Imagine a story about tax policy created by horror writer Stephen King. A fictional Congress, divided between anti-tax ideology and fiscal responsibility, amends the inheritance tax on the very wealthy so that it disappears entirely one year and then returns at steeper rates the following year.
Over the zero year, death rates skyrocket in the nation's most affluent zip codes. Seemingly robust and healthy billionaires perish in mysterious accidents. Lexus wheels fall off from Bloomfield Hills to Scarsdale to Beverly Hills. Sailboats and yachts inexplicably crash in calm coastal and Caribbean waters. Tainted champagne wipes out clusters of prosperous alumni at class reunions from dozens of elite prep schools from Groton to Choate.
Meanwhile, thousands of infirmed elders take their own lives in organized rituals called "legacy sacrifices." Pledging unlimited inheritances to their heirs, these multi-millionaires die with smiles on their faces knowing they've outfoxed Uncle Sam one last time.
If only this were a fiction.
We could actually see these scenarios play next year, unless the real U.S. Congress takes action and prevents one of the more bizarre twists in tax legislation in history from coming to pass.
In 2010, the estate tax, our nation's only levy on inherited wealth, is set to disappear completely. Then in 2011 the tax returns to 2001 levels, with substantially lower wealth exemptions and higher rates. Talk about perverse incentives.
The stage was set for this scene in 2001, when President Bush and conservative tax cutters tried to abolish the estate tax. They didn't have the Senate votes, however, for permanent repeal, nor could they afford to lose the hundreds of billions of dollars the estate tax would generate over the subsequent decade.
Congress structured the law to gradually phase out the tax, allowing it to expire in 2010. Then, in a gimmick to mask the real cost of the tax cut, the law sunsets in 2011, reverting back to its 2001 levels.
Tax cutters in 2001 were confident they would return in subsequent years to finish off the estate tax. But the nation's fiscal situation immediately began to deteriorate and Republicans lost their majority in Congress. In October of this year, the organized wealthy families that spent millions in lobbying Congress to save billions finally conceded they lacked the votes to get rid of the estate tax forever.
You have to remember that the estate tax ‹ at its 2009 level ‹ only effects one in 500 estates. Over the last eight years, the law has been revised so the wealth exemption level rose from $1 million to where it is today, at a generous $3.5 million or $7 million for a couple. Rates declined from 55 percent in 2001 to 45 percent today. This exclusive tax cut for multi-millionaires and billionaires cost hundreds of billions of dollars in lost revenue, a cost added directly to our national debt.
Two weeks ago, the U.S. House of Representatives voted to freeze the federal estate tax at this current level. This is a positive and responsible step. Now the Senate must act.
The Senate could pass legislation that mirrors the House version and settle the issue for years to come. Or they could freeze the tax at its current level for one year ‹ and take it up next year. What they shouldn't do is further weaken the estate tax by passing proposals such as those introduced by Sens. Jon Kyl (R-AZ) and Blanche Lincoln (D-AR).
Without the estate tax, we could lose almost $1 trillion in revenue over the next two decades. There are only three ways to fill that gap: cut spending, raise taxes on the middle class, or, our current favorite: pile it onto the national debt.Instead of leaving prodigious amounts of debt for the next generation, we should retain a meaningful estate tax.
During a time of war and economic crisis, the idea of further tax breaks for multi-millionaires and billionaires is unseemly and unfair.