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Research desk compares: What's the fiscal impact of estate tax cuts vs. unemployment insurance?

By Dylan Matthews

byelin asks:

Could you compare the budgetary effects of an extension of unemployment benefits (currently being considered in Congress) versus a proposal from Senators Lincoln (D-AR) and Kyl (R-AZ) to freeze the top rate on estate taxes at 35% and cap and moving the tax thresholds to estates worth $5 million or more?

The unemployment extension proposal that Harry Reid is trying to pass has a one-time cost of $33 billion. That's for one year, and then the additional cost vs. the baseline is zero thereafter. So let's compare that temporary bump up in the deficit with four proposals (PDF) for reforming the estate tax. The first is outright repeal. The second, proposed by John McCain in the presidential election, would reduce the tax rate to 15 percent and exempt the first $5 million of an estate. The third, Jon Kyl's initial proposal, also has a $5 million exemption, with a 20 percent rate on estates up to $25 million and a second 30 percent bracket for larger estates. The fourth, Barack Obama's proposal during the presidential election, has a lower exemption of $3.5 million and a 45 percent tax rate. Here's how the total revenue effect on the deficit of those proposals compares with that of extending unemployment benefits from 2009 to 2018:

deficit_effects_of_estate_tax_and_unemployment_insurance_proposals.png

The year-by-year spending breakdown is after the jump.

Not stark enough for you? Here's how that spending breaks down by year:

deficit_change,_2009-2018.png

Not only do estate tax cut proposals add much, much more to the deficit in the medium-term than unemployment benefits do, they continue to grow more expensive over time, at least for as long as we have estimates. Supporting estate tax cuts but not unemployment benefits indicates something about a politician, but it's hardly proof of a deep, serious interest in cutting the deficit.

By Ezra Klein  |  July 14, 2010; 1:30 PM ET
Categories:  Taxes  
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Comments

Moreover, the unemployment extension helps 2 million people right now, and more as the ranks of the long-term unemployed grow. My recollection is that the estate tax when it had a 2 million exemption only hit abut 1500 estates a year.

BTW, I wish Dylan had included the $2 million, 45% rate option, as that is where the estate tax was in 2006-8 IIRC. The impact on the deficit would have been even lower, and at that level it would cover most people whose homes greatly appreciated in the bubble but are now back to about $1 mil, not that extravagant in parts of CA and the NE. I think at that level it hit about 3000 estates a year.

For comparison, over 141 million income tax returns were filed in 2007 where positive adjusted gross income was shown. In that year the top 1% made an AGI of over $410,000. The really, really rich are just a tiny fraction of the US population, and I doubt any of them are posting here.

Posted by: Mimikatz | July 14, 2010 1:56 PM | Report abuse

I'm running for John McCain's seat and I consider myself the Maverick in the race. What do you think? JoslynforSenate.com

Posted by: Joslynaz | July 14, 2010 1:58 PM | Report abuse

What about the proposal to treat estates as capital gains for the people who inherit them?

I.e. If grandpa sells all his stock one day before he dies, he pays the capital gains tax on what he sold it for versus what he bought it for.

If he dies and an heir inherits it, they pay the capital gains tax on it based on what the capital gains would have been.

Posted by: jnc4p | July 14, 2010 2:01 PM | Report abuse

I stand corrected. In 2009 the estate tax with the $3.5 mil exemption was projected to hit 5500 estates, although that may be lower because of stock losses in 2008-9.

In 2007 when it was $2 mill it hit 15,000 estates. This is out of the 2.5 million who probably died that year. It is still only a tiny fraction of very rich people who pay estate taxes, and of these an even tinier fraction, only a bit over 100 really consist of small farms and businesses. The rest are just really rich people.

Posted by: Mimikatz | July 14, 2010 2:10 PM | Report abuse

One consequence of the abolition of the estate tax this year is that it ended the stepped-up basis so that the heirs will have to pay tax at the long-term capital gains rate (max 15% this year, probably rising to 20% next year) on all the gains since the decedent acquired the asset. Remember this is only 20% of the gain, not the whole sale price. But it can be a nightmare proving basis if Grandma didn't keep good records.

The step up in basis did mean the loss of cap gains taxes to the gov't, but it gave each heir a fresh start. The step up in basis applied to all estates, not just taxable estates. I presume that the loss of it also applies to all estates, so that if Grandma leaves you some Exxon-Mobile stock she bought for a split-adjusted $2 a share many years ago, you will have to pay taxes on the gains above $2 a share. And if you can't prove her basis, you would have to pay on the whole gain. (Inherited shares are alwasys considered long-term, no matter when the estate acquired them.) And brokers have to report all sales to the IRS.

The step up in basis did encourage heirs to sell and probably did somewhat reduce tax cheating. I think it is a lesser problem than the 15% rate on dividends, which really benefits the very rich, who would otherwise pay top rates. I'd like to see the first $3000 in dividends of US-based corporations be exempt. When I started paying taxes in the mid-1960s the first $600 was exempt, then it went away. That is more of a middle-class tax cut.

