Just after the 2001 tax bill was enacted, I noted that the estate tax would be repealed "only for one year (2010). In that same year, assets would begin to be inherited at their purchase price rather than market value (carryover basis), so heirs would inherit old capital-gains tax liabilities. ... If carryover basis were maintained after 2010 ... then heirs could end up brutally taxed on both the value of inherited assets and old gains on those assets."
A Wall Street Journal fact-checker called, thinking I surely must have made a mistake. But Congress made the mistake and has to fix it.
There are not enough Senate votes for repeal, so the debate is now down to choosing between a 45-55 percent tax rate with a hypothetical $10 million exemption or Republican Sen. Jon Kyl's plan of a 15 percent tax rate with a $3.5 million exemption.
Washington Post writers Jeff Birnbaum and Jonathan Weisman put too much spin on this, putting economics aside and depicting it as nothing more than a contest between the very wealthy (who would pay zero estate tax with a huge exemption), and the extremely wealthy (some of whom might pay less with a lower rate, despite the smaller loophole). They did note, however, that the estate-planning industry is lobbying hard against a 15 percent estate tax, which would kill its costly tax-avoidance schemes.
For the few who might put economics before politics, this is no contest. Combining huge loopholes with high marginal tax rates is the textbook definition of a foolish tax -- one that maximizes economic distortions while minimizing revenue.
Meanwhile, as I warned in 2001, New York Times writer Edmund Andrews is pretending it is a "strange wrinkle" that Kyl would not combine carryover basis with the estate tax -- something that has never been done because it would tax both the entire value of inherited assets plus any past gains on those same assets.
Birnbaum and Weisman cite the "nonpartisan" Tax Policy Center, three members of which (Len Burman, Bill Gale and Jeff Rohaly) recently argued: "Repeal would be expensive. ... Making repeal permanent as of 2010 would cost $270 billion in the next 10 years. Repeal would also be regressive (and) would reduce charitable giving by more than $15 billion a year."
On the first point, the alleged revenue loss from scrapping the estate tax -- $27 billion a year after 2010 -- would be less than one-thousandth of one percent of total revenue, estimated at $3.8 trillion by 2015. Alicia Munnell, an economist with the Clinton Treasury, estimated the cost of collecting the estate tax is as large as the amount collected.