The Costs of Estate Tax Dithering

• Publication year: 2022

43 Creighton L. Rev. 637. THE COSTS OF ESTATE TAX DITHERING

THE COSTS OF ESTATE TAX DITHERING

PAUL L. CARON(fn*)

Thank you for that very kind introduction, Ed. But I fear that it has added to the burden I face in talking about tax law on a Friday afternoon at 4:30 p.m., following three excellent panels.

I was honored last May when Ed called to invite me to deliver this lecture named after your former dean, Louis TePoel, especially in light of the distinguished folks that have stood behind this podium over the past thirty-five years.

Ed and I talked about several possible topics for this lecture, and we soon agreed that I would discuss the new estate tax law that everyone - academics, lawyers, politicians, pundits - assumed would be enacted before the end of 2009. I was working on a new edition of our Estate & Gift Tax casebook(fn1) in anticipation of the new law, so I thought that by today I would surely have a lot to say about the ins and outs of the new estate tax law.

But a funny thing happened ... there is no new estate tax law.

Thank you very much for your time.

As Ed and I spoke in Fall 2009 about a new topic for this lecture, one issue was dominating the political debate in Washington, D.C. [PowerPoint Slide 1, Clip 1: Former Vice-President Dick Cheney accusing President Barack Obama of "dithering" over the decision of whether to add more troops in the Afghanistan War, followed by White House Press Secretary Robert Gibbs's defense of the President and criticism of the President's "dithering" by Fox News personalities Fred Barnes, Lynn Cheney, Charles Krauthammer, and Bill O'Reilly.]

Hence the title of this lecture ... The Costs of Estate Tax Dithering. [PowerPoint Slide 2]

I would like to talk this afternoon about what the failure to enact a new estate tax law by the end of 2009 tells us about the state of our tax law and politics. But before I get there, I would like to talk a bit about how we got to this point.

Let me first talk briefly about the history of the estate tax, which was forged during times of war. Congress imposed some form of estate taxes three times during wars or threats of war, and each time repealed the taxes after the hostilities (or threat of hostilities) ended.

PowerPoint Slide 3(fn2)

Early Estate Taxes

* 1797-1802: War Threat with France

* 1862-1870: Civil War

* 1898-1902: Spanish American War

Congress enacted the estate tax in 1916 as World War I approached,(fn3) and it endured for ninety-three years until December 31, 2009 - 106 days ago. The companion gift tax was soon added to prevent the easy avoidance of the estate tax.(fn4) And a generation-skipping tax followed.(fn5)

There was a rough consensus that the estate tax served three goals.

PowerPoint Slide 4(fn6)

Goals of the Estate Tax

* Raise Revenue

* Enhance Progressivity of Estate Tax

* Curb Concentrations of Wealth

Here are some numbers showing that, for most of its history, the estate tax has by and large achieved these goals.

For eighty-five years, the estate tax applied to roughly one to two percent of decedents dying each year, and raised roughly one to two percent of federal tax revenues each year.

PowerPoint Slide 5(fn7)

Year	%of Deaths	Exemption (2009 $)	Top Rate	Revenue (2009 $)	%of Revenues
1916	n/a	$50,000 ($984,115)	10%	$6m($118m)	0.8%
1931	0.9%	$100,000 ($1,411,428)	20%	$65m ($917m)	2.7%
1941	1.1%	$100,000 ($1,459,435)	20%	$353m ($5.2b)	6.9%
1951	1.5%	$60,000 ($495,085)	77%	$638m ($5.3b)	1.8%
1961	3.7%	$60,000 ($430,509)	77%	$1.6b($11.5b)	1.7%
1971	6.5%	$60,000 ($317,833)	77%	$3.6b ($19.lb)	1.9%
1981	1.8%	$175,000 ($413,025)	70%	$6.4b ($15.lb)	1.2%
1991	1.3%	$600,000 ($945,097)	55%	$11.5b($18.1b)	1.1%
2001	2.1%	$675,000 ($817,688)	55%	$29.0b ($35.lb)	1.4%

During this period, the estate tax enhanced the progressivity of the tax system and helped curb concentrations of wealth.

PowerPoint Slide 6(fn8)

Let's look at how the United States compares internationally. These charts show that the world's wealth is concentrated in North America, Europe, Japan, and Australia.

PowerPoint Slide 7(fn9)

PowerPoint Slide 8(fn10)

Population & Wealth Shares by Region

PowerPoint Slide 9(fn11)

Percentage of Wealthiest Ten Percent

Other countries use estate taxes to raise revenue, enhance progressivity of their tax systems, and curb concentrations of wealth.

