How Dismantling an Obscure Tax Created an American Aristocracy
Republicans’ decades-long efforts to gut the estate tax is creating a permanent ultra-rich class, and undermining the government’s ability to pay for popular programs like Social Security and Medicare
TAYA GRAHAM: The 2017 Republican tax bill was a watershed moment for this country, a nation already struggling with massive and near historic income inequality was forced to confront a new law that only made things worse. The bill not only offered the biggest break to the country’s wealthiest, but it codified those gains for years to come. The damage can and will be far reaching. The debt incurred from the bill will soon make interest payments higher than what the U.S. government spends on health care, and many say the ballooning deficits may be used as a pretext for cutting popular programs like Medicare and Social Security.
To understand the far reaching implications of this policy, The Real News will be doing a series with tax experts and advocates for change, searching for a real assessment of the consequences and the most effective solutions. Today I’m joined by Matt Gardner, a senior fellow at the Institute on Taxation and Economic Policy, a nonpartisan think tank where he has worked since 1998. Matt, thank you so much for joining us.
MATT GARDNER: Thanks for having me.
TAYA GRAHAM: So, Matt, just to give people a sort of primer on the Republican tax bill, what from your perspective are some of the worst changes with regard to benefiting the wealthiest Americans?
MATT GARDNER: Well, first and foremost, it’s a big tax cut and one that offers very little to low and middle income families. And it is, in fact, targeted to the best off, as you mentioned. Probably the number one reason for that is the substantial cuts in the corporate income tax that were enacted as part of this bill, cutting the 35 percent corporate tax rate almost in half. Another big giveaway to that top end is the estate tax, where rather than reforming the taxes, really people have been arguing for a while, what this bill did instead was to double the exemptions. So, we’re now at a point where one out of every 1000 estates is going to be subject to estate tax going forward.
The third element is that we cut the top marginal income tax rates and introduced a new tax break for passthrough income, what the Trump administration referred to as small business income but really isn’t. This is business income that’s reported on personal income tax forms. It is one of these single forms of income that is most highly concentrated in the hands of the top one percent. So, cutting taxes on these businesses is a big giveaway to the best off. So, between those four things, you have a tax cut that is one of the largest in last quarter century and also one of the most unfair.
TAYA GRAHAM: That’s just incredible statistics. I was wondering, what are some of the long term fiscal consequences of the new tax law in terms of creating deficits and the ability of the government to fund programs like Social Security or Medicare?
MATT GARDNER: It depends a lot on what, if anything, Congress does in the next decade. But certainly, the best way of describing it is that we are in a pretty deep hole to begin with, before the tax cuts were passed, and we have now dug that hole a lot deeper. As you’ve seen, the headlines in the last couple of weeks were looking at a trillion dollar budget deficit for this year. That in itself is not new, we haven’t balanced our general budget since I think 1999, during the last year of the Clinton administration. But we have been getting steadily more and more irresponsible.
What that means going down the road is that later congresses are going to have to make the hard decisions that this Congress and this president have chosen not to, which taxes are going to hike to help eliminate the budget deficit? Or, more critically, which spending areas are they going to eliminate or cut back? Right now, congressional leadership and the Trump administration have taken the approach that they don’t need to make these hard choices because tax cuts will spur economic growth, and the deficits that we’re seeing right now will somehow disappear down the road. But there’s no evidence that that’s working. There’s no historical evidence that it ever has.
And so, there’s going to be a reckoning. It could be as soon as 2025 when many of these tax cuts are scheduled to go away and probably won’t. But if it doesn’t happen then, at some point in the next two decades we’re going to reach a crisis level when we simply can’t afford to pay for even the most vital services that our government currently tries to provide. And at that point, it’s going to be either permanent spending cuts of a sort that no American would support, or tax cuts, probably on low and middle income Americans. Again, something that most of us would not support. This is the inevitable choice we face from kicking the can down the road, as Congress has in the past year.
TAYA GRAHAM: Well, why do you think the Republican Party is essentially controlling the government right now? It’s supposed to be the party of fiscal conservatism. Why are they kicking these hard decisions down the road? Can you speculate on that?
MATT GARDNER: I can think of a couple of reasons. One is that it’s the easy thing to do, and certainly the Republican leadership, but also humanity more generally, tends to look for the easy solution. These are hard problems to deal with and they require political will. Second is that there has been a pervasive supply-side ideology taking hold over the last 30 years, where some very prominent elected officials have gotten elected and have tried to govern on this principle that tax cuts will pay for themselves. And if you say something over and over again to yourself, you can really convince yourself. I think there may be quite a few members of Congress who really do believe, despite the utter lack of evidence, that if they just keep cutting taxes, will generate enough economic growth that we’ll all be all right in the end.
