Democrats support for progressivity wanes

{mosads}But the most progressive tax is also one of the most unpopular. Thanks to Republican-led efforts to characterize it as the “death tax” – that is, a tax on death as opposed to one that falls on the estate of the deceased – the estate tax is almost universally reviled in Congress and by the voters. Reflecting that reality, the Democrat-controlled Senate voted 80 to 19 late last week to kill the tax (provided lawmakers find the revenue to offset the cost).

Though the amendment was nonbinding, the vote is an important symbol of the muddled state of the Democratic Party and the extent to which Republicans’ have succeeded in demonizing nearly every tax.

The effort to abolish the estate tax isn’t new. Republicans have whittled away at it over the years, with the complicity of conservative Democrats, who voted to raise the exemption level from $675,000 early in the Bush era to $5.25 million today – a move that the American Taxpayer Relief Act of 2012, which attracted broad Democratic support and President Obama’s signature, made permanent.  Moreover, the top tax rate on the value of the estate that exceeds the exemption level, which was 55 percent in 2001, is now 40 percent.

The permanent estate tax also features portability, meaning that married couples who file their taxes jointly can effectively double the exemption, keeping a shared estate worth up to $10.5 million tax-free. Thanks to the changes, the estate tax is projected to raise $370 billion less than it would have if Clinton-era rates and exemptions were still in place. That’s a two-thirds reduction in federal revenue.

Nor does the Democrats’ move away from progressivity end with the estate tax. 

Quite the contrary, Democrats also voted last week to eliminate a tax of their own creation – the medical device excise tax, an important component of health reform that’s designed to raise the revenue needed to offset the costs of expanded health insurance coverage.

Moreover, in negotiations over the “fiscal cliff” at year-end, the “sequestration” budget cuts that took effect in March, and hopes for larger budget deals, Obama and his Democratic party seem increasingly willing to undermine the progressivity of the code.

They favor lower capital gains tax rates than ordinary income and related capital gains preferences every bit as much as Republicans do. They largely oppose higher taxes on the banking and financial sectors.

In addition, many Democrats, particularly senators, want to reduce the tax burden on U.S.-based corporations, both those who operate only within our borders and those who also operate far beyond. Many Democrats support a so-called repatriation holiday that would let corporations bring their overseas profits to the United States and pay a minimal tax on them, and a territorial tax system that would permanently reduce U.S. taxes on overseas profits.

And – let’s not forget – only 19 Democratic senators voted in favor of keeping the estate tax.

Sen. Mark Warner, the influential Virginia Democrat, would argue that his colleagues support scrapping the estate tax only if they can find other sources of revenue. But what other taxes are as progressive as the estate tax, which targets only the very wealthiest taxpayers (and even then, just their estates)?

Where would this $200 billion in new tax revenue come from? It almost certainly would come from the middle class, or from cuts to tax expenditures that benefit a broader taxpayer base than the estate tax affects.

As the appetite for tax reform grows, perhaps voters should be wary of Democrats’ lip service for progressivity when they seem willing and eager to drop the only truly progressive tax in the code. The need to balance tax cuts with tax increases will surely lead to the kinds of compromise that will make the system as a whole less progressive and less fair.

Scott, an attorney and expert on federal taxation, is the editor of Tax Analysts’ Tax Notes.