Between the Lines: Don’t kill the death tax

You can always tell when April arrives. The sun is a bit warmer. The robins have returned. Tulips are brave enough to sprout, and some even bloom.

It's also the time of the year when politicians of all stripes remind us that this is the month we must file our federal income tax returns.

It's a time to make political hay even though we really don't need to be reminded about taxes and the budget and the deficit.

Seizing upon an opportunity that's just too good to be true, South Dakota Sen. John Thune noted in a recent commentary piece that now is a good time to end the vilest tax of them all – the death tax.

In a commentary released by his office last week, Thune states: "The grieving process becomes even more difficult and prolonged for heirs of family businesses, farms, and ranches as they face looming and often crippling death taxes when a death in the family occurs. More than 70 percent of family businesses do not survive to the second generation, and 90 percent of family businesses do not survive to the third generation.

The federal government has no place forcing grieving families to pay a tax on their loved one's life savings or estate that have been built from income already taxed when it was initially earned. The death tax is an unnecessary, burdensome, and sometimes devastating double tax."

We beg to differ.

I suppose one could easily conclude that ALL taxes are, to an extent, burdensome. But with the financial condition our nation is currently in, we've reached a point where sadly we must conclude that now, more than ever, taxes are necessary.

We also believe our junior senator is going overboard when he describes estate or "death" taxes as being devastating. We'll address that point later in this column.

Tax revenues have accounted for around 18 percent of GDP since World War II, and 18.3 percent over the past 30 years. The budget released by Paul Ryan and the House Budget Committee proposes average revenue levels at this same level — 18.3 percent over the next decade. The Simpson-Bowles plan, released in late 2010, proposed average revenues of 19.3 percent through 2020. Meanwhile, the Obama Administration's 2013 budget proposal sets revenues at 19.2 percent of GDP over the next decade.

All three of these proposals would provide inadequate funding to the federal government. Indeed, each creates a funding shortfall and continued deficits: Simpson-Bowles projects average deficits of 2.8 percent of GDP; the Obama budget, 3.3 percent; and the Ryan plan 1.7 percent. While deficit spending at such levels is acceptable, these numbers are testament to the simple fact that revenue levels at, or even slightly above, historical levels will lead to trillions of dollars in new debt over the next decade. By its own estimates, even the Ryan budget would add $4 trillion to the debt over the next decade.

In other words — and I know this is very difficult for Sen. Thune to accept — if this nation is ever going to get on a grip on solving all of the problems that stem from the federal budget deficit, it must do two things: cut spending and raise taxes.

This could likely be the worst time in our nation's history to even contemplate getting rid of a tax. We don't like the sound of that observation anymore than you do. But it's true.

The persistent Republican mantra for over 30 years now has been that the United States has a spending problem, not a revenue problem. So the party line has been to cut spending, and under no circumstances raise taxes.

The GOP is right about one thing: The country is spending more than it can afford. And economists on the left and right generally agree that big tax increases can hurt economic growth.

But there is abundant evidence showing that taxes must be part of debt reduction, however distasteful the GOP finds them.

Why? Because the looming debt problem is just too big. And reducing it by spending cuts alone would require draconian changes that could hurt the economy far more than a mix of spending cuts and tax increases.

Here's one way to conceive of just how big the problem is. Jeanne Sahadi, a senior writer for CNNMoney, made this observation in an article she wrote in May 2011:

"If lawmakers wanted to permanently freeze the debt held by the public at today's level – 62 percent of GDP – they would need to immediately cut spending by 35 percent or about $1.2 trillion, according to the Government Accountability Office. And those cuts would need to be permanent from hereon out.

How hard would that be?

Consider that in 2010, all of discretionary spending — including defense — totaled $1.35 trillion. In other words, to do deficit reduction all on the spending side means 'you have to cut into the real meat,' said Roberton Williams, senior fellow at the Tax Policy Center.

Consider, too, how much fun lawmakers are having right now trying to negotiate spending cuts for this year alone. Their working range: Between $10 billion and $61 billion.

And here's the kicker: Even permanently cutting $1.2 trillion today wouldn't be the end of the story. Deficit hawks note that public debt at 60 percent is still well above the country's historical average — which is below 40 percent. So more cutting would need to occur in subsequent decades."

Sahadi notes that one the biggest reasons for increased spending — and hence, high debt — is the aging of the population. That means burgeoning Medicare and Social Security rolls, especially over the next 25 years.

Inflation in health care costs is the other big problem.

In both cases, fixing those problems without increasing revenue isn't feasible, Sahadi claims. She proposes that benefit changes be phased in so future retirees can adjust their plans accordingly. And, she notes, reducing health care costs requires systemic changes over time.

"Since retirement program reforms can only be made slowly, we must also cap defense and non-defense discretionary spending, restrain other mandatory programs, and restructure the tax code to raise more revenue," said federal budget expert Alice Rivlin at a Senate Budget Committee hearing last May.

Let's repeat the last three words of Rivlin's final statement: "raise more revenue."

I know. It's painful to hear. But here's the alternative: if more revenue isn't raised and lawmakers instead keep tax revenue at around 18 percent of GDP – the historic average – "by 2040 we will only be collecting enough revenue to cover the costs of net interest and not quite all of Social Security," budget expert Diane Rogers noted in her blog Economistmom.com.

The fastest growing area of spending is interest on the debt, which is expected to approach $1 trillion a year by the end of this decade.

Since tax cuts don't pay for themselves, they reduce revenue going into federal coffers. And that increases the debt. More debt means higher interest costs.

Obama's real deficit problem: His tax cuts.

While Republicans portray President Obama as the biggest of big spenders, in fact the driving force behind the big deficits in his 2012 budget proposal isn't spending. It's his proposed tax cuts, and the increased interest costs that result, according to an analysis by the independent Congressional Budget Office.

Sorry, John. I know you're trying to pluck at our heartstrings right now, like you seem to do every April, to score political points while trying to convince us your estate tax myth is true.

Yes. It's a myth. According to an 2009 article published by the Center on Budget and Policy Priorities, "the number of small, family-owned farms and businesses that owe any estate tax at all is tiny, and virtually no such farms and businesses have to be liquidated to pay the tax.

The estates of only 0.24 percent of all people who die in 2009 (i.e., the estates of between two and three of every 1,000 people who die) are expected to owe any estate tax, according to the Tax Policy Center.

And only about 1.3 percent of the few estates that still are taxable are small business or farm estates. TPC estimated in 2009 that only 80 small business and farm estates nationwide would owe any estate tax that year. This figure represents only 0.003 percent of all estates — that is, the estates of three out of every 100,000 people who died in 2009.

The estate tax is not devastating. This is a particularly bad time to consider eliminating it.

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