The death tax has won another reprieve, and it’s not just revenue-hungry congressional appropriators and left-wing class warriors celebrating its survival: The insurance lobby, long regarded as a Republican preserve, has been showering Democrats with campaign contributions, and preserving the death tax is one of its top priorities. This might seem strange — until you learn that the insurance industry makes almost as much money from estate taxes as the federal government does.
Insurance companies, through “second to die” life-insurance policies, which help survivors pay estate taxes, generate about $18 billion in premiums annually — which is about three-quarters of the annual revenue the federal government derives from death taxes, according to the American Family Business Institute (AFBI). No death tax, no death-tax-hedging life-insurance policies. The insurance lobby is relying on the Democrats to maintain this revenue stream, and rewarding them with campaign contributions: AIG gave nearly 70 percent of its donations to Democrats in the last election cycle, according to a Center for Responsive Politics Study. Charles Rangel was the House’s biggest recipient of insurance-industry money, and seven of the top ten recipients were Democrats, Barney Frank among them.
While the insurance industry makes real money from death taxes, the federal government does not. About 1 percent of federal revenue comes from the estate tax. And even that may represent a net loss, because the tax destroys jobs and the income-tax revenue they would have created. A new study published by the AFBI, conducted by economist and former director of the Congressional Budget Office Douglas J. Holtz-Eakin, estimates that America could create 1.5 million jobs (half the number Obama claims his $787 billion stimulus will create) by eliminating the death tax. A 2006 study by the Joint Economic Committee of Congress also concluded that there is “abundant evidence that the estate tax, along with its high compliance costs and impact on capital accumulation, may actually cause income tax revenue losses for the federal government.” And a 2009 study, also published by the AFBI, estimates that the government would net approximately $26 billion in additional revenue by eliminating the tax.
So why have one?
Death-tax proponents argue that the tax is necessary to prevent the formation of dynasties. But thanks to various estate-planning mechanisms, such as establishing trusts and foundations that are family-owned, the tax is ineffective at preventing intra-family wealth transfers. In fact there are lots of fat cats, such as Warren Buffett, supporting the death tax. Buffet has long profited from buying family businesses at bargain prices when their owners face death-tax burdens and need to liquidate assets. These include Dairy Queen and R. C. Willey Home Furnishings, among others. Buffet also owns a life-insurance conglomerate that reaps hefty profits from estate-tax planning and insurance premiums.
When Congress passed the first death-tax legislation in 1916, the maximum rate was only 10 percent for estates worth more than $5 million. But by 2001, the rate had increased to 55 percent after an initial $675,000 exemption. As part of President Bush’s tax cuts, it was reduced in 2009 to 45 percent after a $3.5 million exemption, and is scheduled to fall to zero in 2010. It then increases in 2011 to 55 percent after a $1 million exemption. Now Democrats are planning to repeal the 2010 phase-out and tax estates at 45 percent after a $3.5 million exemption ($7 million for couples). Barack Obama’s current budget plan assumes a death-tax rate of 45 percent.
Most Americans realize that the death tax constitutes a double or triple levy on wealth, and favor its abolition: A 2009 Tax Foundation survey conducted by Harris International found that 68 percent of Americans (the number was even higher among middle-income earners) advocate repealing the tax completely.
Dick Patten, the president of AFBI, believes that Congress could lower the death tax to 15 percent after a $5 million permanent exemption as part of a legislative compromise this year. That could be the best thing to emerge from Congress in some time — which means, don’t believe it until you see it.
— Brett Joshpe is co-author of Why You’re Wrong About the Right: Behind the Myths: The Surprising Truth About Conservatives (Simon & Schuster). He is general counsel of The American Civics Exchange.