Estate tax and extension of Bush cuts generally

by Linda Beale
crossposted with Ataxingmatter

Estate tax and extension of Bush cuts generally

According to an interview with Treasury’s Michael Mundaca reported in the Wall St. J. today (Sept. 13, 2010), Congress and the Obama administration are discussing a possible bill to allow estates that pass in 2010 to have the 2009 or the 2010 law apply. See Martin Vaughn, Estate Tax Choice May Be In Works For 2010 — Treasury Official, Wall St. J..

Does that make sense? Probably not. The problem exists because the gimmick was adopted by the GOP to pretend that the cost of all their tax changes wasn’t as big as it actually would be if the changes were permanent reforms rather than temporary. Allowing an election doesn’t make sense, but neither did the original Bush tax cuts, that provided a gradual phasing out of the estate tax over the years of the Bush regime with a complete repeal for one year in 2010 and then a resurrection of the 2001 laws in 2011. But how Congress deals with that sunsetting gimmick now will determine a great deal about the economy in the future.

Regretably, politicians hear the loud ranting from the tea partiers and others, and so, as the New York Times reported on Saturday, in an article by David Kocieniewski, Tax Cuts May Prove Better for Politicians Than for Economy, NYTimes, Sept. 11, 2010.

Obama at least knows that passing a new tax cut for the wealthiest 2% makes very little sense–they will save it or invest it overseas; they are unlikely to spend it on consumer goods that create new production demand in the economy or use it to create new, entrepreneurial businesses that hire people. But Obama wants to create billions in new tax breaks for businesses that make no sense at all–such as making the R&D credit permanent (just a tax break for R&D that businesses have to do to stay viable) or providing 100% expensing (just a tax break, and likely to result in purchases of equipment from overseas, thus shipping jobs out of the country rather than helping jobs domestically).

Meanwhile, the Republicans generally haven’t ever seen a tax cut they didn’t like (unless it is one targeted at the lowest-income Americans). They make ridiculous claims such as the one that not providing an extension of the Bush tax cuts for the wealthiest Americans will stifle small businesses and hurt job creation. Ridiculous, because very very few Americans who receive income from small businesses will be much impacted by letting the tax cuts for the wealthiest Americans lapse as currently set by law (only 2% of small business owners receive more than $250,000 of income from their business) and those with small business income aren’t really encouraged to plow it back into the business by cutting their income taxes. See, e.g., William Gale, 1Five Myths About the Bush Tax Cuts, Washington Post, July 30, 2010 (hat tip Linda Galler for reminding me about this article).

The Times article reports on the CBO’s analysis of short-term effects of policy decisions, which concluded that (to quote the Times’ description) “extending the tax cuts would be the least effective way to spur the economy and reduce unemployment” while tax cuts for the rich “would have the smallest ‘bang for the buck’ because wealthy Americans were more likely to save their money than spend it.” The CBO had more support for payroll tax relief, since those cuts in taxes would got to the people who are most likely to spend it in ways that stimulate the domestic economy. The problem I see with payroll tax cuts is not who they are targeted to benefit but the result that can be misused by the right-wingers who want to decimate Social Security and Medicare–a payroll tax cut results in less money going into those coffers, which just feeds the ridiculous notion that the payroll tax programs are nearing bankruptcy. No sense in giving the entitlement-haters more ammunition. Better would be a pre-bate of income tax amounts, including a negative income tax refund to those who won’t pay any income tax but will pay payroll taxes.