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Dusting Off My “Death Tax” Stuff

October 27th, 2009 . by economistmom

sfchron-death-tax-birth-tax-graphic

First we heard that estate tax legislation would be considered as early as next week in the House, but tonight Majority Leader Hoyer suggested it could be put off until the very last minute:  up to six weeks from now, just before the estate tax is scheduled under current law to–well, to put it in really technical terms–“go POOF!”

Under current law (as dictated by the 2001 Bush tax cuts) the estate tax is fully repealed starting on January 1, 2010.  It then comes back with a vengeance–back to pre-2001 levels–on January 1, 2011.  Of course, that’s totally crazy, and we’ve known all along that however far we let ourselves get with estate tax relief, we’d probably end up permanently staying there.  That’s how it always seems to work with tax cuts that start out as “temporary” but were never really meant to be temporary except to make them appear less costly.

I’ve never been a fan of estate tax relief because it’s hard to find a tax cut more skewed to the rich and yet as ineffective at improving either short-term economic activity or longer-term economic growth.  Back in the middle of the Bush Administration even as the expiration of estate tax relief was several years away, Congress kept bringing up proposals to permanently repeal the estate tax.  I would have thought that proposal a bad idea even if Congress would have proposed raising other taxes to offset the cost, because it’s hard to imagine finding another tax to raise that would do less economic harm than the estate tax in the first place.  But when the “offsetting tax” is not a current tax, but instead the adding to the debt that creates a “birth tax” on future generations, permanent estate tax relief is an especially bad idea.

In this longer follow-up story in CongressDaily, Ways and Means Chairman Charlie Rangel seems to suggest that deficit-financed estate tax relief could qualify as additional “stimulus” spending (emphasis added):

The House will not vote to extend the estate tax until after the chamber tackles health care and a package of initiatives to create jobs and jump-start the economy, Ways and Means Chairman Charles Rangel said Tuesday.

It will be after health care and after jobs,” Rangel said after a meeting of his panel’s Democrats. “I don’t know how fast a legislative agenda we’re going to be on … it’s just we’re going to do health care first, and jobs, and then we’re going to do estate tax.”

Rangel and other panel members said there have been no decisions on how to jump-start the economy, and he and others plan to meet with National Economic Council Chairman Lawrence Summers. Rangel said members have many — and expensive — ideas.

“It’s hard really to do what the members want and find the pay-fors to do it; you know, you raise the taxes at the same time you’re trying to create jobs, so there’s a whole lot of thinking that’s going on,” Rangel told reporters. “Some of us will be meeting with Summers to see what the White House is thinking about in terms of a big jobs bill and whether or not there’s any feeling about this being enough of an emergency” that a package may not require offsets.

(What is the world coming to when we are willing to deficit-finance a tax cut that is so heavily tilted to the very richest Americans and has so little economic benefit–and yet declare it an “emergency” measure?)

So I’m dusting off my old “death tax”/”birth tax” writings–like this piece I wrote in May 2006 while at Brookings, published by the San Francisco Chronicle (which also created, especially for my op-ed, the cool graphic above of the “dead person” snatching money from a baby’s hand)–because it’s the same old issue now, just from a starting point of a much higher “birth tax” already in place.  My “old” point that is new again:

The problem is that there is no such thing as a free tax cut, unless — ironically in this case — you die before the bill comes due. It is those born into our current fiscal quagmire who can’t avoid the burden…By adding to the debt, estate-tax repeal would eventually raise this per-person burden — the “birth tax” — by thousands of dollars over their lifetime (including more than $3,000 from just the first 10 years after it would take effect).

This “birth tax” is a true cost imposed on all American babies. It cannot be repealed, no matter how upset Americans eventually get about it. Through the harmful effects of deficits on national saving, these future adults will be less likely to have the means to pay off these debts and are in danger of facing a lower standard of living than adult Americans today.

So repealing the estate tax would swap a “death tax,” which affects hardly anyone and has been found to have little effect on economic decisions, for a higher “birth tax,” which would be universal and seriously detrimental to future economic growth.

Of course, the new “twists” to this year’s estate tax debate are that: (i) we have to fit it in between the big debates on health care reform, and (ii) we’re debating it under the Obama Administration now.  In my opinion these twists make the idea of deficit-financed estate tax relief all the more repulsive now.  On the first twist, it’s hard enough for policymakers to prove they can be fiscally responsible with health care reform without the blatant display of irresponsibility in not wanting to pay for estate tax relief (on top of the displays over the deficit-financed “doc fix” or the deficit-financed make-up-for-no-COLA checks to seniors). On the second twist:  again(!), why is the Obama Administration willing to handicap its own policies by requiring offsets while continuing to bless the deficit financing of the Bush tax cuts by exempting the tax cuts from their PAYGO standard?

More to write on this issue over the next few weeks, particularly as we get closer and closer to the “backed into the corner” date of year’s end when Congress is forced to do something or else see the estate tax completely disappear (die!) and likely never get it back.

