Expectations of the Next President

Capital Letter No. 10

May 19, 2008

By Ronald D. Aucutt

There are differences among the presidential candidates. But what difference do the differences make?

Dear Readers Who Follow Washington Developments:

It appears that a Senator will be elected President. And we thought we would not be able to predict anything about this election!

Only two incumbent Senators, Warren Harding and John Kennedy, have ever been elected President, although in 1880 Congressman James Garfield (the only incumbent member of the House of Representatives to be elected President) was elected President and elected to the Senate in the same election.

Senators, it is said, lack executive experience (as if running a campaign doesn’t qualify). Their day job is talking to each other, not staying in touch with the people – like governors, for example, have to do. But when we were young, my classmates and contemporaries worked as volunteers for two men they found to be among the most ideologically reliable and inspiring candidates in a generation. Both were Senators. And both Barry Goldwater and George McGovern were thoroughly trounced in the general election. That shows how much we knew!

Anyway, with the presidential field narrowing, we should be able to predict the future of estate tax legislation by looking at what the candidates stand for, right? To borrow audaciously from one of the candidates – not this time, not this year! In contrast to Governor Bush’s campaign website in 1999-2000, which featured elimination of the “death tax” among its “Tax Cuts with a Purpose,” the campaign websites of the three remaining candidates this year offer almost nothing on the estate tax and relatively little about taxes at all. The websites do not even include “tax” as a category.

But asking where the presidential candidates stand is nevertheless the thing to do in an election year.

Taking up the three candidates in alphabetical order, in the Democratic debate at Drexel University in Philadelphia on October 30, 2007, Senator Clinton said that “I want to freeze the estate tax at the 2009 level of $7 million for a couple.”

Clearly the “freezing” of the estate tax exemption equivalent at the 2009 level of $3.5 million means we would have the highest exemption we have ever had – almost six times the $600,000 level many of us grew accustomed to as the “permanent” exemption and more than 58 times the pre-1977 level, when the exemption really was an exemption. (How many things are worth 58 times what they were worth in 1976?) It is apparent that Senator Clinton sees this “freezing” as a contrast, not to the past (or to the post-sunset 2011 law now on the books), but to 2010’s outright repeal. As confirmation, in a recent compilation of candidates’ views, Tax Notes’ Marty Sullivan, who has served on the staffs of both the Treasury Department and the Joint Committee on Taxation, said of Senator Clinton’s freeze proposal that “[c]ompared to outright repeal this is expected to increase revenue $400 billion over 10 years.” Sullivan, “Detailed List of Candidates’ Tax Proposals,” Tax Notes, May 12, 2008, at 539. This view of the freeze is consistent with the view held by many that it will be politically impossible to allow the 2009 exemption to go down (or the 2009 rates to go up), and that the post-sunset return to prior law in 2011 may therefore be disregarded as a practical baseline.

Senator McCain’s campaign website states that he has “long sought permanent and immediate reform of the estate tax, and supports raising the exemption from taxation on estates up to $10 million while cutting the tax rate to 15 percent.” It is possible that this reference contemplates an exemption of $5 million per person and, in effect, $10 million per married couple, like Senator Clinton’s debate reference to $7 million.

A few months ago, when the Democrats had a candidate (Senator Clinton) and the Republican field was in chaos, Senator McCain was singled out from the Republican field for voting against the “Bush tax cuts” in 2001 and as the only Republican candidate who did not advocate repeal of the estate tax. Nevertheless, if his website position does indeed represent a $10 million exemption per married couple, it happens to correspond to the acknowledged fallback position of many repeal advocates in the summer of 2006. Certainly the 15% rate it advocates is smaller than most observers view as politically achievable today. Thus, it is fair to align Senator McCain with the advocates of estate tax repeal after all, but estate tax reform has not been a prominent part of his campaign message.

With regard to Senator Obama, Marty Sullivan’s Tax Notes article quotes from pages 191-92 of The Audacity of Hope:

In 2009, this figure [the per couple exemption amount] goes up to $7 million. The tax thus affects only the wealthiest one-third of 1% in 2009. Repealing the estate tax would cost $1 trillion, and it would be hard to find a tax cut that was less responsive to the needs of ordinary Americans or the long-term interests of the country.

While it is possible that Senator Obama would prefer that the estate tax affected a larger percentage of the population, there is no call for expansion here. Although the reference to a $1 trillion cost of repeal may be more accurate if applied to post-sunset 2011 law, the matter-of-fact description of 2009 law might well amount to the acceptance of the same baseline Senator Clinton has apparently adopted, suggesting that they both would simply freeze 2009 law.

Since Congress appears likely to remain in Democratic control after this year’s election, any legislative fix of the estate tax next year will probably be closer to the preferences of Senators Clinton and Obama than those of Senator McCain, no matter which of them is in the White House. Capital Letter No. 9 viewed a small bipartisan group of Senators “in the middle” as the key to a feasible compromise, and the presidential election is not likely to change that.

While there will still be significant interest in Congress in reducing the estate tax even below the 2009 level, the biggest challenge will be paying for it, especially in the face of other priorities like the alternative minimum tax. How Congress can work through that challenge is still hard to predict.

Although I had friends who volunteered for Senator Goldwater and friends who volunteered for Senator McGovern, I don’t know anyone who worked for both campaigns! Partisanship is not new. While partisanship in those days was aggravated by the frustrations of Vietnam, things have not improved since Watergate, 24-hour news coverage, the Clinton impeachment, the 2000 election, and this generation’s frustrations with Iraq. In general, lawmakers in both parties seem to want to get things done. But partisanship gets in the way and makes it impolitic to be found cooperating too much with the other side.

It has long been understood that Congress will have a hard time reversing this phenomenon by itself, and that if there is to be a turnaround it probably must come from the efforts of a strong and determined new President. Many of us remember that President Bush took office in 2001 with that objective; the reasons he has not achieved it will no doubt be debated for many years. While the cynic doubts that any President can ever accomplish that in today’s climate, the optimist sees in all three current candidates the potential to be that kind of President. (The candidates’ respective supporters, of course, see that more clearly in their own candidate.) Thus, it may be possible that the inauguration of any of these three historic candidates would create the most vivid difference in the White House since President Kennedy succeeded President Eisenhower in 1961. If so, and if the new President remembers the commitments to reach across the gulfs of partisanship made during the campaign, we could have a window of opportunity to complete at least some legislation that does not open up deep-seated ideological differences. Modest estate tax reform of the sort most likely to attract a consensus of Senators “in the middle” might fit that description. And 2009 will be just in time.

That might still be a long shot. But it is hard to see a Plan B.

And a prediction of which candidate will win? Why, the Senator, of course!

Ronald D. Aucutt