Death and taxes
Brother, can you spare $7,866,988,405,827.48?
July 23, 2005
There are basically two wings to the Republican coalition, "big tent" claims notwithstanding. They are, of course, the religious extremists and the economic flat-earthers. Each camp has become so rabidly insane that it's hard to refer to these groups by their more innocent sounding labels, such as values voters and economic conservatives.
The economic flat-earthers are incapable of coming to terms with the fact that their once proud tradition of austerity and individual responsibility has been rendered farcical by the ballooning imbalance of trade and federal budget deficits, even though the Reagan/Bush Sr. deficits and ensuing Clinton surpluses undoubtedly proved the folly of supply-side economics. The much vaunted Laffer curve is merely a standard bell curve applied to federal tax rates. It is silly for many reasons, mainly because the right has never articulated its obvious corollary, that there is an optimal tax rate. W.'s windfall deficits have unequivocally confirmed this folly, but what is data next to a taut ideology. And like any preternatural phantom, this one will keep rising despite evidence and the best efforts of real economists. This week's rightwing musings about taxes confirm the resiliency of ideology and the lengths that they will go to avoid facing the reality of bad economics.
MYTH: People are smartly fighting against the estate tax
One part of the liberal campaign to save the estate tax is to make it seem as if the only people who favor repeal are a few rich people who have bought off Congress with campaign contributions.
...Ever since people were first asked about abolishing the estate tax, strong majorities have favored repeal. A Wirthlin poll in August 1999, well before the estate tax repeal effort really got going, found that 70 percent of people favored phasing out the estate tax -- 50 percent strongly and another 20 percent somewhat.
...One explanation for these poll results is that people know that wealth is not stagnant -- today's poor may be tomorrow's rich, and vise versa. This perception is backed up by empirical research. A 1992 study published by the National Bureau of Economic Research found that between 1967 and 1977, 75 percent of people in the bottom 10 percent of the wealth distribution had risen to a higher bracket, with 1.2 percent rising all the way to the top decile. Forty percent of those in the top decile fell to a lower one.
...The estate tax has never been a significant revenue raiser for the government. Its elimination won't affect the budget meaningfully. Its main purpose is to satisfy the envy of those who want no one to be rich if they can't be. That's a poor justification for tax policy and a sufficient reason to get rid of the "death tax."
-- Bruce Bartlett, “Killing ‘The Death Tax’,” Town Hall, 7/19/05
REALITY
The estate tax absolutely should not be repealed. Originally instituted to raise revenues for the government during times of war, the estate tax was permanently incorporated into US tax code in 1916. The Economic Growth and Tax Reconciliation Act of 2001 is set to repeal the entire estate tax system in 2010 and the Bush administration is very adamant about making this revocation permanent, even though it will cost the government $60 billion a year and create a windfall for the very wealthy. Lost in this debate is a meaningful conversation about the true impact the estate tax has on Americans. For one, contrary to popular belief, the estate tax is not a tax on everyone, but historically has only been paid by the wealthiest 2% of Americans. The estate tax is also not inherently unfair to family farms and businesses, as the number of family farms and businesses forced to pay an estate tax is actually very small.
In reality, the estate tax is an attempt by the government to tax the appreciation of an asset. Most estates are comprised of assets that were purchased with previously-taxed income, but in the years following the purchase have increased in value. If any of these assets are sold prior to someone’s death, they would be subject to capital gains tax, so why should this appreciation go untaxed in the event of a person’s death? This is especially important when you consider that when assets are passed down, the assets’ costs are reset from their original purchase prices to their value at the time of inheritance. If estate taxes are abolished, any asset appreciation from the time of purchase till the time of inheritance would go untaxed, even in the event that the heir sells the assets after inheriting them.
The estate tax is a necessary component of the US tax code. The President and Congress may not be wrong in their assessment that the estate tax needs to be eliminated, but instead of eliminating estate taxes altogether, the smarter move for the US may be to a different form of the estate tax, such as instituting an inheritance tax. The main difference between an estate tax and an inheritance tax is the party that gets taxed. In the case of an estate tax, the tax is paid by the estate before any assets transfer to the heirs. The inheritance tax, however, is paid by an heir once they inherit their portion of the estate. The inheritance tax could be implemented in a variety of forms, all allowing special provisions for farms, businesses, spouses, and charitable donations.
Regardless of the ultimate path the American estate tax takes, the answer to the estate tax question is not to abolish it altogether, as this would only benefit the ultra-rich and, in fact, would continue to increase the deficit and take money away from other government programs. Instead the US should take steps to dispel fallacies about the current system and engage the public and elected officials in a discussion about how to make the system better, whether through the restructuring of the estate tax or the creation of an inheritance tax.
