On April 13, the U.S. House voted overwhelmingly in favor of repealing the Federal Estate and Generation Skipping taxes. The bill, designated HR 8 and titled the “Death Tax Repeal Permanency Act of 2005”, seeks to address unfinished business left by Congress in connection with the Economic Growth and Tax Relief Reconciliation Act of 2001. In that bill, Congress gradually increased estate tax exemptions from $600,000 to $1.5 million by 2004. Thereafter, in what can only be described as a bizarre compromise, estate tax exemptions continue to grow to $3.5 million in 2009, leading to no tax whatsoever when a taxpayer dies in 2010. However, for that unlucky (?) soul who hangs on until 2011, the estate tax resurrects itself in its original form, imposing top rates of more than half the estate exceeding the $600,000 exemption.
Given the way the world works, $600,000 is not a lot of money these days. For someone like me with five children, if my wife and I were to perish together in an accident (God forbid), if we left $600,000 to them for their care and future education, they might come up short. However, unless we engaged in some careful planning, under the default rules in 2011 the government would indeed be entitled to take a substantial share of every dollar over $600,000 that I left to them. That, in my view, makes no sense at all. (In a future post, I will explore the philosophical basis – or lack thereof – for any such tax.)
In my opinion, keeping the exemption at $600,000 is not a political likelihood. Even the Democrat opponents of the repeal bill suggested an increase to more than $3 million, but that compromise was rejected. Nevertheless, that eventuality – i.e. returning to prior law amounts – is the benchmark for measuring the tax cost of making this repeal permanent.
The Joint Committee on Taxation has estimated that the repeal bill would cost only $9 billion from 2006-10, but thereafter – when the $600K exemption comes back – the cost jumps to more than $289 billion through the year 2015. This amounts to only 29 billion/year – a tiny chunk of a more than $2 trillion annual budget. (However, more than $72 billion comes in 2015 – presumably a year in which baby boomers will reach room temperature.)
Nevertheless, critics of repeal point out that these funds could help keep Social Security solvent. But not so fast – I have not heard anyone really suggest that we confiscate the property left to orphans to finance the retirement of the next generation. I find it disturbing when political windbagging like this obfuscates what is really going on. That doesn’t help anyone solve anything.
I also note that one group, the Center on Budget and Policy Priorities, has even raised the estimates of the cost by taking into account the additional interests on the national debt associated with the lost tax revenues – a figure they peg at $225 billion over the decade after repeal (See their website www.cbpp.org/4-12-05tax.htm . I’m slightly puzzled over their measurement period – but they add up the revenues through 2021 as being over $1 trillion.)
I suppose thoughtful consumers think this way – the purchase of a consumer good on credit undoubtedly adds up to lots more than the cost of the good when the interest is considered. However, this is the first time I've heard this logic applied to the failure to collect a tax. Maybe looking at spending – much like that consumer – is a more useful tool. So, for example, that $25 million footbridge over the Missouri river which is partly funded by federal dollars actually costs us several times that when we consider future debt costs. Hmm – that pork now starts to taste a little salty.
More to come.