Obama Tax Deal Would Cut Estate Tax To Second Lowest Level Since 1931

One facet of the tax deal negotiated between President Obama and Congressional Republicans that has earned Obama significant ire from his own party in the House is the proposed two-year cut in the estate tax.

The cut — which was crafted by Sens. Jon Kyl (R-AZ) and Blanche Lincoln (D-AR) — will bring the estate tax down to 35 percent with a $5 million exemption (meaning that the first $5 million of an estate can be passed on tax-free). At the moment, the estate tax is expired, but it is scheduled to come back in 2011 at a 55 percent rate with a $1 million exemption. Prior to striking a deal with Republicans, Obama had proposed setting the tax at 45 percent with a $3.5 million exemption.

House Speaker Nancy Pelosi (D-CA) said that the inclusion of the estate tax cut in the tax deal “add[s] insult to injury.” And if the tax deal is approved, the estate tax in 2011 and 2012 will be at its second lowest level since 1931, when it was 20 percent. The only reason that the Lincoln-Kyl cut doesn’t set an 80 year record is due to the tax’s complete expiration this year.

According to Ezra Klein, “a number of sources with direct knowledge of the negotiations have fingered the estate tax as the major player in the size of the deal.” “Republicans were extremely eager to get benefits for the top tenth of a percent of Americans,” one administration official said.

Just so we have some perspective on how few estates we’re talking about here, look at these details from the Congressional Research Service:

According to the Congressional Research Service, the Kyl- Lincoln approach would subject just 0.14 percent of U.S. estates to a tax and would generate $11.2 billion in revenue next year. By contrast, the 55 percent top rate, with a $1-million-per- person exclusion, would affect 1.76 percent of estates and would generate $34.4 billion in revenue, the CRS said. Obama had previously backed, and House Democrats in 2009 passed, a 45 percent rate and a $3.5 million tax-free allowance. If applied for 2011, those parameters would subject 0.25 percent of U.S. estates to a tax and would generate $18.1 billion in revenue next year, the CRS said.

So even at the 2001 level, which was never really on the table, fewer than two percent of estates would have conceivably been subjected to the estate tax. Obama, to his credit, said in his statement announcing the tax deal that the cut was a “more generous treatment of the estate tax than I think is wise or warranted.” That this cut is in a package ostensibly focused on boosting the economy — when it’s impact on job creation is “negligible” — is a testament to how deeply Republicans desire lower tax rates on the super-wealthy.


More reactions from House Democrats:

“We believe the estate tax in the bill is a bridge too far,” the Speaker said. That provision shifts the balance in the agreement to Republicans and “ends any kind of symmetry between the two sides.”

Two other House Democratic leaders — Reps. George Miller (Calif.) and Chris Van Hollen (Md.) — denounced the inheritance provision.

“The estate tax is just gratuitous,” said Miller, a close Pelosi ally.

Van Hollen, the assistant to the Speaker and the House Democratic negotiator on taxes, noted the estate-tax provision would cost $68 billion over the next two years.

“I have very, very serious reservations with this deal,” he said. “I’m certainly not in a position to recommend this to my colleagues, I’ll tell you that.”

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