Posted by: Mimikatz | July 14, 2010 2:24 PM | Report abuse

How are the various state unemployment insurance programs dealing with the 3 million jobs saved or created by the Obama Stimulus? Shouldn't these 3 million new jobs be contributing to the unemployment insurance pool??

Remember, state taxpayer dollars are the larger part of the unemployment insurance picture...

Posted by: rmgregory | July 14, 2010 3:19 PM | Report abuse

The Estate Tax giveaway to the Wealthy is costing the USA $300~700 Billion between 2009 and 2018. The one year unemployment extension is $33 Billion for that 12 month period.

The Washington Post: Choose your own deficit:

http://www.washingtonpost.com/wp-dyn/content/article/2010/06/26/AR2010062600222.html

“The Bush tax cuts are really expensive. The tax cuts expire this year. If lawmakers renew all of them, they'd add $6 trillion to the deficit from 2012 to 2022.”

Oil Companies make Hundreds of Billions every year and pay very little in Taxes. Exxon paid "$0.00" in USA federal taxes in 2009.

Now that's a sweet deal. It's good to be Rich and get multiple tax breaks and subsidies while soldiers do the fighting in the Middle East. It's good to be the Kings.

Posted by: Airborne82 | July 14, 2010 3:57 PM | Report abuse

Steinbrenner heirs could save millions from one-year gap in estate tax
http://www.washingtonpost.com/wp-dyn/content/article/2010/07/13/AR2010071305028.html

Had he (Steinbrenner) died last year and tried to pass his fortune on to his children or grandchildren, they would have faced a 45 percent tax. Had he lived until next year, the rate would have been 55 percent. But Steinbrenner's death this year, like that of three other known billionaires who have died in 2010, gives his heirs a break. Forbes estimated Steinbrenner's personal wealth last year at $1.15 billion.

The year-long hiatus of the estate tax, which normally falls on the very rich, could cost the U.S. Treasury an estimated $14.8 billion in 2010. "In the midst of this terrible recession, the idea of giving billionaires a massive tax break is obscene," Sen. Bernard Sanders (I-Vt.) said Tuesday. "Already we have four billionaire families who are not paying taxes -- Steinbrenner's being the last one. Many billions are being lost. We have to address that reality right now."

Posted by: Airborne82 | July 14, 2010 4:14 PM | Report abuse

I smell "retroactive" tax increase in the air!

Posted by: JakeD2 | July 14, 2010 4:22 PM | Report abuse

Allow me to simply remind you all of Obama's campaign promise:

"I can make a firm pledge. Under my plan, no family making less than $250,000 a year will see any form of tax increase. Not your income tax, not your payroll tax, not your capital gains taxes, not any of your taxes."

Posted by: JakeD2 | July 14, 2010 4:34 PM | Report abuse

What is currently happening in congress is an extremely disappointing display of government. Democrats blame the Republicans for filibustering the bill and Republicans blame the Democrats for everything else associated with the bill. I’d like to know who is actually looking out for the best interest of the people/voters.

I am also curious where the interest accrued as a result of not paying out UI claims over the last month will be spent. It will most likely be another pool of money that ends up falling through the cracks.

If there is any silver lining at all from the outcome of this nonsense in congress, it has to be the fact that there is now a wake up call for the American people to take a closer look at the democratic process in this country. I can’t speak for everyone, but I will definitely be looking much closer at who I choose to cast my vote for this November.

Posted by: Eric76 | July 14, 2010 4:57 PM | Report abuse

And by the way, the number of estates over 1-million dollars is just 3% so how many could possibly be over 5-million dollars? Again, why do we always have to lend a hand to the rich?
btw, if you're looking for work (and who isn't?) I've been hearing great job search advice on an internet radio show at www.jobtalkamerica.com

Posted by: kcsam215 | July 14, 2010 6:28 PM | Report abuse

JakeD2: Obama pledge hardly applies. #1 taxes are only behaving according to existing law. #2 congress doesn't pass his plans anyway... so what's "Under my plan" might as well be unicorns and rainbows for all it matters.

Obama's proposal (which I don't agree with) is a 10% tax cut from the 55% rate that is already law for 2011. Just like he didn't pass any laws making it 0% this year, he didn't pass any laws making it 55% the next; 55% estate tax in the future is already the law of the land.

If you believe otherwise, then you don't believe Obama passed any health reform this year, since it won't take effect until the future.

Posted by: MattSully | July 15, 2010 12:29 AM | Report abuse

So, you don't think that was a "Read My Lips: No New Tax" pledge? BTW: if Obama wasn't born in Hawaii, then he didn't (legally) pass any health reform. Next question?

Posted by: JakeD2 | July 15, 2010 11:50 AM | Report abuse

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