Wake Up, America! (to this estate tax nonsense)

I used up all my brownie points by filing early the previous week by needing an extra day this week, so my column ran on Monday instead of Sunday. The newspaper version is available here.

The Washington Post article mentioned in the column by Birnbaum and Weisman, "The 1% Split Over Estate Taxes; The Few at the Top of the Heap Disagree on How to Keep the Most," appeared on Aug. 12, 2005, at D1.

RICH GET PAMPERED; REGULAR FOLKS GET TAXED
East Valley Tribune, Aug. 22, 2005

Last month, Arizona state workers learned that when it comes to making their lives (and jobs) more difficult, nobody’s more creative than the Arizona Legislature. In their most recent and creative trick yet, lawmakers found a new way to reduce employees’ take-home pay: by giving them a raise.

This spring, state workers faced a significant hike in required contributions to the state retirement system; poor stock market results and some legislatively required benefit increases for public-safety employees meant that employee contributions for retirement would increase by nearly 50 percent.

So the Legislature gave employees a “targeted” 1.7 percent raise, designed to pay, to the dollar, only the expected increase in retirement-system deductions so take-home pay wouldn’t decline. But the budgeters forgot about the tax implications. But the slight pay increase, even though all of it disappears in required deductions, means slightly higher federal -- and state -- income, Social Security, and Medicare taxes. Thus, the pay “increase” actually reduces take-home pay for virtually all employees. A state worker making $25,000 annually now has each biweekly check reduced by this pay raise by some $2.25, while an employee making $60,000 a year sees about $140 less annually.

This kind of problem only affects the middle-class and working stiffs, of course. When big corporations decide to give already exceedingly-well-paid CEOs new benefits or raises, they always make sure to “gross up” the increase with an additional payment to cover the increased taxes, including those on the gross-up payment.

Apparently, treating most employees like dirt is part of “running government like a business.” It’s not enough for politicians to denigrate what these employees do; by giving them a raise that means less pay, it helps maintain a turnover rate calculated by the Department of Administration at 17.6 percent annually -- which costs taxpayers over $50 million a year in lost productivity and higher training costs.

So, naturally, with the current tax system meaning that $35,000-a-year employees face lower take home pay, what’s the debate on taxes in Washington today? It’s all about the estate tax, which has become a battle between what reporters Jeffrey Birnbaum and Jonathan Weisman of the Washington Post called the “very rich” and the “merely rich.”

Lobbying groups representing so-called “small business” owners (the “merely rich”) want to exempt from tax inheritances of up to $10 million. But people with estates worth tens or hundreds of millions, or even billions, are lobbying Congress for a reduced tax rate with a lower exemption, because $10 million just isn’t nearly enough for them.

Arizona Sen. Jon Kyl is siding with the very rich, with a “compromise” plan that would lower the top tax rate on inheritances from 47 percent to 15 percent. But, unfortunately for the merely rich, the exemption would cover estates up to only $3.5 million (estate taxes being one of the few endeavors where you can say “only $3.5 million”). It will save really, really big estates millions or even billions, but will leave many “small” estates (to these people, $5 million is “small”) still subject to tax.

What’s really “small” here is the number of people affected by the estate tax -- and what’s miniscule, according to the Congressional Budget Office, is the number of businesses that had to liquidate assets to pay any tax (only 0.007 percent of adult deaths in 2000). Of the 2.4 million adults who died in 2003, less than 29,000 left estates that were large enough to pay any tax at all. By contrast, more than 43,000 state employees, just in Arizona, just got their taxes raised, but they aren’t on Kyl’s radar at all. Instead, his estate tax plan is “targeted” -- at the richest 1.2 percent of taxpayers.

But it all makes sense when you ask yourself who’s more likely to give campaign contributions or take politicians on golf junkets, state employees making $25,000 a year, or the heirs to the Wal-Mart, Mars candies, or Campbell Soup fortunes?

That’s Washington these days, where the middle class doesn’t matter, because politicians are way too busy taking care of the top 1.2 percent.