Capitol Watch
December 15, 2009
by: Erica Gordon

Government WasteWatch, Winter 2009

Death to the Estate Tax!

The estate tax, better known as the “death tax,” was first enacted in 1916 to prevent the accumulation of wealth in a concentrated number of families and to provide new sources of government revenue.  According to an April 9, 2003, Congressional Research Service (CRS) report, “A History of Federal Estate, Gift, and Generation-Skipping Taxes,” there was no regular use of death and gift taxes prior to 1916.  The report stated, “The federal government turned to them only in time of extraordinary revenue demands, such as wartime, although individual states used them extensively.”
 
The CRS noted that, even though the prevention of wealth transfers was not a rationale for the tax prior to 1916, “Attitudes began to change with respect to the perpetuation of large estates, however, and in a speech in 1906 President Theodore Roosevelt called for:  ‘a progressive tax on all fortunes beyond a certain amount, either given in life or devised or bequested upon death to any individual – a tax so framed as to put it out of the power of the owner of one of these enormous fortunes to hand on more than a certain amount to any one individual.’”
 
The 1916 tax rate was one percent on estates valued at more than $50,000 and 10 percent on estates valued at $5 million or greater.  In 1917, to help finance World War I, the initial rate went to two percent and the higher rate was 25 percent.  The largest tax was 77 percent on estates valued at $10 million or greater; this rate was in effect from 1941-1976.
 
Nearly a century has passed since the “death tax” was born.  While times have changed, the tax has continued to be an element of the tax code, even though it has never been a vital source of revenue.  The Office of Management and Budget calculated that it amounted to just over one percent of all federal tax collections in 2008, compared to more than five percent in 1940.
 
More importantly, the tax no longer affects just the upper echelon of society.  According to the National Bureau of Economic Research, economists generally agree that the “death tax” is a tax on capital because of its negative impact on American businesses and workers.  Considering the nation’s current economic crisis, it seems foolish for lawmakers to uphold a policy that thwarts savings, investments, growth, and innovation.  The time has come to lay this outdated tax policy to rest.
 
In 2010, the “death tax” will expire for one year; however, on January 1, 2011, the tax will be resurrected and will skyrocket to a 55 percent tax rate with a $1 million exemption.  This was the rate from 1984-2001, when the 10-year graduated rate reduction under the Bush tax cuts began, culminating in the zero tax rate in 2010.
 
A bill introduced by Rep. Earl Pomeroy (D-N.D.), H.R. 4154, the Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Act of 2009, passed the House on December 3, 2009.  Although the bill is couched as a fiscally responsible measure, H.R. 4154 will not achieve the “permanent relief” its name so misleadingly promises.  Rep. Pomeroy’s bill would freeze the “death tax” at 2009 levels, leaving a 45 percent tax rate with a $3.5 million exemption.  Some representatives had the audacity to hail this 45 percent tax rate as a tax cut.  Do not be fooled; going from a zero percent “death tax” in 2010 to a 45 percent tax rate would constitute one of the largest tax increases in U.S. history.
 
Additionally, Rep. Pomeroy’s bill fails to index the $3.5 million exemption for inflation.  This means that the “death tax” will fall on an increasing number of Americans each year, much like the Alternative Minimum Tax. 
 
Real relief for Americans could be achieved if the “death tax” is permanently eliminated when it expires in 2010.  Reviving the “death tax,” even at a rate below the scheduled 55 percent, would burden thousands of Americans and small businesses who are struggling during the current economic downturn.  Former Congressional Budget Office Director Douglas Holtz-Eakin estimates that eliminating the “death tax” would allow small business investment to rise about 3 percent annually, adding 1.5 million jobs to the economy.
 
The “death tax” unfairly double-taxes hardworking Americans who scrimp and save their entire lives.  The American dream of leaving something behind for loved ones must be preserved, and the death tax should be permanently buried.

Time to Terminate TARP

Passed as part of the Emergency Economic Stabilization Act of 2008, the Troubled Asset Relief Program (TARP) was given $700 billion to buy failed mortgages and other toxic assets in an effort to address the nation’s financial crisis.  Since TARP’s enactment, however, taxpayer money has instead been used to bail out banks, acquire ownership stakes in financial institutions, and rescue failing automakers.
 
