Costly Myths

By Ruth Flower on 12/08/2010 @ 11:30 AM

Tags: Budget

Washington has long been a land of mythology. Permitted, somehow, under the rubric of “political rhetoric,” stories that were perhaps only meant to be stories take on a patina of truth. And in the rest of the country, we begin to believe the myths.

How else do we explain the power of an extremely small sliver of the population to convince the rest of us that their wealth is our concern?

The estate tax is the case in point. Under legislation passed in 2001, the amount exempted from estate taxes gradually rose for ten years, while the tax rate on the remainder in the estate decreased year by year. For 2010, there was no estate tax; but the legislation expires on December 31 this year. Unless Congress takes some kind of action, the tax will revert to a former threshold and former rate, a 55% tax on estates valued (after all exemptions are subtracted) at more than $1 million (or $2 million for couples).

President Obama proposed winding the clock back to 2009, when estates valued at more than $3.5 million (or $7 million for couples) paid a 45% tax on the remainder after exemptions (resulting in an effective tax rate below 20%).

As the debate warmed up, the myths churned out. This proposal would hurt small family-run businesses and split up family farms; it was a “death tax;” it was confiscatory and unfair.

But what’s real here? How many estates would owe any tax under if the 2009 law was brought back? Just ¼ of 1 percent. All other estates – 99.75% — would owe no tax, according to Gary Bass of OMBWatch in the Huffington Post.

How many farms would have to be sold and split up in order to pay the tax (at the 2009 level)? Thirteen. Not thirteen percent – just 13 – according to an estimate by the Congressional Budget Office.

So why the hue and cry? How did the myth gain the power to swing a deal that will essentially end the estate tax – raising the threshold to $5 million (or $10 million for couples) and lowering the tax rate to 35% ? Bob Greenstein at the Center on Budget and Policy Priorities reports that at this level, only the top one-seventh of one percent (.15%) of all estates will pay any tax at all, and that their effective tax rate will be 14 percent.

Why should we care? Because of the realities in most of our lives that cannot be explained away with a myth. For most of us, the recession is still a reality, and we know that the country is piling up deficits, and that a lot of families are having trouble making ends meet, and that the country needs to be able to invest in jobs and the economy. Instead, this costly proposal directs $20 billion in tax reductions over the next two years to the benefit of the richest one percent in the nation, and over time it will add $90 billion to the debt. That’s $90 billion that can’t be used to build a green economy, put people back to work in good jobs. That’s $90 billion on which American taxpayers (all of us) will have to pay interest, so the “tippy top of the wealth ladder” (as Gary Bass calls it) can enjoy larger inheritances.

That’s the power of a good story, washing aside all those nasty numbers and facts. Mythology in Washington can be very costly indeed.