Deficit reduction is currently the topic du jour on Capitol Hill, with negotiations ongoing between Senate Democrats and House Republicans regarding just how much spending for fiscal 2011 will be cut in order to avert a government shutdown. But at the same time, a bipartisan group of representatives has introduced a bill to “permanently and fully” repeal the estate tax — the tax on inheritance that is paid by only the richest one quarter of one percent of households in the country.

Full repeal of the estate tax would cost nearly $1.3 trillion over ten years, inclusive of “$1 trillion of lost revenues and $277 billion of higher interest payments on the national debt.” But the same five lawmakers attempting to repeal the estate tax have been recently griping about the deficit, calling it “dangerous” and leading to “an ocean of debt”:

REP. KEVIN BRADY (R-TX): “Our deficits and debt are so dangerous, we have to keep cutting every day…We have to make tough choices now.”

REP. MIKE ROSS (D-AR): “The debate about our nation’s budget deficits and debt is one that deserves the national spotlight and the attention of everyone in Congress. There is no doubt our deficits have reached dangerous levels and the deficit spending must stop.”

REP. KRISTI NOEM (R-SD): “For far too long the rule has been spend, spend, spend – with no regard for balancing our budget. Years of out-of-control spending have led us to record breaking deficits and an ocean of debt.”

REP. DEVIN NUNES (R-CA): “[The deficit is one of a] series of storm clouds that are approaching and will overtake us in the next few years.”

REP. DAN BOREN (D-OK): “Every day this (debt) is moving in the wrong direction. Too much money is paid for the debt.”

The bill these five introduced includes no offset for the huge amount of money repealing the estate tax would cost, marking them as deficit peacocks of the highest order. Lawmakers actually interested in deficit reduction could endorse the estate tax plan put forth by Sen. Bernie Sanders (I-VT), which would create a more progressive estate tax, with higher marginal rates at $10 million and $50 million and a “billionaires surtax.”

Last week, ThinkProgress documented conservative efforts in twelve states to shift the tax burden onto the middle class even while cutting taxes for corporations and the wealthy. In three states, conservatives are going even further, proposing massive estate tax cuts for millionaires even as income inequality is at its worse since the 1920s. Here are the details:

MAINE: Tea Party Gov. Paul LePage’s (I) tax reform package would raise the state’s estate tax exemption from $1 million to $2 million — allowing four hundred of the state’s wealthiest estates to escape taxation. At the same time, the tax plan would raise property taxes on middle class Mainers while freezing healthcare funding for working parents, cutting money for schools, and raising the retirement age for public workers. Republican legislators want to go even further, and are currently considering eliminating the estate tax altogether.

OHIO: In January, House Speaker William Batchelder (R) called Gov. John Kasich’s (R) proposal to completely eliminate the estate tax one of the Republican-controlled legislature’s “top priorities.” But already the bill has garnered strong opposition from local governments, who depend on estate tax revenue and are already concerned state spending cuts. Even while finding room for estate tax reductions, Kasich’s proposed budget cuts 25 percent of funding for local schools, $427 million for nursing homes, $1 million for food banks, $12 million from children’s hospitals, and $15.9 million from an adoption program for children with special needs.

NEW JERSEY: In his 2011 budget proposal, Gov. Chris Christie called for raising the state’s estate tax exemption from $675,000 to $1 million even while proposing cuts to the state’s Earned Income Tax Credit and homestead rebates for working poor families. And last year Christie vetoed a bill passed by the Legislature that would have raised taxes on the state’s millionaires to help fund property tax relief for Main Street.

Last December, the federal government set the precedent for estate tax cuts when the bi-partisan tax deal signed by President Obama cut the estate tax rate to its second lowest level since 1931.

– Kevin Donohoe

Our guest blogger is Seth Hanlon, Director of Fiscal Reform for the Center for American Progress Action Fund’s Doing What Works project.

One of the enduring myths of American politics is that the estate tax falls hardest on small businesses and family farms, forcing them to sell their farms and businesses to pay the tax. It’s not true, and has never been true. Nonetheless, newspaper reporters have scoured the land for many years, searching in vain for families forced to sell small businesses or family farms due to the estate tax.

Now that Congress seems poised to eviscerate the estate tax, the task of finding these mythical estate tax victims is going to be even harder. The tax cut compromise moving through Congress would exempt all estates with assets valued at under $5 million and $10 million for couples. With the exemption raised to these levels, only the largest 3,600 estates in the country will pay any estate tax; the other 99.86 percent of estates will be entirely exempt.

Yet it appears that no matter how much Congress slashes the estate tax, the Wall Street Journal will continue to send its reporters in search of the “small businesses” that are going to be devastated by the tax. A Journal story today carries the headline, “For Family-Run Small Businesses, Estate-Tax Uncertainty Adds Cost.”

Has the Journal actually found a small business that will suffer under the weight of the estate tax? Not quite. The story profiles a wealthy Arkansas man who owns a lumber business, forest land, and five mills that are currently valued “between $30 million and $50 million apiece.” This is the Journal’s only example of the “small businesses” faced with uncertainty under the new estate tax regime.

