More on the Estate TAx--the Heritage Foundation speaks gobbledygook

note: for some reason, the original item posted under the wrong date (it wasn't completed until Nov. 11 but published as though it were Nov. 10, and then also posted as the right date).  I'd delete one posting, but there are comments on both, so I will leave both up.  Sorry, in advance, for the confusion.

hat tip to Tax Prof and its commenters

The Heritage Foundation, I'm afraid I've concluded, is not a "think tank" at all--it's a propaganda tank.  And the propaganda it spews tends to be in support of ideas that may sound sort of okay if you don't probe them very deeply but are apparently intended to further the benefits of society for the elites who already enjoy most of the benefits of society.

Look at their most recent take on the estate tax.  Beach, Seven Reasons Why Congress Should Repeal, Not Fix, the [Estate] Tax (Nov. 9, 2009).  (Yes, I "corrected" the title--after all, the use of "death tax" is an attempt to use emotions about death to move people to hold particular positions about the tax.  And there's no such thing as a tax on death--death is not taxable income.  What is taxed is the estate left by the decedent to heirs or beneficiaries who did nothing to earn it.  So estate tax is the correct name, and death tax is a manipulative play on words.)

I've argued here, of course, that the current fiscal crisis (brought on by many of those people, by the way, whose estates will likely be big enough to be subject to the estate tax if we are not so foolhardy as to repeal it before they die) calls for rethinking the "tax cuts are always good" mentality that was set in motion with Ronald Reagan's "privatization, deregulation, militarization, and tax cut" dogma.  We do need to rebalance our budget once we are through this crisis, and a good place to begin is by getting rid of tax loopholes that don't make sense and retaining or even increasing taxes that make a lot of sense.  The estate tax is a tax that makes a lot of sense and should probably be increased, not eliminated.

(ASIDE:  Reagan is often treated as though he was a great philosopher.  What he was was a master of sound bites and a person with rigid views that were self-contradictory.  You can't increase military spending, privatize government function at great costs to the government, and cut taxes to pay for those new subsidies for private business and the military-industrial lobby without running up huge deficits.  So he had a big tax cut, and then tried to make up for it with a bunch of tax increases.)

So how does the Heritage Foundation seek to justify its proposal for repeal of the estate tax?  It provides seven arguments:

1) the estate tax discourages savings and investments

True, to some extent, but probably much less so than proponents of repeal would have us believe.  Any tax discourages what is taxed, so labor taxes discourage labor and taxes on capital income discourage savings.  But much less so in the case of the estate tax (compared to a tax on wealth as it is accumulated).  The estate tax doesn't have much effect on living accumulators, because their goal is to accumulate ever more--if anything, the estate tax may encourage saving so that they will have "enough" to leave.  So while the Heritage Foundation says that the estate tax sends a signal in favor of consumption, the fact is that estates are continuing to grow at phenomenol rates. IN fact, we might well want to encourage the wealthy to consume more and even say that this might be a very positive incentive effect of the estate tax, if only it were true.  Wealthy consumption would reduce the size of the estate and limit the windfall power of plutocracies.

Of course, the estate tax doesn't have any effect once the one who gathered the estate dies--the decedent can no longer be incentivized to save or not.  The estate tax doesn't have any incentive effect on the people who acquire the estate (heirs, beneficiaries) since they are getting a pure windfall, whatever they receive.

2. The estate tax undermines job creation.

The Heritage foundation is claiming that the tax money is kept out of the investment stream and therefore undermines job creation.  This is just a restatement of the same argument in item one.

Again, no empirical evidence here, of course.  Right-wing economists consistently claim that the wealth in estates would be the source of powerful job creation entrepreneurialism if only we would leave that tax money as well to heirs, so they could invest to create jobs, but there's no evidence to support that claim.  Entreprenuerialism doesn't ordinarily come from wealthy heirs to estates sitting in their effortlessly acquired empires.  In fact, again, it is more likely that dispersal of big estates would do more for job creation than letting heirs continue to horde the wealth set aside by their benefactors in hidden overseas bank accounts or invested in emerging markets or in other ways passively collecting income as most capital assets do.  Even if letting heirs receive that tax money to invest rather than giving it to the federal government might create a few jobs, it is equally true that government spending with the same money creates jobs and perhaps does it better.  Heritage's argument here just amounts to the same old saw that government is less efficient at using money than the private sector is.  And again, this is simply not an established fact.  In fact, we have evidence to the contrary in many instances--there are numerous examples that privatization is less efficient/more costly at getting the same job done.  Take subsidized student loans compared to direct student loans without banks as intermediaries.  The first costs the government money (to subsidize the banks) while the latter makes money for the government.  Take Blackwater (now Xe Company).  It's employees are paid 2 to 6 times what soldiers are paid for doing the same job.  Not more efficient, and in fact more costly. and fewer jobs because each job is paid so much.  There are numerous examples that privatization is less efficient at getting the job done and that government may in some, maybe many, instances be better at job creation than rich guys hording wealth or buttressing up under-utilized family ranch empires.

