Dick Cheney Speaks Out In Favor of the Estate Tax

Ok, the title is simply untrue. But Dick Cheney's recently released income tax return does present a strong argument for the retention of the estate tax.

Ordinarily, the ability of an individual to reduce his or her income taxes through charitable deductions is limited to a certain percentage of the individual's income. In reaction to Hurricane Katrina, those rules were suspended with respect to charitable contributions made between September 27, 2005, and the end of that year. As a consequence, in 2005, Cheney was able to satisfy various pledges that he had made to charitable organizations that would otherwise had taken years to fulfill. Citizens for Tax Justice discusses Cheney's strategy here.

The CTJ report also claims that Cheney reduced his 2005 taxes by almost $1.1 Million due to the Bush tax cuts. CTJ does not explain how it made that determination. If it used the post-Katrina suspension of charitable deduction limitations in their calculation, its conclusion is simply not justified. The reason that Cheney had such high charitable deductions is that the tax law provided him with a strong incentive to cash in his Halliburton stock options and contribute them to charity in 2005. Absent the temporary suspension of the limitations on deducting charitable contributions, the contributions would inevitably have been made, but at a much later date. While taken as a whole, the charities to which Cheney directed his contributions received a Katrina-related benefit by getting their money now, not later, the Cheneys' total income tax bill, over time, would likely have been about the same.

Nevertheless, this brings us to the estate tax. As presently formulated, the estate tax generally falls on the estates of the wealthy and, most heavily, on the estates of the very wealthy. Within the estate tax are provisions that strongly encourage charitable giving. Some of these allow wealthy contributors to "double dip." Thus, in Cheney's case, he received a charitable contribution that wiped out any tax on the income on his stock options. (As reported by the Washington Post, "[t]he options largely were from Halliburton Co. . . . [with] [s]maller amounts came from companies for which [Cheney and his wife] had been board members, including Electronic Data Systems, Procter & Gamble, Lockheed Martin and Anadarko Petroleum Corp.") Furthermore, the net proceeds that Cheney would have realized had he exercised the options and taken those proceeds into income are also effectively taken out of his estate for estate tax purposes. Assuming that these proceeds would have been taxed in his estate at a fairly high marginal rate, one can reasonably conclude that the economic cost to him and his wife of each dollar of these charitable contributions was significantly less than fifty cents because of the tax savings provisions they were able to utilize.

As a practical matter, the Cheneys' contributions illustrate that tax incentives do work to "create" charitable contributions that would ordinarily not be made. After all, absent the provisions that increased the charitable deductions that the Cheneys would have been allowed to take in 2005, the charities would have had to wait for their money. There is no reason to expect that a similar dynamic is not at work in the estate tax area.

BTW, the WaPo story completely misses the post-Katrina change in the tax law as the reason that the Cheneys' contributions in 2005 were so high. Instead, it buys into the Cheney cock and bull story that the contributions were made in late 2005 because the "options were at a good value for the benefit of charity." Right. And the estate tax overly burdens family farms and small businesses and there are alligators living in the sewers in New York.