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