One of the patterns that we see in discussions of tax bills is that people generally find the statistics that they want to support the type of reform they have decided they want. Yet if you look closely at the assumptions underlying those statistics, it becomes possible to separate the wolf in sheep's clothing out from the flock.
It's not any different in the current debate about the millionaire's estate tax. In 2003, the American Family Business Institute, formed to protect the heirs of super-wealthy multimillionaires from having to part with some of their unearned wealth through the estate tax, hired Wilbur Steger and Frederick Rueter of CONSAD Research Corp. to figure out how much it would cost to repeal the millionaire's tax and replace it with a limited carryover regime (i.e., essentially the system that would exist for the one year of estate tax repeal under current law in 2010).
The CONSAD study, not unsurprisingly, concluded that there would be more money after repeal, by $1.74 billion for the period from 2004-2015. But that study is based on a slew of flawed assumptions that overestimate the amount of money brought in by heirs' sales of estate assets and underestimate the amount of money lost through estate tax repeal. John Irons, the director of tax and budget policy at the Center for American Progress, provides a concise examination of those "fundamental flaws." Commentary Understates Cost of Estate Tax Repeal, 108 Tax Notes 241 (July 11, 2005).
Irons notes that the pro-repeal camp assumes that the limited carryover basis approach can be implemented, in spite of the ultimate rejection of that approach when tried in the 1970s as simply unworkable. The pro-repeal camp also assumes that repeal would lead to a surge of tax revenues from realization of capital gains.
Those estimates just don't make sense. First, they assume there are 25% more unrealized capital gains than the best estimates for large estates currently show. Irons notes that reliable estimates suggest that about 56% of the value of estates worth more than $10 million consists of untaxed capital gains. The CONRAD study, however, assumes that 70% of such estates is unrealized appreciation. What is the source for this significant upward estimate? It is anecdotal and unsubstantiated.
Second, the CONRAD study assumes that all heirs will sell their entire portfolios within 3 to 5 years. This is particularly unreasonable, since one of the reasons that the pro-repeal camp gives for repeal, as noted by Irons, is that paying the estate tax may force heirs to sell off long-held assets that they would rather hold onto for long term. In fact, heirs are likely to hold onto assets considerably longer after repeal, since there would no longer be a uniform step-up in basis allowing them to sell tax free!
Third, the CONRAD study underestimated revenue loss from repeal of the estate tax. It suggested $201 billion would be raised by estate taxes between 2005 and 2014. Irons notes that number should be 310 billion, based on CBOs figures. Furthermore, the loss of revenues also should include reductions in income tax estimated by both Treasury and CBO.
For all ordinary Americans who earn average wages and have few assets other than their homes and a few personal items, one fact from a 2001 study by Poterba and Weisbenner mentioned by Irons is especially worth remembering. Based on 1998 estate tax data, eliminating the millionaire's estate tax and providing for a capital gains tax at death (with only a $250,000 deduction, under the Poterba study assumptions) would provide an average tax savings of $672,700 for those multimillionaires who are the only ones subject to the tax.
For another analysis of the reasons why repeal of the millionaire's tax doesn't make sense, see this report issued by the Center for American Progress after the House passed its repeal bill this year.
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