UPDATE:  The Senate leadership decided that the partisan divide was too great to address tax issues, including the ticking estate tax time bomb, until after the November elections.  Shame on them.  Rational and careful estate planning by the nation’s affluent citizenry has been damned by partisan politics.
 
It really shouldn't have been that difficult to reach a compromise over the past year between the estate tax proposals the House passed last December, which kept in place the 2009 end-of-year benchmarks (a 45% tax rate on estates larger than the $3.5 million individual exemption), and the long-standing Republican counteroffer, reaffirmed in their just-presented Tax Hike Prevention Act of 2010 described earlier in this blog.

The Wall Street Journal opines that "a key to an eventual compromise could be on the emotional issue of the estate tax, where a possible compromise would see a return to the 2009 rate of 45%, with an eventual reduction to 35%."  Hopefully this opinion is not overly optimistic.  The Journal doesn't speculate as to the possible compromise of the individual exemption levels between the $3.5 million in the House-passed bill and the $5 million favored by key Senate Republicans (and Senate Democrat Blanche Lincoln of Arkansas).  
 
Lame duck sessions of Congress are notoriously unproductive.   And after November 7, there’s going to be an unusually large number of lame ducks in both the House and the Senate.  Without legislative action by the Democratically-controlled 111th Congress, the Bush tax cuts, as they were designed to do, will expire at year end.

The 111th Congress is back, confronting the key issue of the extension of the Bush tax cuts of 2001 and 2003.  Amidst the partisan sound and fury, progress may have been made on a key component of the debate—the future of the estate tax or, as the Republicans prefer to call it, the death tax.  Death and taxes are an innate part of our culture, so it is particularly galling to its citizens when a partisan and dysfunctional Congress can’t reach policy agreement over death taxes.  The result has been chaos in estate planning.
 
The underlying culprit is the way in which the Bush death tax cuts were written.  The blueprint was indeed for the elimination of the estate tax in 2010 ONLY, and then its reinstatement at a very punitive level in 2011.  The 111th Congress has wrestled with this contentious issue, with the House of Representatives voting 225-200 in early December of 2009 to make permanent the year-end 2009 estate tax rate of 45 percent on estates larger than $3.5 million per individual and $7.0 million per couple.  Every House Republican voted no. 
This House-passed measure didn't find any traction in the Senate.  And as written in the Bush tax cuts, the estate tax became zero on January 1, 2010, but with a huge fly in the ointment.   Without any further legislative action, come January 1, 2011, estate taxes will revert to the pre-Bush tax cut level of 55 percent with an individual exemption level of only $1 million ($2 million for a married couple).  The bill the House passed at the end of 2009 never came up for a vote in the Senate in 2010.  The Republican-proposed alternative was a 35 percent estate tax rate on estates over an individual unified exemption amount of $5 million.  Despite the support of at least one Democrat, Senator Blanche Lincoln of Arkansas, the Republicans didn't have the votes to pass their alternative in the Senate.  And Senate Democrats didn't have the votes to break the Republican filibuster against the House-passed language.
 
Fast forward to September 14, 2010.  Senate Minority leader Mitch McConnell joined with the ranking minority member of the Senate Finance Committee, Charles Grassley, to introduce the Tax Hike Prevention Act of 2010.  In introducing this comprehensive bill extending all of the Bush tax cuts, Senator McConnell specifically noted that the legislative proposal "provides for a 35 percent death tax rate, a unified exempt amount of $5 million (per individual), indexed for inflation, and a stepped up basis for inherited assets."  While this specific Republican estate tax proposal in the Tax Hike Prevention Act doesn't break any new ground, it also doesn't call for the permanent elimination of the death tax or any temporary extension of the present 2010 estate tax level of 0 percent.  It faces criticism from tax libertarians for not having done this.  Hopefully, it will create an opening where politicians of both parties will compromise before December and agree to a new and permanent estate tax rate and an individual exemption level in place of the prescribed, punitive estate tax language in the present law.  This would allow taxpaying, law abiding Americans of both political parties to engage once again in rational estate planning.  This should not be a partisan issue.

