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Thursday, March 02, 2006

Estate Taxes and Family Values Tax Rhetoric

Senate Majority Leader Bill Frist has stated that he will push through permanent repeal of the millionaire's estate tax this spring.  "Mark it on your calendar, this May I'll bring it to the Senate floor," he warns.  Feb. 13 2006 Wall St. J. at A6.  Given the vehemence of the threat (or promise, for those aching to see millionaires pass their estates taxfree to their heirs), it is worth taking a few minutes to consider what the fuss is all about.

Here's a sample of the rhetoric on the repeal side.  A tax that is only paid by multimillionaires is labeled the "immoral" "death tax" and accused of "destroy[ing] hundreds of thousands of jobs every year and forc[ing] many family-owned businesses and farms to shut down."  Philip G. Kerpen, Bury the Death Tax, The New York Sun, February 16, 2006.  Kerpen, policy director for the Free Enterprise Fund, goes on to claim that the estate tax rate of 45% is "confiscatory" and that "thousands of Americans, including many World War II veterans, are having their estates seized."  Id.

Those claims are way overblown.  Very few (if any) family farms have been lost because of the federal estate tax, since the tax Code provides up to 14 years to pay any tax that may be due on amounts in an estate above generous exemption thresholds.  Those same generous thresholds mean that only the largest estates pay any tax at all.  See my discussion of these issues, and the way the temporary repeal of the estate tax enacted in 2001 works, in this post at A Taxing Matter.

Although the revenues from the estate tax are not nearly as substantial as those from income taxes, they are not insignificant.  More importantly, the estate tax accomplishes some level of redistribution at a time when income inequality in America is on the rise: the primary beneficiaries of economic growth are the super-rich at the very top of the top quintile of the income distribution chart.  The threshold for estate taxation is set by the exclusion amount--$2 million today and scheduled to rise to $3.5 million by 2009.  Accordingly, ordinary Americans with minimal capital assets and annual incomes below $100,000 simply do not have to pay the federal estate tax.  The beneficiaries of repeal are the country's multimillionaires.

The repealers' use of  the term "death tax" to paint the government as a heartless interloper at the funeral of the decedent may sell well in trying to persuade the typical American who would never be subject to the estate tax that they ought to worry about it.  It misses the boat, however, in terms of assessing the best time for the government to collect its share of an entrepreneur's increase in wealth.  What better time than death could there be to pay a tax on the appreciation that builds up over a lifetime of holding capital assets?  If some sales are necessary, they will unlock capital from tired, old forms for investment in human capital expansion--education, basic scientific research, and the many other essential programs that are supported by taxation.   

But these arguments  and the many others that can easily be trotted out in favor of retaining the estate tax are, of course, not the point.  As Dick Kaplan pointed out in his review of Death by a Thousand Cuts: The Fight over Taxing Inherited Weath by Michael J. Graetz and Ian Shapiro, "the effort to repeal the estate tax is based on political, even moral, philosophy."  58 National Tax Journal 831 (Dec. 2005).   Graetz and Shapiro persuasively demonstrate that the estate tax assault has been led by a group of "true believers and crusaders" who have convinced small business owners, whatever the truth of the matter, that the estate tax is their nemesis.  Lobbyists can be effective in bringing about change  through stories (whether true or not) with which ordinary Americans can identify.  It is even easier to convince Americans to worry when "40 percent of Americans believe that they are in the top one percent ranked according to wealth."  Id. at 833.

This story of the estate tax repeal movement is, perhaps, one of the more worrisome aspects of the way tax policy is being made in America today.  Most Americans are ill-informed about tax and economic issues, and they are easily misled by stories that pull at the heartstrings or threaten the dreams that make up the American "up by the bootstraps" myth.   Bush's standing by a family of four and proclaiming that "the average American family" would enjoy an $1800 tax cut from the 2001 tax legislation was both true and false at the same time, but the falsity was too subtle for many Americans even while the truth meant they were being taken for a ride.  In its push for repeal of the estate tax and flattening of the income tax rates, the Tax Foundation's use of Ozzie and Harriet as exemplars of the middle class, which they redefine as a "values" class rather than an income distribution class, is similarly misleading.  The  new "middle class" ends up being the best off  of the income distribution groups, and the single moms and other nontraditional families who do make up a large portion of the middle class are treated as less worthy of concern and protection.   See here for further discussion.   

Organizations with considerable funding and broad ideological agendas are busy pushing an entire package of tax-and-benefit ideas this way, from repeal of the estate tax to elimination of all taxes on capital to privatization of Social Security.  There is a small group of organizations fighting to preserve a more progressive tax system and arguing for long-term fiscal responsibility--groups like Citizens for Tax Justice, the Center for Budget and Policy Priorities, and United for a Fair Economy.  They have a large job ahead of them to get out the stories and images that will speak to ordinary Americans.  The topic needs to be no less than saving the broad middle class.

Posted by LindaMBeale on March 2, 2006 at 12:26 AM | Permalink


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"Bush's standing by a family of four and proclaiming that "the average American family" would enjoy an $1800 tax cut from the 2001 tax legislation was both true and false at the same time, but the falsity was too subtle for many Americans even while the truth meant they were being taken for a ride."

True and false? It was a tax cut. Completely true. Those who paid tax, received technically a rebate. Why would anyone who didn't pay in tax get a rebate. They wouldn't have paid anything in in the first place. I'm sure when you send in for a rebate for a computer, battery, etc., you would need a receipt, correct? Why? Becuase it is only for the ones who bought in.

Posted by: Brian | Mar 20, 2006 3:17:13 PM

I think we differ on the extent to which we believe a laissez-faire economy is a zero-sum game (in my view almost never), but that's an old debate and not one I was trying to get into. My point was just that inequality-over-time should be talked about in conjuction with standards-of-living-over-time.
Modern social and economic inequality is a tremendous problem, but I think it has more to do with short-term structural change on the one hand, and bad but well-intentioned policies (e.g., support of our current public school system) on the other.

Posted by: JP | Mar 2, 2006 11:27:53 AM

JP--take a look at this article from the Economist:


(hardly a left-wing outfit)

and give me a sense of how income gains to a top 0.01% that utterly dwarf gains by the rest of society benefit the rest of society.

Perhaps some of this money goes into R&D that eventually helps all....but quite a bit goes toward the type of spending for positional advantage that Robert Frank has described so well in books like The Winner Take All Society.

Posted by: Frank | Mar 2, 2006 10:55:35 AM

"This is part of the story behind the astonishing rise in inequality in America."

It's also part of the story behind the astonishing rise in quality of life around the world.

Posted by: JP | Mar 2, 2006 10:30:56 AM

Great post. A recent Krugman column noted that while income gains to college graduates in general rose by about 1% per year from 1970 to 2002, those in the 99.99th percentile saw a gain of about 437%. This is part of the story behind the astonishing rise in inequality in America.

Posted by: Frank | Mar 2, 2006 10:14:59 AM

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