Does a business with 600 employees that is worth more than $150 million fit within the definition of “small business”? Only if you’re the Wall Street Journal publishing a story about who pays the estate tax, and you need a sympathy-inducing headline.

Estimates by the Tax Policy Center show that only fifty small farm and business owners in the entire country will pay any estate tax next year under the new framework, and they would pay an average rate of just 7.4 percent. If they actually exist, these fifty farms and businesses can probably avoid the tax altogether with only a little bit of estate planning — and so can many estates well in excess of $5 million.

According to the Journal, the $5 million exemption “won’t apply” to the lumber mill owner “because the value of the mills is so high.” Actually, the $5 million or $10 million exemption applies to all estates, and only the value above that level will be taxed.

With the tax legislation nearing passage in Congress, the estate tax is all but dead. It appears, however, that on the pages of the Wall Street Journal the small business myth is as alive as ever.

The most odious part of the tax deal agreed to by the Senate yesterday is that it would cut the estate tax beyond the 2009 level, giving the wealthiest 0.25 percent of households in the country billions in tax breaks that will do nothing to spur job creation. But it was reportedly the estate tax cut that ultimately got Republicans to sign onto the agreement with President Obama (making quite plain where their priorities lie).

In order to justify making tax cuts for the ultra-wealthy the price of extending middle-class tax cuts and unemployment benefits, Republicans have resurrected the conservative fiction that cutting the estate tax will somehow help small businesses. Sen. Jon Kyl (R-AZ) — one of the architects of the estate tax cut included in the deal — took to the Senate floor today to claim that the cut “is not about giveaways to the wealthy,” but rather “small business employers”:

The effect of the compromise will be to eliminate the “death tax” liability for about 90 percent of estates that would otherwise owe exorbitant sums. And according to the Institute for Research on Economics and Taxation, the “death tax” reform proposal in this bill will add more than $200 billion in annual economic growth relative to current law. So this is not about giveaways to the wealthy, as some have asserted. Most of the people helped by this measure are small business employers.

Watch it:

Kyl’s assertion has absolutely no basis in reality. According to the Tax Policy Center, at the 2009 level favored by President Obama and Congressional Democrats, just 6,460 estates in the country would be subject to the estate tax in 2011. Kyl’s plan spends $25 billion to lower this to 3,600. Of these 3,600 estates, just 50 could charitably be characterized as small businesses.

Even under Obama’s original proposal, just 110 small businesses in the country would have been subject to the estate tax, and their average effective estate tax rate would have been about 11 percent. For the exceedingly few businesses that might have trouble paying the tax, there are options in place to mitigate the pain. And while Kyl asserts that cutting the estate tax would somehow be a boon for economic growth, CAP’s Michael Ettlinger and Michael Linden characterized the estate tax cut’s impact on job creation as “negligible.”

As Eliot Spitzer pointed out, “the additional $25 billion [to cut the estate tax] is six times what we’re spending on Race to the Top and three times what was allocated in the stimulus to build high-speed rails.” And contrary to what Kyl would have us all believe, the money would almost all be spent to benefit the richest of the rich.

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.

While much of the attention regarding the looming expiration of the Bush tax cuts is focused on where income tax rates will be set, the 2011 estate tax rate also has yet to be resolved. As a reminder, the estate tax, which is levied on inheritance, doesn’t exist this year, but comes back next year at the 2001 level of 55 percent with a $1 million exemption (meaning the first million is passed on entirely tax-free) due to a Bush-era budgeting gimmick.

Instead of allowing that reset to occur, the Obama administration has proposed setting the estate tax permanently at 45 percent with a $3.5 million exemption. But conservatives in both the Senate and the House — led by Sens. Jon Kyl (R-AZ) and Blanche Lincoln (D-AR) — want to see a 35 percent rate and a $5 million exemption.

The Kyl-Lincoln plan to cut the estate tax would cost about $91 billion over ten years. Today, Bloomberg pointed to a Congressional Research Service report, which found that those billions would be spent to save just 0.1 percent of estates from a possible tax increase:

The Congressional Research Service says using [President Obama's] parameters in 2011 would subject 0.25 percent of U.S. estates to any tax in 2011 and generate $18.1 billion in revenue. By contrast, a 55 percent top rate, with a $1 million exclusion, would affect 1.76 percent of estates and generate $34.4 billion in revenue, the CRS said. That’s enough to fund the departments of Labor and State. The Kyl-Lincoln approach would subject just 0.14 percent of estates to any tax and generate $11.2 billion, according to the CRS.

At the 2008 level, which is slightly higher than Obama’s proposal, just 0.6 percent of deaths resulted in any estate tax liability at all. Under Obama’s plan, just 0.25 percent of estates in the country would conceivably have to pay the estate tax, but Lincoln and Kyl want to spend billions to lop another 0.11 percent off of that.