That’s sort of the cheerful view. The more cynical view, I think, would be that Republican leaders in Congress know that their recent history is Republican leaders cut taxes and Democratic leaders, when they take power, clean up the mess and make the more unpopular decisions that are required to make things balanced. And frankly, that’s the real concern going forward. If, as is likely, Democrats take over Congress in a month or so, the House anyway, they’re going to be faced with a difficult question: do they let things sit where they are with spiraling deficits for the next 10 years, or do they try to clean it up? If they try to clean it up, they’re the ones who are hiking taxes, who are cutting spending.
So, it could be a very cynical and clear-eyed political strategy designed to enforce this view that Republicans are the party of cutting taxes and Democrats are the party of hiking spending. It’s a profoundly unfair outcome if it works out that way, but it’s one that is allowed in our budgetary system because it’s entirely legal for Congress to enact a budget that is not balanced, that is profoundly out of balance. An in fact, we’ve done it consecutively for almost two decades right now. So, there are a lot of reasons why they could be doing it. Some of them are sincere some of them profoundly cynical. I think it’s probably a mix of the two.
TAYA GRAHAM: Well, some people have suggested that the tax bill was actually a precursor to defund programs like Medicare and Social Security, that it was quite purposeful. What do you think?
MATT GARDNER: That’s another view that I think could certainly be true. One thing we know is that Americans like the notion of tax cuts taken on their own. Another thing we know every bit as well from polling data is that when it becomes clear that tax cuts have consequences, that tax cuts must be accompanied by spending cuts, the popularity of these tax cuts withers, it goes away. So, the trick, I think, that congressional leaders have tried to do is they can’t get people to swallow this combination of tax cuts and spending cuts that are the recipe for the smaller government Republican leaders want to see. So, they pretend there’s a free lunch, that they can cut the taxes and they don’t have to worry about the other side of the equation.
And then, I think the thinking is, five years, ten years down the road when the tax system faces a crisis of sustainability, they can point to spending and say that’s the problem, it’s not the tax system it’s the spending side, we’re spending too much. And then, the hope is I suppose, Congress will be forced to make these spending cut decisions that Americans don’t want, that through a crisis of sustainability will have to enact profound reductions in the size of government that no American would support on their face.
TAYA GRAHAM: Now, this bill that we’re discussing I think also cut the estate tax, is that correct?
MATT GARDNER: That’s right.
TAYA GRAHAM: I just want to ask; how has the estate tax been altered over the past decade and what does that mean for our budget going forward?
MATT GARDNER: I think there are three important ways in which the estate tax has changed. One is that the exemption has gone sharply up. There’s always been a baseline amount of wealth that can be passed on from one generation to the next without incurring even a dime of tax. That was around a million and a half at the end of the Clinton administration and it’s been sharply ratcheting upwards ever since then. Before the Trump tax cuts were passed, it was the case that you could have and estate as a single person of five million dollars. If you’re a married couple, almost eleven million dollars, and not pay a dime of tax. The Trump tax plan doubled these numbers. So, now a married couple can have an estate worth twenty-two million dollars and not owe any estate tax at all, simply pass that on tax free to their heirs.
So, that’s a really big impact. It gets us to a place, taken on its own, where roughly one in one thousand estates, zero point one percent of all estates, are not going to generate any tax going forward. Second thing is that the rates have gone down. And a third thing, I think this is probably the most significant, is that there has been a gradual erosion of the IRS’s ability, from a spending, from an administrative perspective, to enforce the laws. And that’s why you get headlines such as the one we saw in the New York Times a couple weeks ago, where the Times, which had the money to do this, did a big investigative report where they looked in detail at how President Trump’s family has shifted income in between generations and found what sure looks like tax avoidance, if not illegal tax evasion, where they’ve undervalued assets before shifting them from one generation to the next.
When you handicap the IRS’s ability to enforce the laws, as Congress has done for a couple of decades now, that opens the door to the sort of tax avoidance that really, I think outweighs the impact of cutting the rates and doubling the exemptions, as Congress has. If the rules can’t be enforced, it’s almost not worth having rules at all. And I think that has been the long term strategy of Congress with the estate tax. As a result, the budgetary impact is pretty profound. The estate tax really is an insignificant contributor to our federal budget right now precisely because it’s been undercut in these three ways. And that’s a shame, because right now, given the deficit situation we face in the short run and going forward, we do have a sort of budgetary zero sum game. Every billion dollars we’re not collecting from progressive sources like the estate tax or the capital gains tax or the personal income tax more generally is a billion dollars that has to be made up somewhere else.