3.  Estate taxes suppress productivity and wage growth

This is just another version of two which was another version of one, since what the Heritage Foundation says is that productivity and wage growth are suppressed because there is less investment that keeps businesses from buying tools and equipment that keeps them from hiring new employees.   As noted, maybe some investment isn't made that would have been made, but also government spending takes place that wouldn't have taken place.  Hard to be sure where the tradeoff is in terms of productivity and wage growth.  To the extent that the estate tax repeal amount would be horded in unproductive, locked in investments, releasing it to the government, which spends it back out into the main stream of the economy might well multiply the productivty much faster. 

4. Estate taxes contradict the central promise of American life--wealth creation.

Folderol.  The central promise of American life is not plutocracy--it is the promise that everyone has opportunity to live a decent life--to acquire life's necessities and to live secure in their homes.  There is in fact a conflict between that true conception of the central promise of American life and the conception forwarded by the Heritage Foundation, because if the wealthy elite is able to continue consolidating their stranglehold over the wealth of this country without contributing to the common good through taxation (as the capital gains preference, nontaxation until realization, and repeal of estate tax would mean), we will end up with a have and have-not society, with the haves living in gated communities and the have-nots left to struggle in a very rigid and immobile class structure without opportunities for advancement. 

5. Estate taxes hurt those who have tied their savings up in land

This is the same old canard that the estate tax causes the loss of family farms and ranches.  It's simply not even true, as has been explained countless times (there are special provisions to provide an installment payment so that the limited taxes due can be paid out of the income). 

Then the Heritage Foundation seems to suggest we should pity those wealthy farmers and ranchers whose land value has increased astronomically so that their immensely grown wealth means they do have some tax to pay and  they might end up deciding to sell some small part to pay whatever taxes are due.  So?  just because they own it in the form of land, we are supposed to say--don't ever pay any taxes, just continue to accumulate immense wealth, and pass it on to your heirs so that they can become a plutocracy?  I don't think so.

6. Estate taxes hurt African American business owners

 The Heritage Foundation only talks about African Americans when it is attempting to co-opt a group and get them to support something against interest.  This is not about African Americans but about businessmen--an argument that people who have businesses ought to be able to pass them along without being taxed.

7.  Estate taxes hurt women business owners

Again, this hasn't got anything to do with women.  It's about business owners, just like number 6.  A

nd there is no real showing, by the way, that the estate tax hurts small business owners.  The estates of small business owners are almost always below the exemption level.  The estate tax gets the Bill Gates (Microsoft) and Waltons (WalMart) type business owners. And they can clearly afford to pay some tax.  The Heritage Foundation in items 6 and 7 is simply trying to pull on heart strings.  In fact, there is no reason at all to let the Walton billions accumulate and consolidate power once Sam Walton is gone. 

This is pretty much a garbage piece.  Although Beach, the author, has a title with the terms "data analysis" in it, there is no data analysis in this opinion piece. There are three footnotes. One presents a very incomplete picture about the politics behind the Bush Congress's ridiculous bill dealing with estate tax (gradual decrease in the amount of tax collected until 2010, when the tax would be repealed for one year, but then the tax would spring back into life as it was pre-2001 when all of the Bush Congress's tax cuts died their natural planned death).  One is a quote to the author's own work claiming that estate taxes "kill the economy" (hardly credible, since the economy actually has done much better in periods of history when it was much higher than it is now, and performed only weakly under the Bush tax cuts).  One is work by Holtz-Eaken and Cameron Smith where they "present an argument" that repealing the estate tax--ie "investing" (if it was invested) the taxes saved--would create 1.5 million jobs.  That's a very weak piece itself.