MYTH: The increase in tax revenues pouring into the US Treasury this year is vindication for W’s questionable tax cuts
John Spratt, the ranking Democrat on the House Budget Committee, seems especially upset that this revenue surge isn't coming from wage income, but rather from investment income--that is, the so-called non-withholding income tax collections, which have skyrocketed by some 30% this year. "These are typically taxes paid on one-time capital gains, bonuses, stock-options income that may not recur," he laments. Well, sure, Congressman, the 2003 reductions in the tax rates on dividends and capital gains seem to be resulting in much higher tax revenues on . . . dividends and capital gains. This is called the Laffer Curve effect, and we thank Mr. Spratt for validating it. If he wants those revenues to "recur," maybe he'll even vote to make those tax cuts permanent.
...
This revenue surge from investment income also rebuts the mantra that the 2003 tax cuts were a giveaway to the rich. Nearly half of all Americans have some kind of stock ownership, and thus have shared in these gains in investment income. And if most of the extra tax income is coming from capital gains and dividend payments, that would have to mean that the rich in America are paying more taxes, not less, as a result of the 2003 tax cut.
...There is a looming budget problem, but it has nothing to do with the Bush tax cuts or insufficient tax revenue. It is a government spending crisis, especially the liabilities that politicians have promised to retirees in Social Security and Medicare.
-- Editorial, “Windfall for Washington,” The Wall Street Journal, 7/15/05
REALITY
First of all, let’s dispel the myth that every American is equally benefiting from W’s 2003 tax cuts on dividends and capital gains. As CBS Marketwatch reported last year:
Unsurprisingly, families with the most assets and the highest incomes own the vast majority of stocks. The wealthiest 1 percent of Americans owned 33.6 percent of stock market wealth, while the poorest 80 percent owned less than 11 percent, according to an analysis of 2001 Federal Reserve data by economist Ed Wolff of New York University. The 2.7 percent of Americans with household income above $250,000 owned 40.6 percent of market value, while the 59.2 percent of Americans who make less than $50,000 held 12.1 percent of stocks. For the poorest 60 percent of American families, stocks accounted for less than 10 percent of total assets, compared with 28 percent of total assets of the wealthiest 1 percent.
The right’s theory that all are benefiting and therefore the tax cuts were worthwhile is similar to the estate tax debate—it is all about the right hoodwinking the general population into believing that they are benefiting from a policy that is obviously not benefiting them. Even Warren Buffett, who arguably stands to gain more than almost anyone from these new tax policies, called attention to the lopsided benefits of these tax cuts.
Aside from the obvious flaws of the everybody wins argument, the other problem with The Wall Street Journal’s argument is the one-time nature of the taxes that were paid in 2004. As John Spratt pointed out, as communicated above, taxes on capital gains are one-time payments. What will happen to tax receipts in 2005? Since capital gains do not represent recurring payments, it is not unreasonable to project that tax revenues may not remain at their current high levels in future years. Therefore, the right has a few more years of tax revenues to examine before declaring the capital gains tax cuts a success.
The other important fact to keep in mind is the source of the tax revenue increase. The right brushed aside Democrats’ concern that the revenue is coming from capital gains and dividend payments and not from wage income. The major contention of the Right is that the tax cuts W has pushed through Congress over the last 4 years have resulted in economic progress for the United States. Their manipulation of the news about the recent increase in tax revenue is a diversionary tactic. They are trying to keep people from focusing on the fact that the tax cuts have not stimulated the economy, at least not in a manner that would benefit the majority of Americans.
If the US economy is really growing as quickly and as strongly as the Republicans would have the public believe, we should see this in the employment data. Looking at the Bureau of Labor Statistic’s Economic Situation Survey from 2001 and 2005, one interesting statistic emerges—the number of people who are not in the labor force has grown more than 10% from 2001, when W. took office, to 2005. What does this tell us? There are 10% more people sitting at home after giving up on finding a job. In a recent article in The New York Times, Paul Krugman substantiated this fact, stating that:
Economists who argue that there's something wrong with the unemployment numbers are buzzing about a new study by Katharine Bradbury, an economist at the Federal Reserve Bank of Boston, which suggests that millions of Americans who should be in the labor force aren't. "The addition of these hypothetical participants," she writes, "would raise the unemployment rate by one to three-plus percentage points." Some background: the unemployment rate is only one of several numbers economists use to assess the jobs picture. When the economy is generating an abundance of jobs, economists expect to see strong growth in the payrolls reported by employers and in the number of people who say they have jobs, together with a rise in the length of the average workweek. They also expect to see wage gains well in excess of inflation, as employers compete to attract workers. In fact, we see none of these things. As Berkeley's J. Bradford DeLong writes on his influential economics blog, "We have four of five indicators telling us that the state of the job market is not that good and only one - the unemployment rate - reading green."
So, if tax revenues are up, but the employment situation has not improved, thus not blessing the US Treasury with additional wage income, what does this tell us? Does it validate The Journal's assertions? Of course not. Then again, what else do we expect from the Right?