PowerPoint Slide 10(fn12)

Country	as a percentage of total tax revenue	as a percentage of GDP
Australia	___	___
Austria	0.13	0.06
Belgium	1.30	0.59
Canada	___	___
Czech Republic	0.06	0.02
Denmark	0.40	0.20
Finland	0.70	0.31
France	1.19	0.52
Germany	0.53	0.18
Greece	0.41	0.11
Hungary	0.19	0.07
Iceland	0.20	0.08
Ireland	0.50	0.15
Italy	0.01	0.00(1)
Japan	1.14	0.31
Korea	0.91	0.23
Luxembourg	0.38	0.15
Mexico	___	___
Netherlands	0.86	0.33
New Zealand	0.01	0.00(1)
Norway	0.21	0.09
Poland	0.07	0.02
Portugal	0.05	0.02
Slovak Republic	0.00(1)	0.00(1)
Spain	0.73	0.26
Sweden	0.08	0.04
Switzerland	0.67	0.20
Turkey	0.06	0.02
United Kingdom	0.70	0.26
United States	0.89	0.24

But the estate tax consensus evaporated in the United States during the 1990s and 2000s, as anti-tax advocates turned large swaths of the public and politicians against the estate tax(fn13) culminating in the 2001 Bush tax cuts.(fn14)

The 2001 Bush tax cuts unfolded much like the recent health care law. Early in his administration, President Bush and the Republican Congress pushed forward a number of tax cuts, including the repeal of the estate tax. Under Senate rules, legislation that causes a loss of revenues beyond a ten-year budget window must be approved by sixty votes(fn15) - but the Republicans only had fifty-eight votes. To minimize the revenue loss, the estate tax cuts were phased in slowly, raising the exemption and lowering the rate gradually. To avoid the necessity of getting sixty votes, the estate tax was repealed for only one year (2010), and would be resurrected in 2011 at the prior exemption and rate.(fn16)

PowerPoint Slide 11

Year	Exemption	Top Rate
2002	$1,000,000	50%
2003	$1,000,000	49%
2004	$1,500,000	48%
2005	$1,500,000	47%
2006	$2,000,000	46%
2007	$2,000,000	45%
2008	$2,000,000	45%
2009	$3,500,000	45%
2010	Estate Tax Repealed	Estate Tax Repealed
2011	$1,000,000	55%

Even by Washington, D.C. standards, the legislation was breath-takingly cynical. For example, an elderly widow with $10 million would be able to leave $6.4 million, $7.1 million, or $10 million to her heirs, depending on when she died in the 367-day window between December 31, 2009 and January 1, 2011.

PowerPoint Slide 12(fn17)

Elderly Widow with $10m

* Dies Dec. 31, 2009: $7.1m to Heirs

* Dies Jan. 1, 2010:$10m to Heirs

* Dies Jan. 1, 2011:$6.4m to Heirs

Paul Krugman called it the "Throw Momma from the Train Act"(fn18)because of the financial incentive for children (and grandchildren) to kill their parents (and grandparents) in 2010. [PowerPoint Slides 13-14, Clip 2: Movie poster and trailer from Throw Momma from the Train. (fn19)]Everyone laughed and agreed that Congress and the President would never allow the scenario to play out.

Republicans focused on 2010: once even the temporary repeal was in place, the thought was that the politics would shift and it would be impossible for Congress to re-impose the estate tax in 2011.

Democrats focused on 2011: with the threatened return of a $1 million exemption and fifty-five percent top rate, they expected Republicans to trade the one-year repeal for a higher exemption and lower rate.

Everyone expected that the parties would eventually compromise on the exemption and rate in the run-up to 2010.(fn20) President Obama and various congressional leaders last year proposed extending 2009's exemption ($3.5 million) and top rate (forty-five percent), either permanently or as a one-year patch to give Congress time to resolve the issue. But Congress did not act, leaving taxpayers and their counsel with the current absurd state of affairs.

PowerPoint Slide 15

Year	Exemption	Top Rate
2009	$3,500,000	45%
2010	Estate Tax Repealed	Estate Tax Repealed
2011	$1,000,000	55%

It is worth pausing to talk about the curious politics that have brought us to this point. Michael Graetz and Ian Shapiro have written a wonderful book on the subject, Death by a Thousand Cuts: The Fight Over Taxing Inherited Wealth.(fn21) [PowerPoint Slide 16: Book cover.] I have written about the subject, drawing on the Graetz and Shapiro book,(fn22) as have many others.(fn23) Much of this material was mined in two episodes of the third season of The West Wing.(fn24)[PowerPoint Slide 17: DVD cover.]

The first West Wing clip [PowerPoint Slide 18, Clip 3: The...