For more comments, look at the commenters on tax prof.  I particularly like an anonymous posting, where he notes (again substituting the correct term and providing only part of his comment) that

1) lack of [estate] taxes encourages investment lock-in and inhibits efficient allocation of investments

2) lack of [estate] taxes inhibits job creation (see 1)

3) lack of [estate] taxes discourages the real central promise of American life--that hard work and smarts, and not being born lucky, are to be rewarded

4) lack of [estate] taxes discourages the 19th century view that wealth comes from holding huge tracts of under-utilized land.....

And there's Chet Hardy's statement (an excerpt only here):

Its just amazing that the same people who decry deficit spending (Sen. Jon Kyl) turn on a dime and advocate repealing the estate tax. That's $20 billion per year folks. To put that in perspective, that's enough to provide health care to every child who doesn't have it. Its enough to build a new High Speed Rail line every single year.

Comments

[Michael]

The heritage foundation may very well be a far right think tank, but on this issue they are not as wrong as you all think they are. Watch this video: http://www.youtube.com/watch?v=Urvkfi134Ew and then tell me that this tax does anything but line the pockets of big insurance companies and men like Warren Buffett, who I personally think has enough money.
The goal of the Estate Tax was to prevent the creation of an American aristocracy, do you all really think that has succeeded? The Kennedy clan, the Bush Clan, and others like them, the various ways lawyers have found to dodge the intended effect of the Estate Tax all to me mean that this is one tax that is ripe for repeal, as it produces very little federal income (and the tax revenue lost due to lost income tax is always an imponderable) does not succeed in its stated goal, lines the pockets of companies like AIG (that already have enough tax payer money), and basically has degenerated into a racket.
I too think that the rich should contribute their fair share, but I also think there are far more progressive and rational ways to achieve that goal than the antiquated Estate Tax.

[LindaMBeale]

Michael, note that the logic you are applying is--the estate tax should be good, but there are various gimmicks whereby the rich can avoid it, so gee, might as well just repeal the tax and give the rich people what they want, without any transaction costs!

The logic you should be applying is--the estate tax should be good, but there are various gimmicks whereby the rich can avoid it, so LET's REPEAL THE GIMMICKS so it isn't so easy to avoid.....

Besides which, if Congress would let the estate tax go back to the pre-2001 levels or something similar (like it is slated to do under current law), it would raise quite a bit of money annually--as one person put it, enough to fund some rather important projects (child health, rail, etc.) That's not petty cash. Even at $20 billion per year under the current emaciated form of the estate tax applicable to 2009, it is not petty cash.

[LindaMBeale]

Readers and Michael:

by the way, Michael didn't reveal that he is connected with the American Family Business Foundation, an anti-estate tax group.....Take his words (about wanting progressive taxation and about the "antiquated" estate tax), and his use of the populist dislike of wealthy aristocrats, with a grain of salt.

[John]

"Death Tax" is a very clever term cooked up by Frank Luntz. What are the only two things in life that are guaranteed? Death and taxes, so the saying goes.

Guaranteed! Everybody dies! Everybody pays!. Only it's not true about the estate tax. Only a very small percentage of heirs pays, those who inherit millions.

[Dave Cribbin]

Linda , your quote
" Entreprenuerialism doesn't ordinarily come from wealthy heirs to estates sitting in their effortlessly acquired empires." shows that you have missed the point in arguing for the estate tax.

No credible person is making the argument that heirs who inherit capital from their parents and grandparents are the front line entrepreneurs.
They are rightly arguing that the government confiscating capital from someone at their death reduces the amount of capital available at the margin to other entrepreneurs and thus reduces the ability of the economy to grow. Because the lack of capital always effects those who are at the margin it is the small business owner who pays the price not GE or IBM. Small businesses are the very group that are responsible for the majority of new jobs created in this country

Capital is the seed corn of economic growth, any farmer will tell you that when you start to consume the seed corn you are on the road to starvation.
All My Best
Dave

[LindaMBeale]

