Billionaire Warren Buffett testified before the Senate Finance Committee on Wednesday in defense of the federal estate tax, the nation's only tax on inherited wealth.
Buffett invoked the historical roots of the estate tax, established in 1916 during the Gilded Age to put a brake on anti-democratic concentrations of wealth and power. "Dynastic wealth, the enemy of meritocracy, is on the rise," Buffett told the panel. "Equality of opportunity has been on the decline. A progressive and meaningful estate tax is needed to curb the movement of a democracy toward plutocracy."
As a result of the 2001 Bush tax cut, the federal estate tax is being phased out and in 2010 will be completely repealed for one year. But the entire tax bill sunsets in 2011, and unless Congress takes action, the estate tax will return. The votes no longer exist for "permanent repeal," so a compromise lies ahead.
Wealthy individuals and tax cutters have always disliked the estate tax, which they labeled the "death tax." In the mid-1990s, a group of superrich families began funding organizing efforts to abolish the tax, culminating with the passage of the 2001 legislation.
For the last decade, conservative tax cutters working to abolish the tax have had the upper hand, beating up Democrats for supporting a tax that they alleged "destroy family farmers and small businesses." They put forward these farmers and small business owners as the public face of their campaign, even though research and investigative reporting have vanquished these charges. Tom Buis, president of the National Farmers Union, representing 250,000 farmers, complained, "Family farmers and ranchers are insulted by those who use farmers as the reason for eliminating estate taxes, when the real beneficiaries are the nation's multimillionaires."
After a decade of false accusations and innuendo, Wednesday's hearing was the first opportunity to set the record straight as to who pays the estate tax, how much revenue it generates and why we should retain it. Senate Finance Chair Max Baucus, D-Mont., a supporter of abolishing the tax, conceded that the "99 times out of a hundred, the tale is worse than the tax."
Republican Chairman Charles Grassley, R-Iowa, complained that "the death tax" was "fundamentally wrong." Buffett responded that use of the phase "death tax" was "intellectually dishonest" and "clever, Orwellian and dead wrong."
Buffett pointed out that tax cuts of the last decade have enabled the superrich, including himself, to get richer. "Tax-law changes have benefited this superrich group, including me, in a huge way. During that time the average American went exactly nowhere on the economic scale: He's been on a treadmill while the superrich have been on a spaceship."
Buffett noted that only one in 200 households in the United States pays the tax, and they are exclusively multimillionaires and billionaires. "Leona Helmsley's dog, Trouble, reportedly is inheriting $12 million," Buffett quipped. Without an estate tax, "Trouble could instead receive $22 million."
Abolishing the estate tax will cost over a $1 trillion in lost revenue over the next 15 years. This would shift debt further onto future generations and low- and middle-income taxpayers.
With massive budget deficits and Democrats in control of Congress, the conversation is changing from "Should we abolish the estate tax?" to "How should we responsibly reform it?"
"The estate tax is not going away," acknowledged Sen. Jon Kyl, R-Ariz., who has led the effort to eliminate the tax. Those who have historically voted for repeal, like Kyl and Sen. Blanche Lincoln, D-Ark., are now putting forward "virtual repeal" proposals intended to gut the law. But these proposals cost almost as much as repeal.
The fight comes down to how high the wealth exemption will rise and how low the rate will be reduced. Currently estates valued under $2 million pay no estate tax and this amount is scheduled to rise to $3.5 million in 2009. That year, the tax rate comes down to 45 percent.
Raising the wealth exemption reduces the number of estates that pay the tax. But this doesn't help the superrich families that have bankrolled the repeal movement. They care about the rate reduction and advocate for dropping the rate down to 35 percent and even 15 percent. But as Bill Gates Sr. wrote in Politico, "This would mean handing out hundreds of billions of dollars in tax breaks to the wealthiest five out of every 1,000 citizens."
Coalitions working to preserve the estate tax are now coalescing around a "revenue neutral" estate tax reform that retains revenue lost from raising wealth exemptions by instituting progressive rate structures on estates over $10 million and $20 million.
Warren Buffett has a few lessons for Congress on tax priorities for the coming years. He supports making the tax system more progressive. To underscore the unfairness of the tax system, he recently offered a $1 million reward to any member of the Forbes 400 who could prove that they pay a higher tax rate than their personal assistants and secretaries. So far, he has had no takers.
"Keep the estate tax and its $24 billion," Buffett proposed. "There are 23 million households in the United States with $20,000 or less of income. … Let's give those 23 million households a $1,000 annual credit. ... The cost of this would be less than getting rid of the tax on less than 12,000 estates."