbitrariness. This arbitrariness is part of what makes small-government types so uneasy anytime the government makes sudden grasps for the assets of its citizens. One day it's yours. The next day, by government order, it's not.

As a solution to this oddity, Reich proposes a compromise:
Don't restore the estate tax ceiling to the million dollars per couple that it was in 2001. Acknowledge that the cut has been made and it's politically unrealistic to go backwards. But at the same time, don't permanently repeal the estate tax either. Instead, keep it where it is right now, this year ­kicking in only for estates over $3 million. Compared to a permanent repeal, this compromise would bring in enough money to fill most of the shortfall in Social Security funding for the next 75 years. This way, the heirs of the super-rich-- who'll be wealthy even if they never lift a finger except to speed-dial their financial advisors-- will pay taxes on inherited fortunes over $3 million so people who have worked hard all their lives get the Social Security they're counting on.
Some economists dispute that the estate tax would have the benefit Reich promises, or any benefit at all. Reasonable minds can differ on this empirical point. What's worth noting, however, is that Reich's justification turns only on the use to which the money would be put, and not at all on the interests of those from whom it would be taken.

Why $3M? Because, with this cut-off, the tax revenue would be enough to meet particular government spending needs, and because it would be "politically unrealistic" to make the cut-off any lower. As for the people from whom the money would be taken, there's no need to worry about them. Why? Because they're rich. And, from Reich's perspective, it's not job of the rich to decide what to do with their money. It's the job of the government. You don't need to read Reich's whole article to conclude that. The title says it all: "What's enough? Let the rich keep $3 million."

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