***UPDATE (11:15 am 10/28): CQ’s Richard Rubin pointed out to me this morning that Chairman Rangel didn’t mean to call deficit-financed estate tax relief a “stimulus” measure; Rangel was referring to any elements of any new “jobs bill” that might need to be deficit-financed in order to have a stimulative effect.  I do know what Rangel meant, but as I replied to Richard, there is at least the suggestion that there’s no other economic/policy justification for not paying for estate tax relief it other than stimulus (or not wanting anti-stimulus).  And I’m sure we’ll be hearing the ol’ economic justifications for estate tax relief from Republicans (hence my “dusting off” of the ol’ counterarguments and “myths” pieces) and that this time around those Republican arguments will sound strangely compelling to the Democrats, too.

17 Responses to “Dusting Off My “Death Tax” Stuff”

  1. comment number 1 by: Brooks

    Diane,

    Re: “estate tax relief“, [this is the sound of me cringing] although I’m glad you didn’t call it the “death tax”, pleeeeeease don’t adopt the similarly Frank Luntzian labeling of a tax cut as “tax relief“, even some of the time. Just my humble request, and one with which you may find complying not just appropriate but also better rhetorically for your argument.

    Per the entry in my Official 2007-2008 Political Glossay http://swordscrossed.org/node/1721, the term “tax relief” is intended to make tax cuts sound like “the moral equivalent of helping victims of natural disasters”.

  2. comment number 2 by: B Davis

    More to write on this issue over the next few weeks, particularly as we get closer and closer to the “backed into the corner” date of year’s end when Congress is forced to do something or else see the estate tax completely disappear (die!) and likely never get it back.

    I do think that it would be a serious mistake to let the estate tax disappear. Just as there is a rationale for a tax on income, there is a rationale for a tax on wealth. Those who have wealth benefit from the existence of the police, military, and courts in the task of protecting their wealth. In a country without those services, they would have to at least hire their own police force to guard it. In any case, the wealthy derive a greater benefit from some of these services than do the poor. It only makes sense that they pay more of the cost.

    If wealth is to be taxed, the easiest time to do that is usually at the time of death. If there is more than one beneficiary, then there will have to be an accounting of the estate at that point anyhow. However, I do support a reasonably high limit below which estates are not taxed. For someone who is handling a relatively small estate, it can be quite a burden to have to handle the estate taxes as well as the final year’s individual taxes of the deceased. For a large estate however, someone can be paid to do them. In addition, the beneficiaries are compensated with a larger inheritance in whose creation, in most cases, they played little or no role.

  3. comment number 3 by: murf

    Really. You guys can NOT be serious here. Those who have real wealth FIND WAYS AROUND the estate tax. This tax - like most of those aimed for the “wealthy” - ends up hitting the middle class to upper middle class the hardest—the ones who can’t afford to pay a lawyer to get around it.

  4. comment number 4 by: dave.s.

    I’m with B Davis - let the person who built up a Toyota dealership pass it on to the heirs, but don’t let Bill Gates pass on Microsoft. murf is quite right: the story of how Malcolm Forbes’ wealth passed through to Steve Forbes is appalling.

  5. comment number 5 by: Underwriterguy

    The tax who’s name we must not speak seems like theft pure and simple. What I have earned in my lifetime has been taxed, sometimes more than once. To give the state the right to take an additional bite at my death just seems wrong. One reason to work hard, save and invest is to help one’s children and grandchildren have more choices that economic security affords.

  6. comment number 6 by: Josh Uy

    Yeah, I’m not convinced either that the government has a right to money within a family or more bluntly since “government” is not an abstract organization, I don’t think other people have a right to the money passed between family members. Why should my neighbor get a cut of what I give my kid? And how is that his right? I get that by not taxing estates, then everyone will have to pay more in taxes per person, but doesn’t that seem fair in a way?

  7. comment number 7 by: B Davis

    The tax who’s name we must not speak seems like theft pure and simple. What I have earned in my lifetime has been taxed, sometimes more than once. To give the state the right to take an additional bite at my death just seems wrong.

    Once again, just as there is a rationale for a tax on income, there is a rationale for a tax on wealth. Where could you find a security firm that would agree to protect your wealth into the infinite future for a one-time fee? How then can you expect the government to provide such a service?

    There is an interesting blog entry on a Fox interview with Warren Buffett and Bill Gates on the Estate Tax. The blog states the following:

    Gates then says that people with very rich estates, himself and Buffett included, have benefited from the rules and stability of this country. If they had to choose where to be born, they would choose the U.S., even if that meant paying the estate tax.

    You can hear Gate’s precise statement in the actual interview. They also make a couple of other good points in the interview. One is that the estate tax affects just one out of every 200 estates. According to this link, the estate tax exempts the first of $3.5 million in 2009. Hence, it is not affecting the “middle class to upper middle class” as murf suggests. The second point is that nobody supporting the repeal of the estate tax is saying how they propose to make up the lost revenue. I assume that they just want to government to go out back and shake it out of the proverbial money tree.

