Brad DeLong approvingly quotes Edmund Andrews' piece in the New York Times on estate tax repeal, slated to be among the first bits of business taken up by the Senate when it returns from the August break. While there is no question that the populist rhetoric employed by the administration and its allies in support of repeal does mistate the case significantly (populist appeals used to obfuscate and distort an issue? No, sir, the Left would NEVER do that!) I don't see how Andrews' piece is any less misleading than the "Republican con game" DeLong wishes to assail.
As Michael J. Graetz and Ian Shapiro of Yale recount in "Death by a Thousand Cuts" (Princeton University Press), their entertaining account of the repeal movement, opponents of the estate tax have already achieved a remarkable political feat by building broad public support for abolishing a tax that currently affects only 2 percent of all estates...
Only 2% of estates PAY the estate tax. The percentage that the tax's existence "affects" is significantly larger, since most individuals with estates sizeable enough to be subject to the tax have the foresight to plan around it.
The nonpartisan Joint Committee on Taxation estimates that full repeal would cost $290 billion over the next 10 years, but that calculation understates the true cost because full repeal would not occur until 2011.
Once the estate tax was fully repealed, the Treasury would lose more than $70 billion a year in today's dollars. Over the first 10 years of full repeal, the cost would total more than $700 billion, plus interest.
That's a remarkably precise projection to offer on a subject that no sane person believes he could predict with any measure of reliability. Estate taxes are applied to assets, not income. The bulk of those assets are in real property. Are you willing to bet that the same sort of run-up seen over the last five years in housing prices will continue unabated through 2021? I'm certainly not.
It's not at all inconceivable that aggregate inflation-adjusted asset prices will drop, rather than rise, over the coming decades or that the Joint Committee's estimate is an overstatement of future potential estate tax liabilities, rather than an understatement.
Assuming that the government is still running an annual deficit in 2011, which is more likely than not, the total 10-year cost would be close to $1 trillion.
Holy broken window fallacies, Batman! Leaving aside the fact that consideration of whether to tax inheritances should be an altogether separate issue from whether the budget is balanced (there's no reason estate tax proceeds couldn't be offset by taxes on income or consumption or by, oh, you know...SPENDING cuts, just to throw a wild idea out there) you can't just tack on debt financing to the "cost" of estate tax repeal (I still bristle and grit my teeth at this nomenclature that regards NOT taking people's money away from them as a "cost") without making at least a cursory attempt to account for the effect of having those funds available for investment in productive ventures.
For that matter, you can't assess what the government would lose by estate tax repeal without accounting for the ways the present system cannibalizes income taxes. Among the more obvious of these are the effects of the gift tax exemption -- which allows tax-free gifts of up to $11,000 per-year to as many people as the giver wishes -- that often results in transfers of interest- and dividend-yielding assets from givers who would have paid the highest marginal income tax rates to recipients who tend to be in the lowest income brackets and thus pay much lower rates.
Or, for that matter, you can't ignore the much ballyhooed charitable trust exemption. Opponents of repeal often point to the impact repeal would have on charitable bequeathments. I tend to think they overstate the case somewhat, but if the impact truly is significant, then having those funds invested in taxable, income-bearing assets is bound to produce more tax revenue than if they were held by a tax-exempt trust or foundation.
And neither does it take into account the taxes that would be collected either on new investments that would otherwise never have been made were the estate tax still in place, nor the potential gains from redeployment of millions that would have otherwise been devoted to compliance with the tax, or the many billions that would have been spent on the estate planning industry -- a huge deadweight cost if ever I saw one.
It is for these reasons that Alicia Munnell, a former member of President Clinton's Council of Economic Advisers, estimated that the revenues generated by the estate tax were more or less a wash when compared to the costs of imposing it.
A compromise being floated by Senator Jon Kyl, Republican of Arizona, could be almost as expensive. Indeed, because of a strange wrinkle, the compromise could end up being far more generous to many heirs than outright repeal...As a practical matter, Mr. Kyl's approach would eliminate the estate tax for more than 99 percent of all families and greatly reduce taxes for the few who owed anything at all. If the $3.5 million exclusion were in effect in 2000, the Congressional Budget Office estimated, only 3,676 estates - about 0.15 percent of all estates - would have had to pay any tax. But the proposed compromise also comes with an important twist that could make it more expensive than the $53 billion a year estimated by Congressional tax scorers.
The twist is that the proposal would retain a big tax break that is supposed to disappear along with the estate tax. That break is known as the "stepped-up basis," and it means that an heir does not owe any capital gains taxes on any increase in value of property during the life of the person who died.
The intent of Kyl's bill is to avoid the perverse effect likely to proceed from eliminating the step-up provisions of the code along with estate tax -- it would mean that those who initially got in under the estate tax exemption and paid no tax on their inheritted estate would, with repeal, suddenly be expected to pay potentially large capital gains based, not on the asset's value at inheritance, but based on profits over its INITIAL value.
My biggest problem with the Kyl compromise is that it would seem to signal the senator feels no pressing need to cut the capital gains tax, itself, below the 15% threshold.
And then we come to this :
That's why it is misleading for opponents of the estate tax to claim that it is a double tax on earnings that have already been taxed once.
In many cases, that's not true. "A lot of assets that passed through very large estates have never been taxed and never will be," said Mr. Graetz of Yale. "It's a very big issue."
So, in other words, despite having paid income tax on the original earnings, and sales taxes on things purchased with those earnings, and further income taxes on interest and dividends that investments made with those earnings yielded, and property and luxury taxes on the holding of assets purchased with those earnings, unless you ALSO pay capital gains taxes on the appreciation of those assets -- which ends up largely being a tax on inflation, despite the fact that everyone must already pay that tax through the reduced value of savings -- AND another tax on intergenerational transfers of those assets, then the assets were "untaxed."
Talk about your creative accounting schemes.
I've never really understood the apoplectic fits that the estate tax issue tends to inspire in the Left. It's true that Republicans have been disingenuous in selling the notion that the tax applies to many more people than it actually does, but how is that any worse than selling opposition to repeal based, not on any sort of substantive policy or economics basis, but purely on the basis of class envy?
For my part, I tend to think that, at a time when savings have dropped essentially to zero, enforcing a tax that encourages excess consumption by penalizing long-term capital formation just might not be the best idea.