And how rich are these estates Lincoln and Kyl are working so hard to defend? Well, at the 2009 level, 62.5 percent of estate tax revenue comes from estates worth more than $20 million and another 35 percent comes from estates worth between $5 million and $20 million.

With Congress refusing to fund unemployment benefits and middle-class government workers being asked to swallow a pay freeze, spending billion of dollars on a tax break for the richest quarter percent of households in the country would be completely unconscionable. But such a move is actually on the table for the current lame-duck session.

Last week, the Wall Street Journal noted that more than 250 current congressional candidates have signed a pledge to support elimination of the estate tax (which is levied on inheritance). 253 Republicans and 2 Democrats joined the repeal pledge, which is being circulated by the American Family Business Institute, an organization that also funds right-wing attacks on the estate tax.

Due to a Bush-era budgeting gimmick, there is no estate tax this year, but President Obama has proposed permanently setting it at the 2009 level of 45 percent with a $3.5 million exemption (which means the first $3.5 million is passed on entirely tax free). Conservatives, when not pushing for outright repeal, have coalesced around a plan put forth by Sens. Jon Kyl (R-AZ) and Blanche Lincoln (D-AR) that would cut the rate to 35 percent and raise the exemption to $5 million.

The common right-wing refrain when it comes to the estate tax is that it decimates scores of small businesses and family farms, preventing them from being passed on to the next generation. But as a new report from Citizens for Tax Justice points out, at the 2008 level (which is lower than the level Obama has proposed), just 0.6 percent of deaths resulted in any estate tax liability at all:

New data from the IRS show that only 0.6 percent of deaths in the U.S. in 2008 resulted in estate tax liability in 2009. (Estate taxes are usually filed during the year after the year in which a person dies.) The estate tax that would exist under President Obama’s tax plan would affect even fewer estates, which demonstrates why Congress should consider enacting a more robust estate tax than what President Obama proposes.

As CTJ put it, “one of the strangest things about politics in our nation’s capital is that the taxes that get attacked the most by lawmakers are those taxes which affect the fewest, and the richest, people.” Indeed, the data confirms that there is certainly no case for making the estate tax any lower than it was in 2009, and plenty of reasons to increase rates on some estates.

If it were permanently set at the the 2009 level, 62.5 percent of estate tax revenue would come from estates worth more than $20 million, according to the Center on Budget and Policy Priorities. Another 35 percent of the revenue would come from estates worth between $5 million and $20 million. Repealing the tax, meanwhile, would cost $784 billion over the next ten years.

CTJ endorsed the estate tax plan put forth by Sen. Bernie Sanders (I-VT), which would create a more progressive estate tax, with higher marginal rates at $10 million and $50 million and a “billionaires surtax.” This kind of move makes sense, as income inequality in the country is the worst its been since 1928 and the richest households have been taking in a bigger and bigger share of the country’s total income.

As I’ve discussed extensively, the currently expired estate tax is scheduled to come back in 2011 at a 55 percent rate with a $1 million exemption. President Obama and many congressional Democrats have proposed permanently setting the estate tax at the 2009 level of 45 percent with a $3.5 million exemption but Republicans, in their constant zeal to reduce the tax burden of the wealthy, blocked that proposal.

Since then, Republicans have been going gangbusters with the claim that the estate tax will devastate family farms across the country. The latest was Sen. Chuck Grassley (R-IA), who “absolutely” agreed with an Agwired interviewer’s assertion that the estate tax will decimate “our farmers of the future”:

Q: I mean, I think that probably, maybe we’ll see your opinion, it just has a huge impact on these people who are major landowners in some cases. Who are going to be our farmers of the future, for example, right?

GRASSLEY: Absolutely, because if we go back to a million dollar estate tax exemption, which is going to happen January 1, we’re going to be selling a lot of farm land to pay estate taxes. And even at $3.5 million, which I think is where we’re going to end up, is still going to be detrimental to some family farmers. But I think that’s where we will end up and I think we’ll do it before the end of the year.

Listen here:

For starters, exceedingly few farms ever pay the estate tax. In fact, in 2001, when the estate tax was at 55 percent with a $675,000 exemption, the American Farm Bureau “could not cite a single example of a farm lost because of estate taxes.” Even if the tax were to come back as scheduled by current law, only one in ten farms would owe any tax at all.

But no one has actually proposed allowing the current law to take its course. Under the Obama administration’s plan to permanently set the tax at the 2009 level — which only needs the approval of the Senate, because it has already passed the House — just 1.6 percent of farms in the country would face the estate tax, according to the U.S. Department of Agriculture. Those farms have an average net worth of about $7 million.

The fact remains that the estate tax overwhelmingly affects the super-wealthy, with nearly two-thirds of the revenue coming from estates worth $20 million or more. Interestingly, Grassley believes that the administration’s plan will be the one that’s adopted, which means he does not see the estate tax cut crafted by Sens. Blanche Lincoln (D-AR) and Jon Kyl (R-AZ) as ultimately becoming law.