July 19, 2010

July 19, 2010 | Commentary on Economy, Economic Growth

Harkin Heads Wrong Way on Death Tax

Economic recovery - across the country and in Iowa in particular - remains sluggish, and in fact could be going in reverse if recent economic figures are any indication. Yet despite the bleak economic outlook, some in Congress are pursuing policies that could actually make the economy worse.

Consider the death tax. In 2001, lawmakers finally admitted the financial damage it was inflicting. To rectify this, Congress passed a tax relief package that phased out the tax in year-by-year increments before repealing it completely in 2010.

But because Congress passed the tax relief under "budget reconciliation" rules, the repeal wasn't permanent. Thus, current law has the death tax coming back to life next year - unless Congress acts to extend this pro-growth policy.

Resuscitating the death tax would be bad enough. But unfortunately for the workers, family-owned businesses and family-run farms that it hits every year, Congress isn't simply planning to sit on its hands and let the death tax return. Some senators are actively working to make the tax even more of a burden for American families - and a bigger drag on the economy.

Sens. Tom Harkin (D-Iowa), Bernie Sanders (I-Vt.) and Sheldon Whitehouse (D-R.I.), recently offered a bill that would drastically increase the death tax at the worst possible time. This would be a body blow to a weakly recovering economy.

If Congress does nothing, and the death tax returns, it would do so with a punitive rate of 55 percent and an exemption of $1 million ($2 million for couples, or roughly the value of a small business, a house and average investments), enough by itself to seriously slow the recovery. But this draconian rate and less-than-generous exemption level are not enough for Harkin, Sanders and Whitehouse.

They want to wring even more revenue out of those trying to live the American dream and pass on the fruits of a lifetime of hard work to their children. The senators' wrongheaded and dangerous proposal would set the top rate at 65 percent for the largest estates. For smaller estates, the rates would range from 45 percent to 55 percent. The first $3.5 million ($7 million for couples) would be exempt for the death tax.

If this plan became law, Americans could see a large majority of what they have built confiscated by a profligate government, to be redistributed as seen fit by Washington. A death tax at such levels would certainly become the nightmare side of the American dream.

A death tax at those levels would also badly hurt the economy.

Higher death taxes would put more weight on the struggling economy and delay recovery further by reducing investment and therefore job creation. When economic recovery does finally occur, a higher death tax would mean that economic growth and job creation would remain permanently below where they otherwise would have been. For all their rhetoric about wanting to help the unemployed and aid economic recovery, with plans such as this, lawmakers continue to compound the uncertainty that keeps businesses from hiring.

Meanwhile, in just six short months, the death tax will jump from 0 percent to 55 percent. While such a jump isn't as much as proposed by Harkin, Sanders and Whitehouse, it's only slightly less bad. And it can be achieved by Congress doing nothing, which is much easier than passing the controversial Harkin plan.

Congress should stop playing games with the death tax and repeal it for all time. Doing so, according to Douglas Holtz-Eakin, former director of the Congressional Budget Office, would create 1.5 million jobs. That would be a much-needed and timely boost for an economy in which job creation is nonexistent.

Even more important, repeal would signal that this country remains a land of economic opportunity for all who dream about a better life.

Curtis Dubay is a senior policy analyst at The Heritage Foundation.

About the Author

Curtis S. Dubay Research Fellow, Tax and Economic Policy
Thomas A. Roe Institute for Economic Policy Studies

Related Issues: Economy, Economic Growth

First appeared in the Des Moines Register