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

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

[Raza]

Excellent post, Linda. Thank you for covering this in detail -

[Richard Knox]

I think you can build a case to the effect that current crisis was caused by passive investors hiring investment managers to get them good returns. The scramble for higher returns certainly was not poor workers, or business owners running firms that they owned.

The great pool of money consisted of wealth such as inheritances? no?

Raise the tax rate, and take the money away from these fools.

[LindaMBeale]

Good point, Richard. The problem with passive investment by the super-rich who have too much money on their hands is that they want to get rent profits. Except in rare cases, those kinds of returns are achieved in speculative investments, high leverage, and exotic financial instruments. The estate tax is another way to dampen the speculation that led us to this wacky financial crisis.

[Michael]

The Estate Tax does 2 things: it lines the pockets of life insurance companies to the the tune of $12 Billion a year (on second to die policy premiums) and it forces small businesses to either close or cut back on operations, both of which cost American workers JOBS. America needs jobs NOW. The fact that anyone can support this tax shows how their class warfare ideology has isolated them from reality. For the truth about this tax see www.estatetaxtruth.org

[LindaMBeale]

Michael
Next time you comment here, don't just repeat the same old arguments funded by the coalition for wealthy families.

And answer these questions--who funds "estatetaxtruth.org"?; what is likely their self-interest in having no estate tax?; and are you a part of the organization or its funders?

YOU ARE MERELY REPEATING THE SAME MISLEADING PROPAGANDA OF THE ANTI-TAX GROUPS, WITHOUT SUBSTANTIATING THE ARGUMENTS. And you are not bothering to answer the strong counter-arguments to those positions.

1) Congress can legislate limitations on the planning provisions that allow wealthy taxpayers to plan out of the estate tax. That includes controlling/restricting the use of insurance, if it so desires, because while insurance is not a per se bad idea, it may be that the Code needs to treat some types of insurance in different ways than it currently does (for example, it is not clear that it is reasonable for life insurance proceeds to be excludible). The answer to "there are gimmicks that make the estate tax raise less than it should" is to get rid of the gimmicks, not to get rid of the estate tax.

2) There is very scant evidence that the estate tax is a significant hindrance to small businesses. Small businesses are typically so far below the estate tax exemption amount that it is irrelevant for them. Small businesses that have to pay some estate tax likely pay it at an effective rate that is less than the current 15% rate for capital gains.

3) the estate tax may well be a spur to small businesses and job creation. To the extent that do-nothing heirs do decide to sell to pay the estate tax, that means that resources should be better allocated, rather than "locked in" to historic uses. There is no economic reason that the government should assist wealthy owners in perpetuating their families' ability to lock in capital to particular businesses for generation after generation.