Both the House and the Senate have had repeal--or at least a 'compromise' drastic reduction--of the billionaire's estate tax on their to-do dockets for this session of Congress. See, e.g., prior A Taxing Matter postings here (describing 'compromise' proposal passed by House in June), here (describing Senate decision not to repeal), here and here (noting problems with 'compromise' proposals) and here (cumulative postings on the estate tax since July 2005); House Votes to Cut Estate Tax, CBS News Stories (describing House bill reducing the estate tax rates to capital gains rates and eliminating estate tax altogether on more than half of the wealthy estates currently subject to it, in a context where the number of estates has already been reduced from about 30,000 in 2004 to about 12,000 in 2006, and at a 10-year cost of around $300 billion (or more, if capital gains taxes are reduced even further as desired by the current majority); Estate Tax--repeal or revision? Tax Policy Institute (describing Senate bill and various analyses of possible changes to current estate tax); GOP Bid on Wages, Estate Tax is Blocked , Washington Post (Aug. 4, 2006) (noting Democrat resistance to linking minimum wage increase with estate tax repeal as election season ploy).
Some people in Congress--especially a few stalwart souls in the Senate--continue to resist the pressure from the well-funded lobbyists (see here for a discussion of those behind estate tax repeal) to further reduce government revenues that we need for safe harbors, clean waters, protection from epidemics and support when we can't make it on our own in a globalized economy that sucks the lifeblood (jobs) right out of the country. So Roy Blunt, Republican Whip in the House, and Kevin Brady, Texas representative on Ways and Means, have admitted that the current Senate proposal to eliminate or reduce the billionaire's estate tax is dead in the water for the period prior to the November elections. See, e.g., Estate Tax Cut Dead Before Elections but Extenders to Remain as Sweetener," Daily Tax Report No. 184, Sept. 22, 2006, at G-2. They're still planning to tie minimum wage increases to it, though, in hopes of bribing reluctant Congresspersons to support this absurd reduction in revenues during the lame-duck session after the election when they are least accountable to their constituents back home. Id.
Certain think tanks continue their outpouring of studies to support their position against the estate tax. The National Center for Policy Analysis (NCPA) is one which has played a role in arguing for repeal of the estate tax for several years. It has just published Wealth, Inheritance and the Estate Tax, written by a senior fellow at the Cato Institute and a graduate fellow at NCPA. The arguments presented, however, fall far short of convincing.
First, the authors suggest that opponents of estate tax repeal assume both that "inheritances are a major source of wealth inequality" and that "the offspring of wealthy families tend to be as rich as their parents are due to bequests". They then claim that inheritances are not the most significant indicator of wealth and that an individual's skill, education, intelligence and marital alliances are more important in determining household wealth than inheritances. These counter-arguments are in many way pseudo arguments, however. First, no one claims that inheritance is the only source of wealth but rather that inheritance of enormous wealth exacerbates inequality. The argument that individual skills and choices are a statistically larger factor in determining household wealth does nothing to debunk the inequalities created when inherited wealth is passed on. If we were all equally wealthy to start with, inheritance would be a muchlarger factor in the amount of wealth that everyone had, but it would not be very important in increasing inequalities. It is the fact that the vast majority of Americans do NOT inherit large estates (and are dependent on their own skills and choices and the vagaries of a class society that rewards those that have) that makes it even more significant that a select few of the upper crust are able to inherit huge amounts of unearned wealth. Any taxation of that wealth can provide a source of revenue to fund government programs and can assist, albeit only to a small degree, in rebalancing the allocation of resources.
Second, the argument about inequality has to do with the unearned advantage provided by inherited wealth. Whether that advantage accrues to all offspring or only to some (under primogeniture laws, for instance) is irrelevant to the fact of advantage to those who inherit wealth. If inherited wealth is spread out among a large number of siblings, a family's wealth may, but may not, be diminished across the generations. It will depend on the ability of one or more heirs to reconsolidate the family wealth over a short period of time. Dispersal of wealth is much better than concentration of wealth, as Stiglitz showed in his 1969 study, but the fact of sometimes dispersal doesn't gainsay the problem of oft-times concentration.
Third, the paper argues that the link between inheritance and wealth is tenuous because many 'households' that inherit have incomes of less than $200,000 per year at the time of inheritance. The question, however, is whether those who inherit are part of a larger family that has grown up with wealth. For example, if an emancipated 21-year-old grandson with income (at the time) of less than $200,000 inherits a $10 million estate, that does not suggest that there is no link between inheritance and wealth. The paper's authors seem to think that the fact that "only 16 percent of households expect to receive any inheritance, and only 2 percent of households expect to receive substantial bequests of $1 million or more" supports that argument that bequests are not a contributor to wealth inequalities. On the contrary, the fact that so few households receive significant bequests (which is a corollary of the fact that very few households are subject to the existing estate tax) evidences the role inheritances play in exacerbating inequalities.
