What's the greatest obstacle to fundamental tax reform? No, it's
not powerful defenders of the tax code, such as the realtors, state
and local governments and large employers. Nor is it eloquent
liberal lawmakers who specialize in the art of class warfare
demagoguery. Rather, it's an obscure federal agency that provides
lawmakers with technical reports estimating the "revenue effects"
of tax proposals -- the Joint Committee on Taxation (JCT).
The reason is quite simple. These official and "nonpartisan"
estimates routinely determine the outcome of major legislative
battles. The most recent example involves the longstanding effort
by congressional tax reformers to end the death tax. In early June,
the Senate considered legislation passed previously in the House
that would permanently repeal the tax. After defenders torpedoed
the repeal bill on a procedural motion, congressional leaders moved
to enact a compromise plan that cedes the moral high ground long
held by reformers in return for miniscule economic benefits.
The death tax is profoundly counterproductive. According to former
Clinton economist Alicia Munnell, for every dollar of tax revenue
it raises, another dollar is squandered on insurance policies,
lawyers, estate planners, and accountants to avoid the tax. "Some
experts estimate," my colleague Bill Beach notes, "that as much as
8 percent of all personal insurance payments go to premiums on
policies to protect individuals from ruinous death tax bills."
These premiums, one senator related during floor debate, can run as
high as $80,000 per year. Little wonder why the insurance industry
has lobbied Congress to retain the tax.
In all, the congressional Joint Economic Committee estimates,
business owners have spent $847 billion on death tax-related estate
planning and compliance costs.
While most liberal senators defend the tax on class-warfare
grounds, dubbing it the "Paris Hilton tax break," quite a few cite
the official Joint Tax Committee estimate that full repeal would
deprive the federal treasury of $281 billion in just five years.
"With an $8.4 trillion national debt," Sen. Dianne Feinstein
(D-Calf.) explained, "a budget deficit that will exceed $300
billion this year, [and] a looming entitlement crisis,...full
repeal of the estate tax at this time is simply not
responsible."
But did Feinstein and some of her colleagues vote down full repeal
on the basis of severely flawed information provided by the JCT?
After all, during the five-year period beginning in 2011, JCT
estimates total receipts from the death tax to be $218 billion. So
how could it inform lawmakers that repeal would cost $281 billion
-- 29 percent more than the tax is supposed to raise?
It turns out the JCT conveniently ignored a provision in the
repeal bill that would eliminate a provision known as "stepped-up
basis." This allows heirs to avoid paying capital gains taxes on
the unrealized increase in the value of assets they inherit.
Translation: a stock purchased in 1960 for $50 that is worth $500
at the time of death would, under this rule, be entirely exempt
from the capital gains tax. Repeal advocates believe these gains
should be subject to the capital gains levy.
JCT's economists, however, informed senators that they didn't know
how to calculate the extent of these offsetting revenue gains.
Armed with calculators that could only calculate revenue losses,
JCT provided lawmakers with an incomplete and misleading revenue
estimate.
Most galling of all is that the JCT previously provided Congress
with a detailed estimate of how much revenue Uncle Sam currently
loses thanks to this provision. Stepped-up basis, the JCT reported
separately, will cost the treasury $293.1 billion during this same
five-year period. Remarkably, had JCT incorporated this estimate
into its overall calculation, lawmakers would have been informed
that repealing the death tax could actually generate as much as
$12.3 billion in new federal revenues during the first five years
of repeal.
How would those senators who opposed full repeal on purely fiscal
grounds have voted if the official revenue estimate had reflected
this? If only three had viewed repeal as a job-creating and
revenue-enhancing boon to the economy, then the senate filibuster
would have failed and this major step toward fundamental tax reform
would already be signed into law.
So if fundamental tax reform seems out of reach, you know who to
blame: the unaccountable, closeted economists at the Joint
Committee on Taxation.
Michael Franc who
has held a number of positions on Capitol Hill, is vice president
of Government Relations.
First appeared in Human Events