Restoring Estate Tax To Pre-Bush Level Could Make Huge Strides Toward Avoiding Sequestration

WASHINGTON -- If the estate tax is restored to a level similar to its rate before the Bush-era tax cuts went into effect, the federal government could rake in over $500 billion in revenue over the next 10 years, according to an analysis by the Congressional Budget Office.

The windfall could make up a large portion of the $1.2 trillion that Congress needs to find by Jan. 2 in order to head off the potentially disastrous sequestration cuts currently scheduled to take effect by the year's end.

"The catastrophe that the House has created is coming," Rep. Jim McDermott (D-Wash.) told The Huffington Post. "At some point, people are going to have to face the fact that we need some revenue. And if we don't face that, we're going over a cliff ... When we finally get down to this, it is going to be a bloodbath. We cannot cut the budget of this country $1 trillion without decimating everything that we consider civil government."

Under the Office of Management and Budget's analysis released on Sept. 14, the sequestration would be "deeply destructive to national security, domestic investments, and core government functions."

OMB predicts that the measure would slash defense spending by 9.4 percent and cause significant damage to government agencies and programs, including education grants, food safety inspections, the Environmental Protection Agency, the National Institute for Health's research capabilities, disaster readiness and housing and food assistance programs for struggling Americans.

In order to stave off the cuts, Democrats are rallying around proposals to secure significant revenue through the expiration of the Bush tax cuts and other tax measures. But GOP lawmakers remain fervently opposed to any form of tax increase and instead propose to slash additional spending from domestic government programs instead of defense.

In order to head off the impasse, the top members in the Congressional Progressive Caucus sent a letter on Sept. 20 to the Gang of Eight -- the Democratic and Republican leaders in the Senate and House and the ranking members on the Senate and House Committees for Intelligence -- asking that the congressional leaders pledge to put revenue increases on the table before contemplating additional spending cuts.

As the lawmaker spearheading the effort, Rep. Mike Honda (D-Calif.) described it as a much-needed call to end the "revenue stalemate."

"It's quite simple: You can't get a balanced deficit reduction deal without revenue," Honda said. "It's clear what's holding up progress here. We can't get down to the hard business of governing if Grover Norquist is the de facto Chairman of [the House Committee on] Ways and Means," referring to the longtime tax opponent.

That 'revenue first' reasoning has prompted McDermott to introduce a number of tax measures, including the Sensible Estate Tax Act of 2011. SETA would take the estate tax back to its 2001 level with adjustments for inflation -- a move that could bring in over $400 billion to government coffers by 2022, according to rough projections from the CBO and the Joint Committee on Taxation.

"If they adopted my estate tax, [the proposal] would raise enough -- actually a little more than is necessary, between the expiration of some of the tax cuts to the wealthy" to prevent the sequestration from taking effect, McDermott said.

Yet McDermott's measure has not gained much traction among his congressional peers since its introduction last November. With the sequestration cuts looming, he predicts that will soon change.

"We need several hundred billion dollars, and it's there in the estate tax," McDermott said. "It fills the hole, [the measure] will stop the sequestration. And for that reason, I think it's going to be right there, front and center, during the middle of the debate."

Sometimes referred to as the inheritance tax, the rules take a percentage from the estates of the wealthiest individuals upon their deaths. In its current formulation, the top marginal rate is set at a generous 35 percent and applies the heirs of less than 0.3 percent of Americans.

Opponents claim that estate taxes, like most other tax measures, hurt the economy. One of the more vocal critics of the estate tax, Sen. Orrin Hatch (R-Utah), has even called for its elimination , characterizing the measure as "one of the biggest threats to our nation's small businesses."

But little proof exists to show that families are shuttering their businesses or selling off their farms as a result, according to Chye-Ching Huang, a tax policy expert at the Center on Budget and Policy Priorities.

"Under the [stricter] 2009 rules, only 60 small farms and business estates would even pay the estate tax in 2013," Huang said.

In fact, a study conducted in the mid-2000s could not locate a single farm that had been closed down because of its estate tax payment, according to Huang.

For McDermott, the measure is simply another aspect of Americans' civic duty.

"This country is making it possible for you to have the wonderful success that you have had, and you owe something back to this country," he said. "The idea that the United States is nothing but a platform for people to make money off of is simply wrong."

In 2000, less than 2 percent of estates paid any tax, according to the CBPP report; and individual estates of up to $1 million didn't face any penalties. The report found the top tax rate paid by the wealthiest Americans was 55 percent.

But after a decade of Bush-enacted tax breaks, the top rate had fallen to 45 percent and the exemption threshold had grown to $3.5 million for an individual and $7 million for a couple. If the rate were to return to similar levels, only three in every 1,000 Americans who die would be affected, according to a CBPP report .

In 2010, Congress extended the breaks to the nation's millionaires even further by raising the exemption up to $5 million for individuals and lowering the statutory marginal tax rate down to 35 percent. But although the marginal tax rate is locked in at 35 percent, a variety of loopholes and exemptions would make the effective rate an average 14.5 percent per estate in 2013, if the current framework is extended, CBPP said.

Unless Congress reaches a new deal before the end of the year, the estate tax will relapse to its 2001 levels, with a top marginal rate of 55 percent. But given the politicization of tax increases by figures like Norquist, such an outcome is unlikely.

If passed, SETA would adopt a taxation scheme similar to the 2001 regulations, adjusted for inflation, which would bring in over $400 billion in additional revenue while still continuing to tax less than 2 percent of estates in 2013 to any degree, McDermott said.

The Obama administration, on the other hand, has declared its support for a proposal to return the estate tax back to its 2009 levels, which Huang describes as "already very generous."

"You are looking at only three of every thousand of the wealthiest estates owing any estate tax at all," Huang told The Huffington Post. "Even though the top rate under the proposal would be 45 percent, that's 45 percent after taking the large exemption of $3.5 million per person and $7 million per estate ... And with some special valuation rules, you're looking at an effective average tax rate of less than 20 percent."

Huang predicted that the federal government would forgo an additional $119 billion in revenue over the next decade if it extends the 2010 estate tax instead of taking up the president's proposed 2009 rate.

"So that's quite a significant amount of revenue, obviously, when you are looking at the context of deficit reduction," Huang said.

But for McDermott, returning to the 2009 scheme simply doesn't raise as much money as the federal government needs in order to avoid the fiscal cliff.

Neither proposal, however, will meet with success unless some GOP legislators can be convinced to get on board, which currently runs counter to the Republican caucus platform.

But given how few people the tax affects, McDermott said he hopes that estate tax reform can gain momentum over the next few months.

"[The money] is just sitting somewhere multiplying," McDermott told The Huffington Post. "There is no public benefit ... It is protecting the past. I'm not trying to take it all. I just want to take some of it to make it possible for my grandchildren to do well."