The Broken Senate Confirmation Process
 
UPDATE: Senate Banking Chairman Chris Dodd (D-Connecticut) and Senator Richard Shelby (R-Alabama), the committee's ranking member, told the Reuters Washington Summit meeting on Monday that the Senate could vote quickly on two of these nominations.  IT’S TIME.
 
San Francisco Federal Reserve Bank President Janet Yellen was nominated to become a Federal Reserve governor and the Federal Reserve's vice chairman on April 26, 2010. In July, the Senate Banking Committee voted to confirm her by a bipartisan 17-6 vote.  Senate Shelby voted "no," citing her inflationary bias—just what the Fed needs as it struggles with the tepid growth of our economy and deflationary pressures.  Dr. Yellen’s previous posts include chairing President Clinton's Council of Economic Advisors from 1997-98 and serving as a member of the Fed's Board of Governors from 1994-1997.
 
The second nominee that received the Dodd-Shelby nod was Sarah Bloom Raskin.  Mrs. Raskin’s previous posts include serving as Maryland's commissioner of financial regulation from 2007-2010, managing director of Gene Ludwig's Promontory Financial Group, and counsel to the Senate Banking Committee from 1993-1997.  At Senate Banking she worked under two chairmen—Don Riegle (D-Michigan) and Alphonse D'Amato (R-NY)—who had very different philosophies.  Commissioner Raskin's state banking regulatory experience is unusual, needed and welcomed. 

Both Yellen and Raskin would significantly strengthen the Board.  However, even with these two additions, it would still not be at full 7-person strength.  Senator Shelby has been successful in slowing down the confirmation of MIT Professor Peter Diamond for the third open Board seat.
 
And, once Yellen and Raskin are confirmed (hopefully very, very quickly), this could trigger other Board changes.  Governor Kevin Warsch, who came to the Board from the Bush White House and helped save the country and Wall Street during the great financial collapse of 2008-09, may be getting restless. But he might want to stay around for the upcoming great debate and political main event—the restructuring of Fannie Mae and Freddie Mac as they emerge from nationalization.   Warsch was on point for the Bush administration on Fannie and Freddie issues.

On September 1, 2010, a friend and former colleague, Donald Kohn, retired from the government after 40 years of service.  He was scheduled to retire a few months earlier, but his boss asked him to stay on.  Kohn began his government career at the Federal Reserve Bank of Kansas City in 1970 and moved to headquarters—the Board of Governors of the Federal Reserve System—in the summer of 1975.  I joined the Federal Reserve also in the summer of 1975 from the Ford White House. 
 
When Kohn left the Fed, he was its highly regarded vice chairman.  With his departure, the seven-person Board of Governors—one of the most powerful independent agencies of the U.S. government—is down to four members.  The Senate has not been able to vote on Kohn’s nominated successor.  It has not been able to vote on the other two nominees for the other open Board seats. These are all highly qualified individuals.  So in addition to being tremendously understaffed, the Board is now without a vice chairman.   

This is far from an ideal situation.  It may be worth mentioning that on 9/11, then-Fed Chairman Alan Greenspan was travelling and Vice Chairman Roger Ferguson stepped into the communications void at a vital time for our nation.  Also, having only four governors changes the formulation of monetary policy.  The Federal Open Market Committee (FOMC) makes the Fed’s key monetary policy decisions.  Its voting members are the seven members of the Board and five Federal Reserve Bank presidents.  If there are only four governors, the five voting Federal Reserve Bank presidents hold the majority of votes.
 
It also weakens the Fed's regulatory policy infrastructure at the very time the Congress has given the Federal Reserve enhanced regulatory authority to prevent future financial crashes.  And our system of government and the effective governance of the Fed are based on the assumption that its governors, who have gone through Presidential nomination and the advice and consent of the Senate, will be the FOMC’s voting majority. 

Senate inaction on the pending nominations undermines and weakens the Federal Reserve as an institution.  The Senate’s growing governance problems are beginning to undermine other institutions of our functioning democracy.  To our nation’s increasing detriment, the Senate's confirmation house is not in order.