But Dave, you are missing the point. Your argument that estate taxes rightly paid on wealth accumulated during the lifetime of the decedent (which you inappropriately using a term that suggests that taxation of capital is an inappropriate taking (confiscation) rather than an appropriate taxation on wealth accumulation that may well have gone untaxed hitherto) reduces entrepreneurialism depends on several assumptions: 1) that the heirs aren't just going to leave the capital locked into the current investments--which may well be not the best allocation of resources and do nothing to help entrepreneurialism; 2) that spendthrift heirs won't just dissipate the capital in poorly managed sales/investments that do nothing to support entrepreneurialism (because they don't have the skills to invest wisely in ways that support entrepreneurialism); and 3) that the investments the heirs make will per se be a better way to invest capital that benefits entrepreneurs than the government's use of that same capital . In other words, Dave, your assumption of estate tax "support" of entrepreneurialism is just another variant of the Heritage Foundation conclusion that private investment is always good and always better than public investment. In fact, the lock-in effect with the heirs (that they may continue to keep the resources in the same investments) is likely negative in terms of supporting entrepreneurialism. The misplaced resources effect of spendthrift heirs who know nothing is likely to be a negative, whereas the government funding of needed infrastructure, etc. with government spending should have a good chance of being a wiser allocation of capital resources. Small busineses are indeed responsible for more entrepreneurialism. And there is no difference between a dollar spent by the government and a dollar spent by the undeserving heir as far as small businesses are concerned. The question is which spending is most likely to get in the hands of those that are inventive. What you are saying is that heirs will more appropriately allocate that capital than the government. I don't think so, which is why my point--that entrepreneurialism doesn't ordinarily come from wealthy heirs sitting in their effortlessly acquired estates" is an important one.

[Dave Cribbin]

Linda,

Again you miss my point, I am saying that the government confiscating capital by means of an Estate tax, by definition reduces the amount of Capital available in the private sector.

If there are five red balls on the table to fund business expansion and the government takes two there are only three left, some companies are not going to get the capital they need to expand , a number of the others are going to pay more for the capital they get , this is simple supply and demand stuff.You're just messing with me right?

This lack of capital shows up at the margins, again it's not GE and IBM who don't get the capital they need it's the smaller and newer businesses, the ones that create the jobs.

If you truly feel that the estate tax is so beneficial, why don't you advocate for the estate tax to be applied to every estate and that the rate be 100%?

All My Best Dave

[LindaMBeale]

Dave
you continue to miss the point, because you insist on asserting as though true tired old statements about private use of funding versus public use of tax monies.

Please don't use the term "confiscation"--it's simply wrong. Not to mention that it's a loaded term, intended to incite anti-estate tax views. It isn't appropriate, because taxation is not confiscation--it's the mode of paying for the many governmental services on which we all depend.

You continue to state--without support--that leaving all the money in an estate is good for growth because government use of tax monies deprives companies of money they need. That argument is deeply flawed for several reasons, including 1) the fact that leaving the money in private hands does not insure that it gets allocated to useful business needs--it may just as well end up in an offshore bank account that funds some oligarch's business in Hong Kong rather than funding some young entrepreneur's enterprise in the US; and 2) the fact that your assumption that government "takes the balls out of service" entirely misses the point that public funds are shuffled right back into the private sector in dollars paid to businesses and workers. And in many ways that may be a preferable allocation means compared to spendthrift heirs who are trying to sock their money away in Gibraltar or somewhere similar.....

Further, you are using straw man arguments. Nobody's arguing for a 100% estate tax. There are, however, strong arguments for a robust estate tax as I have outlined several times.

Your arguments for eliminating the estate tax are the tired old arguments that the wealthy have been making for centuries. Have you noticed though that countries with concentrated wealth among a very few families do not generally have broad economic growth, strong entrepreneurialism, or a decent standard of living for all their folk?

[Zack]

How does an argument get "tired and old"? It would seem that if there is any correlation between the age of an argument and its validity that correlation would be positive. Regardless, age is not a good way to evaluate the validity of an argument.

As to "tired", is the idea that if a valid argument is used too often it will lose much of its validity due to fatigue? More likely it is you, not the argument, that is tired of people disagreeing with you when your mind was long ago made up.

Perhaps I make too much of a figure of speech, but sometimes it can be revealing of a person's thought process.

The reality is that much of this disagreement result not from faulty arguments, but rather from differing first principles as to what constitutes fairness and justice. These concepts are hard wired in our more primitive brain structures based on long term evolution and the need for individual and collective survival. Unfortunately, as is clear to me from reading your blog, we are not all wired the same.

[LindaMBeale]

I tend to use the term "tired and old" to describe arguments that are reiterated over and over again without taking account of the counter-arguments. For example, the various groups supporting repeal of the estate tax have argued, over and over again, that family farms are lost to the tax or that small businesses are harmed by the tax--without even acknowledging that there isn't much evidence supporting those positions, and simply repeating the argument when it is countered with lack of evidence and some of the reasons for thinking that sales because of the estate tax could be a good thing if they did happen.