Last night I watched the tax bill and today I caught up on my reading in The Fiscal Times and TaxVox by Brookings Urban. The fact that we came to this point was highlighted very clearly by the Republican manager, who echoed what I had been saying. This did not have to happen during the Lame Duck session. The extension of the middle class tax cuts should have been done under reconciliation during the first session. Indeed, the existence of such authority might have been leverage to get a public option on health care or at least some degree of bipartisanship, instead of having to get bipartisanship on the GOP's terms.
I comment below the fold on the estate tax and why it is good that the Pomeroy amendment was defeated.
Howard Gleckman of the Tax Policy Center wrote about how the tax bill was not stimulus, especially regarding the estate tax. Bob Williams of TPC also talked about the estate tax provisions.
Unless a few thousand super-rich people die, the estate tax cut won't amount to much of a loss. I suspect that the number will be more like 10 or 15 (if you count the 5 who dies this year who could use these provisions rather than expiring law).
The estate size threshhold is meaningless when you are talking about the super-rich. Given the extent of asset inflation over the last generation, it is not inappropriate to separate mega-fortunes from simply having a nice nest egg and a McMansion.
For some hiers, it may be much more advantageous to probate under the new rules rather than the zero tax, since doing so allows hiers to value assets at current value rather than purchase price. That is the other important part of the tax... base to consider - much more than the estate value. Indeed, if the capital gains on an estate are big enough, it is much better for the hiers to pay a lower rate with a five million dollar exemption, rather than paying no estate tax but having to pay taxes on sale for an asset that increased in value by 90%.
What is most important than the estate tax threshold is the tax rate. If the top income tax rate is 35%, then it is appropriate for the estate tax rate to match. If we one day enact a Value Added Tax, which is the best tax on heirs, the rate can be ratched down with more money collected from the idle rich.
The purpose of the tax bill was not to inject stimulus. Given that the root cause of the current crisis is the deflation of asset prices for a large number of households, either mortgage modification or inflation is the appropriate stimulus. If the White House ignores this, it does so at its own peril.
The purpose of the deal was to avoid tax hikes that would exacerbate deflation, since almost all households would cut back on spending on the margins - with some unemployed households getting nothing at all because their extended benefits are now gone.
Do no harm.
Now, if the mortgage crisis had been dealt with appropriately by automatic modifications, the tax cuts for all could have been allowed to expire. Further, if the 2009 budget had included reconciliation instructions to make the tax cuts permanent on the middle class, we would not be discussing this now as the issue would have gone away. The problem was, the Democrats wanted to make it an electoral issue, but never quite got around to brining it up.
This deal buys time for an emerging consensus on the need for tax reform, which was highlighted by both the Fiscal Commission and the Bipartisan Policy Center. It is actually good for the TPC, which should have some input into this debate. This is certainly not the end game, especially with the Debt Limit vote looming. I suspect that tax reform will be linked to it, either because the President wants it to be or because the Chinese will insist on it.
One more thing - had the amendment to modify the estate tax passed, dealing with it would have become the center of attention in the Senate, effectively killing DADT repeal, which instead is going to the floor on Saturday. Sometimes you win by losing.
Bob Williams article was brief, but he got spammed with comments - most from right wing fools who did not leave their names. Of course, this prevents any real discussion, as no one wants to wade through the ersatz... libertarian BS to get to posts that actually say something. They also ignore the fact that much of the capital gains on inherited assets have never been taxed and that tracking the gains so that they could be is more arduous than any estate tax plan.
One reason many support a consumption tax is that it will hit estates when people spend the money. Oddly, some of the same people who posted on killing the estate tax will tell you in the next breath that we really need a FAIR Tax - and we need to privatize Social Secuirty (which is harder to do if you end payroll taxes than if you keep them in place). They will also swear up and down that the VAT piles tax upon tax when it does nothing of the sort. Indeed, the Fair Tax in its current incarnation, with employers lowering wages rather than raising prices, is, in essence, a VAT.
Of course, the FAIR Tax proponents badly understand the standard rule that you must tax government services - however they misunderstand the fact that you must tax them when government provides the service commercially, not when they purchase it, which makes the resulting tax rate untenable without a separate income tax on the wealthy. While it may be that they are trying to cut all government budgets by the amount of the tax, I suspect that they simply don't understand enough about tax policy to know that they are wrong.