The paper misuses statistics. It suggests that the fact that only about 17.5% of the wealthiest 1 percents' wealth is directly due to inheritance means inheritances aren't important. Of course the amount of wealth of an heir later in life won't be the same as the amount inherited. That misses the point about inherited wealth opening doors for even greater wealth. If a person inherits $5.5 million at age 21 and holds $32 million at age 65, odds are that much of the $32 million is due to the inheritance. That is, in fact, what the British study allued to in the paper demonstrates when it shows that about 60% of British males worth 100,000 pounds had inherited 25,000 pounds and that almost 70% of the variation in a son's estate could be explained by the size of his father's estate. That confirms the role inherited wealth plays in aiding future wealth accumulation.
The paper relies on empirical modeling of wealth and bequests and claims that American society is highly mobile. The New York Times study of class in America reached a different conclusion, finding that while some people do advance from lower class into middle class and some from middle to upper, class in America is much more stable than might be expected.
The paper makes three more arguments worth noting: First, that elimination of Social Security would permit bequests to reduce wealth inequality. This is a warped bit of logic, driven by the privatization ideology and particular model used. Here's how it goes. Since higher-income households save whether or not they receive Social Security, Social Security just lets them use it and save more to pass more on to their heirs. Poor people depend on Social Security, but its benefits are not transferable at death, so they have less to pass on. If only, the logic goes, we'd eliminate Social Security, inequality would be reduced as lower income families save more (to replace nonexistent Social Security and pass those savings on to their heirs at death. The counter-argument has more credibility. Lower-income people may well not earn enough to be able to save without Social Security. Lower-income people are more likely to use all their retirement savings by death than the wealthy are. Without Social Security, lower income people would be even worse off and have even less to pass onto their heirs.
The second argument is that the estate tax is just too small--at about 3% of federal tax revenues--to be worth redistributing and the effective estate tax rate--at about 14% even for the largest estates--is too low to make much difference. In a climate where the U.S. government has cut revenue sources for five years, increased spending on a preemptive war in iraq, and borrowed record amounts of money to bridge the gap (with a strong likelihood of ever-increasing debt service amounts to cover higher and higher interest rates), every bit of revenue counts. Eliminating 3% of federal tax revenues is not a step to be lightly taken, especially when, with debt service included, it will cost about $1 trillion over a full ten years.
The fact that the effective tax rate is so low is a direct result of policies put into place by proponents of estate tax repeal and by the ability of wealthy families to engage in estate planning to avoid the tax. The answer to that is not to eliminate estate taxation, but to eliminate the many "legitimate" loopholes (such as valuation discounts) that help the wealthy avoid tax and to ensure that estate rates and exemption amounts are reasonable.
Finally, the argument that the burden of the estate tax falls on the recipient is a ploy intended to encourage lower-and middle-income support for estate tax repeal. The fact is that the estate tax may be the only time that the realized gain in an estate is ever taxed, and much of it already escapes taxation. For wealthy estates, the estate tax is the tax that is due from the owner's lifetime of accumulation of wealth, much of which is appreciation that has gone untaxed throughout the life of the owner. The recipient of the inheritance is blessed with an unearned windfall, even when there is a significant estate tax.
Mike Sharpe has an interesting article entitled The Heavy Burden of Weath in Challenge, 121 (September-October 2006). It is worth quoting in part.
Most of the top corporate and bank officials come from the wealthiest 1 percent of the American population, which owned 57.3 percent of all business equity in 2001, while the bottom 90 percent owned 10.4 percent. For all practical purposes, the wealthiest 1 percent is an upper class. Of course, the dividing line between the lower upper class and the upper middle class is also arbitrary, but the fact that there is a wealthy American upper class is not. ... Pundits who argue that it doesn't matter because families are entering and leaving the upper class all the time miss the point. The same could be said of the old aristocracies of Europe, but the aristocracies themselves endured as an institution. The American upper class also endures as an insitution. It wields power by supplying the most powerful American organizations--the largest corporations and banks, the most influential policy-making groups, and the federal government--with a disproportionate number of top officials. And many families remain in the upper class for generations, just as did members of the old aristocracies.
Recent Comments