Obama Tax Cut Compromise Capitulates on Estate Tax

By Gary D. Bass, OMB Watch
Simultaneously published Dec. 7, 2010 in the Huffington Post
President Obama's tax cut deal with congressional Republicans, if enacted by Congress, will achieve what President George W. Bush could not get done: create a path to effectively kill the estate tax.

Some elements of the "compromise" reached Dec. 6 that would extend the expiring Bush tax cuts are well worth the increase in the federal budget deficit, as they help struggling families cope with the worst economy since the Great Depression while simultaneously providing a boost to the economy. At the top of this list are the 13-month extension for unemployment insurance benefits and a two percent cut in the payroll tax for employees for all of 2011. Indeed, the nonpartisan Congressional Budget Office (CBO) estimates these two policies could provide up to $1.90 and $0.90, respectively, in additional economic activity for every budgetary dollar put into them. Similarly, extensions of a more generous child tax credit and the Earned Income Tax Credit – also part of the tax cut deal – are much-needed pocketbook buffers that help the economy.

But this aid to working families comes with a price. Specifically, Obama would write a $163 billion check to the nation's richest families and reverse himself on his campaign promise to let the tax cuts for the wealthy expire. There's no shortage of commentary on the extension of the lower tax rates for those earning more than $250,000, but what deserves special attention is how Obama inexplicably gave away the store to Paris Hilton and other heirs to vast fortunes through the evisceration of the estate tax.

Temporarily repealed in 2010, the estate tax is ready to spring back to life in 2011 with its former vigor, returning to the parameters of 2000 with a 55 percent rate on inheritances above a $1 million exemption ($2 million for couples). In 2009, the year before the estate tax was temporarily put on hold, there was a 45 percent tax on estates greater than $3.5 million ($7 million for couples). At the 2009 levels, less than one quarter of one percent (0.25 percent) of estates with people passing away would incur any estate tax liability. In fact, as a compromise on the estate tax, Obama has been calling for extending the 2009 levels in his annual budget requests. Progressives, however, had been calling for smaller exemption levels ($1 million to $2 million ($2 million to $4 million for couples)) and higher rates (45 percent to 55 percent, and even higher for the super-wealthy). Conservatives and some like the U.S. Chamber of Commerce have argued that the estate tax, the nation's most progressive tax, should be eliminated. However, it has been clear that Obama would not agree to permanently repeal the estate tax.

So it would seem that, as Obama agreed to temporarily extend the Bush tax cuts, he would also agree to temporarily extend the estate tax at 2009 levels. But that isn't the deal he struck. Instead, he went with a proposal being pushed by conservatives to lower the tax rate to 35 percent and to increase the amount exempt from any tax to $10 million for couples.

Read the rest of this piece at The Huffington Post

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