What's enough? Let the rich keep $3 million
The Senate will soon take up the question of whether the estate tax should be permanently repealed.
Before it was cut in 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. 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.
But lawmakers back in 2001 knew that permanent repeal, beyond 2010, would bust the federal budget. And that would look very bad. So they made the phase-out temporary. 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.
Of course, the politicians who created this odd result didn't really plan for the estate tax to pop up again in 2011. They assumed that a few years down the line they'd permanently repeal it when the public wasn't paying that much attention, even if this meant driving a big whole in future federal budgets. And so now, not surprisingly, the House of Representatives has voted to permanently repeal it.
Permanent repeal of the estate tax is just as crazy as its ghoulish return in 2011. It will cost the Treasury nearly a trillion dollars over the first ten years it's implemented, which comes to $75 billion a year on average.
To put this in perspective, $75 billion is about what the federal government will spend this year on homeland security and K through 12 education combined. Besides, there's a war on. And don't forget that Social Security shortfall the President keeps reminding us about.
Projections by the Social Security Administration claim that Social Security will run out of money some time over the next 75 years, despite the payments that future generations of workers will make into it. Most of them will contribute more in Social Security payroll taxes than they'll pay in income taxes. In other words, they'll be hard-working people with modest incomes.
By contrast, most of the heirs of the super wealthy who will get super-fat inheritances if the estate tax is repealed won't have to work a day in their lives.
So, here's 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.
Robert Reich, former Secretary of Labor in the Clinton administration, is professor of social and economic policy at Brandeis and the author of "Reason: Why Liberals Will Win the Battle for America."