While American families have watched every penny during this economic downturn, the government continues to dole out large sums with little forethought, transparency or accountability.  The result has been a disastrous mismanagement of federal funds that will never be entirely recouped.
 
While Neil Barofsky, the TARP Inspector General, states that it is highly unlikely that taxpayers will be repaid the full $700 billion that they were forced to loan struggling banks, the Obama administration announced on December 7, 2009 that the bailout will cost $200 billion less than original projected.  Treasury Secretary Timothy Geithner stated during a December 4, 2009, Bloomberg television program that taxpayers can expect to see as much as $175 billion in TARP repayments by the end of 2010.
 
TARP is currently set to expire on December 31, 2009, unless Secretary Geithner exercises his authority to extend the program through October 3, 2010.  This is a golden opportunity to do what should have been done long ago - put an end to this profligate government program.
 
Reports show that the Treasury is sitting on $200 billion in unobligated TARP funds.  Not surprisingly, the prospect of faster-than-anticipated repayment of TARP funds by the banks, coupled with the tantalizing $200 billion in currently untouched TARP funds is irresistible to spendthrift members of Congress, for whom the deficit and the national debt are either an irritant or an irrelevancy.
 
Wary of taxpayers’ discontent over the size of the country’s unfunded fiscal obligations, President Obama is certainly talking about “deficit reduction.”  He announced in his much-anticipated December 8, 2009, speech at the Brookings Institution that his administration favors allowing TARP to unwind.  However, he is proposing another round of “stimulus spending” on such programs as weatherization assistance (which received $5 billion in the first stimulus bill and is already being dubbed a “cash for caulkers” program), more bailout money to cash-strapped states, and the usual vague promises of job creation. 
 
New rounds of fantasy spending are emanating from members of Congress and they have eyes for the TARP money, regardless of the administration’s intentions.  Reps. Maxine Waters (D-Calif.) and Mel Watt (D-N.C.) want to siphon the funds to the unemployed so they can get low-interest HUD loans.  House Financial Services Committee Chairman Barney Frank (D-Mass.) will pursue $4 billion in unused TARP funds for foreclosure prevention and redevelopment of foreclosed homes.  House Speaker Nancy Pelosi (D-Calif.) envisions TARP funds being used to help local communities and small businesses.  Let the wild rumpus begin. 
 
Sen. John Thune (R-S.D.) and Rep. Todd Tiahrt (R-Kan.) have both proposed legislation that would save these remaining taxpayer dollars by eliminating the administration’s authority to extend the TARP program.  The Council for Citizens Against Government Waste has strongly urged lawmakers to support these bills.
 
The national debt has soared past the $12 trillion mark, and is heading north toward $19 trillion at the end of the next decade.  If Congress acts now, taxpayers could be spared hundreds of billions of dollars of that debt, significant savings that could be used to pay down the nation’s looming liabilities.

Washington:  Where the Sun Don’t Shine

In October, WasteWatcher readers were alerted to the “read the bill” initiative being pushed by Republican lawmakers that would require all non-emergency legislation to be posted online in final form at least 72 hours before a vote.
 
This project has since become part of a larger effort to promote transparency in Congress.  On November 19, House Republicans set forth five commonsense reforms that will shed light on the legislative process, making Congress more open and accountable to the American public.
 
The transparency resolutions would require all bills to be posted online at least 72 hours before they come to a vote; committees to provide bill text online within 24 hours of adoption; and, members’ committee votes to be shown online within 48 hours.  The resolutions also seek to open healthcare negotiations to the public and allow cameras into the secretive Rules Committee that decides which bills come to a vote.
 
President Obama consistently campaigned for transparency and accountability, and the White House released new agency “open government” rules on December 8.  However, Congress does not appear to be following his lead.
 
In fact, the Democratic leadership on Capitol Hill has rammed through multi-billion dollar spending bills without a moment’s notice, conducted secretive healthcare negotiations that result in “managers’ amendments” being added at the last minute prior to a vote, and kept deliberations about how legislation will be discussed on the floor of the House from public view.  Members of Congress are obligated to tell the American people exactly how they are spending taxpayer dollars.  It is time they acknowledge that responsibility by agreeing to the GOP’s transparency proposals.