Updated: May 3, 2013 12:14PM
Originally published: July 20, 2000
It’s amazing what a decade of prosperity can do to politics. Suddenly both parties in Congress are vying to accommodate the American taxpayer. Politicians are now debating three economic issues that once seemed highly unlikely: eliminating death taxes, privatizing Social Security and ending the marriage penalty.
When 65 House Democrats broke ranks with their party to vote for eliminating the death tax, it became apparent that this election year would not mean politics as usual. Perhaps it was the change of name, from the lofty “estate tax” to the more menacing “death tax” that turned the political tide. Or perhaps it was the realization that this tax would start to affect more middle-income families, who had already paid income taxes, real estate taxes and capital gains taxes on their property.
Suddenly, Congress rushed for the high ground on this issue.
True, fewer than 50,000 “estates” paid any tax at all in 1997, the latest year for which figures are available. Yet there was a dawning realization that many voters are moving above the current $675,000 level at which death taxes are levied. (That exclusion currently is scheduled to rise to $1 million in 2006.)
But when baby boomer voters add up the total value of their estates--including homes, investment accounts, retirement plan assets, and even life insurance if it is owned by the covered individual--it appears that America’s growing prosperity is about to create a windfall for federal tax collectors in coming years.
Traditional pension plans used to provide only a check a month for life, thus having no impact on net worth. But Americans now have more than $3 trillion growing in self-directed retirement accounts--all counted as part of their estate. Even members of Congress are realizing that they might face death taxes if something isn’t done now.
The second unlikely issue in an election year is Social Security. It was always called the “third rail” of politics: Touch it and you die. Now both major political candidates are vying to reformulate Social Security.
Although neither plan goes far enough to save the system for future recipients, it’s heartening to see that a national political debate about economic realities may take center stage in presidential election politics.
It ought to dawn on the public that allowing the government to become the stock market investment adviser to their retirement accounts could wreak havoc on both the market and their financial security. Over the long run, even the least knowledgeable individual investor should be able to improve on the guaranteed negative returns that today’s younger worker’s will receive on their “contributions.”
A healthy debate over how much of Social Security will be privatized, while maintaining promised benefits for today’s retirees, should give voters a real economic choice--and a debate worth listening to.
As for the marriage tax, it’s been a staple source of year-end tax planning stories for years. When two successful people marry, their tax bill goes up. It seems a simple task to return equity to the tax code by eliminating the marriage penalty.
But Congress is now getting an object lesson in tinkering with incentives. Is the tax code supposed to discourage marriage? If the penalty is abolished, will more people take the plunge into wedded bliss? If President Clinton vetoes a bill ending the marriage tax penalty--the Senate passed a version Tuesday--does that mean he’s against marriage?
The possibilities are endless, and outrageous, once Congress starts creating incentives for social and economic behavior.
Americans are taking a close look at whether they should manage their financial futures or trust the government to do it. This economic boom has given them confidence that they can do a better job with their own money than government can.
And that’s the Savage Truth.
Terry Savage is a registered investment adviser for stocks and commodities and is on the board of directors of McDonald’s Corp. and Pennzoil-Quaker State Co. Send questions via e-mail at email@example.com. Her third book, The Savage Truth on Money, recently was published by John Wiley & Sons Inc.