Tax Analysts Blog

Senate Democrats Abandon the Estate Tax

Posted on Mar 25, 2013
The most progressive tax in the United States is also one of the most unpopular. Thanks to Republican-led efforts to characterize it as a death tax, the estate tax is almost universally reviled in Congress and by voters. To emphasize the point, last week the Democrat-controlled Senate voted 80 to 19 to kill the tax, provided revenue could be found to offset the cost. How Democrats can reconcile their quest for more revenue from the wealthy with a desire to repeal a tax that hits only the wealthiest taxpayers (and even then, just their estates) is anyone’s guess.

The vote was part of the 50-49 passage of Senate Budget Committee Chair Patty Murray’s budget resolution. The amendment calling for repeal of the estate tax was nonbinding. Indeed, the entire budget resolution process was something of a political sideshow because Murray made no effort to draft anything that will even be discussed by the other chamber (she seems to have emulated her House counterpart, Paul Ryan, in that regard). But the vote is an important symbol of the muddled state of the Democratic Party and the extent of Republicans’ success in demonizing nearly every tax. Democrats also voted to eliminate their own creation -- the medical device excise tax. The excise tax was an important component of Obamacare, and the vote symbolizes the precarious state of the unpleasant parts of the healthcare reform regime. (Let’s wait and see what happens in Congress when the mandate and penalty are supposed to kick in.)

The estate tax doesn’t raise much revenue. Republicans and their Democrats-in-name-only colleagues ensured that throughout the 2000s. Conservative Democrats repeatedly voted with Republicans to both raise the exemption level of the tax and lower the rate. Former Arkansas Sen. Blanche Lincoln tried to save her Senate seat in 2010 by joining with Republicans to undermine the estate tax (and gut the healthcare reform law). She lost her seat in a landslide anyway, but her estate tax compromise lived on for two years, until it was replaced by the permanent provisions in the American Taxpayer Relief Act of 2012. The exemption is now a whopping $5.25 million, and the rate is 40 percent. The permanent estate tax also features portability meaning that married couples can effectively double the exemption. Thanks to changes in the law, the estate tax is projected to raise $370 billion less than it would if Clinton-era rates and exemptions were still in place. That’s a two-thirds reduction in revenue.

Democrats claim they are committed to a progressive tax code. President Obama frequently calls on wealthy taxpayers to pay more. And ATRA did allow some Bush tax cuts for the rich to expire. But when it comes to details, Democrats frequently undermine the progressivity of the code. They favor capital gains tax preferences just as much as Republicans do. They largely oppose additional taxes on the banking and financial sector. Many Democrats, particularly senators, are committed to lowering the tax burden on multinationals and U.S. corporations. There is strong support in the Democratic Party for so-called repatriation holidays and a territorial tax system. And only 19 Democratic senators voted in favor of keeping the estate tax.

Sen. Mark Warner, D-Va., would retort that his colleagues support scrapping the tax only if other sources of revenue can be found. But what other taxes are as progressive as the estate tax? Where would this $200 billion in new tax revenue come from? It almost certainly would come from the middle class, or from cuts to tax expenditures that benefit a broader taxpayer base than the estate tax affects.

Again, the Senate vote on the estate tax was nonbinding, and the estate tax isn’t going anywhere any time soon. But voters should be wary of what Senate Democrats will support during any tax reform debate. If the Senate is willing to drop the only truly progressive tax in the code in favor of other sources of revenue, it is very likely that Republicans will call the tune during the elaborate compromises that make up tax reform. If that happens, then even if the tax base becomes broader, it probably will be a lot more regressive.

Read Comments (4)

Steve ZornMar 26, 2013

As a tax law professor, I always pointed out the role of the estate and gift
tax system in the overall progressivity of the Code. The Democratic Senate
budget is just the last step in a 15-year journey away from that goal. I don't
suppose there's any likelihood we could just replace it with a wealth tax.

edmund dantesMar 27, 2013

"Thanks to Republican-led efforts to characterize it as a death tax . . . "

Guess what, it *is* a death tax. It is a tax that is triggered by a death. The
phrase "death tax" appeared in the tax code decades before the Republicans
started using it. Why? Because there is a second death tax, the inheritance
tax. The phrase "death tax" conveniently, logically, encompasses them both.

Frankly, the phrase "death tax" is more honest, easier for ordinary people to
understand, than the term "estate tax." In no way is the phrase a distortion.

Here's the other part liberals don't get, as they reason that the person paying
the tax is dead already so who cares? And only a tiny number of estates will
be taxed, so who cares? Death taxes are opposed by beneficiaries, who hope to
inherit, not by those who have the wealth. There are lots more beneficiaries
(real and imagined) than there are taxable estates. That's the real reason
death taxes are unpopular.

William D. LewisMar 28, 2013

Sorry, Edmund Dantes, there is no such thing as an IRS imposed "inheritance
tax." Some states might have them, but not the federal government.

The progressive estate tax is a part of American culture, and has contributed
to our many great works. To quote Andrew Carnegie, one of THE great
capitalists, "By taxing estates heavily at death the State marks its
condemnation of the selfish millionaire's unworthy life. It is desirable that
nations should go much further in this direction."

edmund dantesApr 16, 2013

Sorry, William D. Lewis, I never said there was an "IRS imposed" "inheritance
tax." The tax code for years referred included a "credit for state death taxes"
which explicitly encompassed both estate and inheritance taxes. William, are
you denying that some states still have an inheritance tax? I hope not. My
point was about the nonabusive nature of the language used in the debate.

As you love Carnegie and his accomplishments, I hope that you also endorse the
tax rates he faced on his income and capital gains--that is, none.

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