TAYA GRAHAM: So, this kind of leads me to my next question, is if an equitable estate tax could actually have a positive impact on the federal budget, would it make a difference to make the state tax more equitable?
MATT GARDNER: It absolutely would make a difference, both in fiscal terms and the sort of psychological terms, the public support terms that I mentioned. Right now, the estate tax operates in a larger framework though. It’s best understood as a backstop to the federal income tax. And part of the reason why continuing to have an estate tax is so vital is that as long as it exists, it is at least a backstop against rampant tax avoidance on the personal income tax. The reason I say this is that even if a high income earner can escape all taxes on their capital gains income or their investment income over the course of their lives, at least you have this backstop that requires one level of tax at the end of people’s lives as they try to hand over these huge piles of cash to the next generation.
So, I think the estate tax plays a vital role as a backstop in making sure that a personal income tax works in the first place. If it goes away, I think that will open the door to even more widespread tax avoidance on the personal income tax side. And that’s a real concern, because the personal income tax is roughly half of all the revenue we get right now as a nation.
TAYA GRAHAM: So, how have these cuts affected local estate taxes, if at all?
MATT GARDNER: That’s a great question. Before the Bush tax cuts of 2001, we had a federal estate tax system in place. Federal means there’s a national component and a state component as well. And there was sort of an understanding that every state would be able to levy an estate tax, and the states were there first before the federal government started doing this, and that the federal government would do sort of a revenue sharing agreement with the state. In 2001, when Congress passed substantial estate cuts, they pretty much ripped up the agreement between the federal government and the state government and took away this implicit aid to state governments. What that meant was that state governments suddenly faced a choice. If they wanted to have an estate tax, it was all coming out of their own state residents’ pockets. And that made the idea of having a state estate tax much less popular.
And within five years, something like two thirds of all the states repealed their estate taxes. So, now I think we’re left with roughly one third of the states that have any estate tax revenue at all. That’s the direct effect. The indirect effect, of course, is that the weakening of the federal tax on its own diminishes the ability of Congress to provide aid from the federal level to the state level for all ongoing services. So, without a question, these two mechanisms, indirect and direct, have made it harder for state and local governments to make ends meet, to pay for the things we all depend on from our local governments, especially education healthcare and transportation.
TAYA GRAHAM: Now, we have seen that a large share of the gains from economic growth have not just gone to the one percent, but an even smaller handful of people. So, how much has wealth for the richest of the rich in our country?
All indicators are that inequality is getting worse, that the share of wealth, including capital gains, dividends, other forms of unearned income that’s going to the top one percent, is going up. All indicators like corporate profits are near all-time highs. But at the other end of the spectrum, median income, the inflation adjusted average income for working families, really has not changed at all. It’s roughly where it was three decades ago. So, as prosperous as our nation seems to be from an aggregate perspective over the last decade or so since the recession ended, there is very little indication that this growth is benefiting low and middle income working families, and every indication that the lion’s share of the benefits are going to owners of stock, owners of companies and those with potentially taxable estates.
TAYA GRAHAM: So, given the apparent inequity here, what can be done to fix the tax system and make it fair? What kind of major changes would you recommend.
MATT GARDNER: It’s a really interesting time to ask that question because legislation just got introduced, I think today, earlier this week, in Congress by Senator Kamala Harris of California, which would enact a big tax cut in the form of the earned income tax credit, expanding the ITC, which is a targeted tax credit for low and middle income working families, in a way that is designed as an alternative to the big tax cuts that Congress enacted just a year ago. And it’s not by accident, I think, that the ten year cost of these tax cuts proposed by Senator Harris would be substantially less than what Congress enacted last year and would still deliver much higher benefits, substantially higher benefits to everyone in the bottom 60 percent of the income district distribution, low and middle income Americans.
That alone, abandoning the Trump tax cuts and shifting more towards the approach that Senator Harris has proposed, is a very straightforward way of moving forward. It’s not that simple. There are certain elements of the Trump tax cuts, I think, where it would be hard to put them back in the bottle so to, speak. Having cut the corporate income tax rate from thirty-five percent down to near twenty percent, it’s going to be very difficult for Congress to simply increase it again. But undoing many of the most damaging tax cuts, like the marginal income tax rate cuts, certainly undoing the estate tax cuts and this gigantic new deduction for passthrough businesses that Congress has pushed through at the last minute last year, I think is a very sensible first step toward a more sustainable and fair tax system.
TAYA GRAHAM: I think you’re absolutely right. And I think as long as income taxes are punitive to the lower and middle classes and they’re not enforced for the wealthiest, I think it’s going to be difficult to have that dialogue. But Matt, I just want to thank you so much for joining us. I’m your host, Taya Graham, and I want to thank you for joining me at The Real News Network.