  8. comment number 8 by: P.G. Garber

    Mom likes the estate tax, not because it reduces the deficit (the effect is laughingly minuscule), but rather because it hurts the rich.

    Why should I be upset that Bill Gates, Warren Buffet, et al, who earned money and payed taxes on it, now can pass their money on to their grandchildren? If they send it to the government in the form of taxes, not one penny will go to my grandchildren.

    Be honest: You know a double tax is unfair, whether on the rich or on the poor. The estate tax was instituted, not as a way to reduce the deficit, but as a political sop to the poor who cheer anything they perceive as hurting the rich.

    (That, by the way, what the executive pay fuss is all about. Cynical politicians know that slamming the rich gets votes.)

    Mom needs to forget her class-warfare ideas.

  9. comment number 9 by: Saul Elnadav

    I don’t think they’ll be comprehensive estate tax legislation this year. We’ll probably get a one year extension at year’s end to prevent the 2010 repeal, and Congress will pick it up next year. I have a feeling, though, that 2010 won’t look like the early 2009 proposals. Moderate democrats seem to be feeling the pressure to sound fiscally conservative, particularly after healthcare, and we haven’t even entered the election year. For example, Kurt Schrader, freshman democrat from Oregon, recently proposed raising the exemption to $5m. See http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_cong_bills&docid=f:h3841ih.txt.pdf

  10. comment number 10 by: Saul Elnadav

    “They’ll be” — who is this clown?

  11. comment number 11 by: AMTbuff

    Two important points were omitted:

    1. In 2010 the estate tax goes away but so does stepped-up basis, except for an $1.3 million exemption (which is much less than the current $3.5 million estate tax exemption). Therefore some estates which would have paid no tax in 2009 will owe tax in 2010. The really large estates will get a tax cut, but for smaller estates the effect is mixed.

    2. Because the 2010 rules bring in less revenue than the 2009 rules, a one-year extension of the 2009 rules would be scored as a significant revenue raiser. I’m surprised that someone in Congress hasn’t grabbed this “free money” already to fund his favorite new spending plan. The catch is that extensions to 2001 and beyond will be scored as significant revenue losses, but that’s the next guy’s problem.

    Look for a one-year-only extension of the 2009 rules, followed by one-year extensions near or even past the end of every year for the next decade. This will fit the pattern of kicking the can down the road that Congress has perfected with the AMT.

    As to Gates and Buffett, does anyone else find it ironic that they first used the loophole of non-taxation of unrealized capital gains, then the loophole of giving the appreciated stock to charitable foundations that they control? These guys avoid the same taxes that they advocate increasing.

  12. comment number 12 by: Saul Elnadav

    “As to Gates and Buffett, does anyone else find it ironic that they first used the loophole of non-taxation of unrealized capital gains, then the loophole of giving the appreciated stock to charitable foundations that they control? These guys avoid the same taxes that they advocate increasing.”

    The problem is that their justification for retaining the estate tax doesn’t quite get you there. Even if you believe you owe a debt to society, you don’t necessarily agree that using your money to, say, buy clunkers is the right thing to do. You may conclude that best way to benefit society is to give your estate to a charitable foundation that you control. That’s what these guys did. You’re right that it is disingenuous to advocate something they go out of their way to avoid, but what they actually did is consistent with the overall sentiment.

  13. comment number 13 by: Jim Glass

    Once again, just as there is a rationale for a tax on income, there is a rationale for a tax on wealth.

    Sure — the same one as for taxing corporations: “Hey, the money is right there in one spot so easy to tax (always the #1 consideration when imposing a tax) … plus we get the populist vote for doing it too!”

    Alas, there is precious little economic justification in either case. Corporations don’t pay any tax at all, only the people related to them (employees, customers, suppliers, owners, etc) do — but as the tax is opaque it’s impossible to say how much falls on whom in each case … so the taxers pretend no real people pay it.

    Estate tax is just as opaque but far worse on several counts. First, as a matter of economic principal, it is a tax on invested savings to fuel consumption…

    “As long as an inheritance tax remains a true inheritance tax, it always involves a conversion of capital into income, hence an act of economic waste which is damaging to all.”– Joseph Schumpeter.

    In our era, with our huge, dominating economic problem being lack of savings — lack of capital wealth productively invested to produce the future income needed to fund the coming retiree-cost tsunami — the very last thing taxed to fuel govt consumption should be private, productively invested capital! Tax anything else first — income, consumption, wages, land, fruit drinks, blogs, anything.

    Second, the measures of a “good” tax are: (1) transparency, so everybody understands it, (2) equity, so people in like situations are treated in like manner, and (3) efficiency, low cost to both taxpayers and govt for the revenue obtained.

    The estate tax by these measures grades across-the-board at F minus: F-, F-, F-.

    1) Nobody understands it. Professionals need continuing education to keep up with both the constantly changing law and regulations and ever-evolving “tax engineering” (I know, I’m one). I guarantee you, no “average taxpayer” understands it. Tax professionals in other areas of tax don’t understand it

    2) Because of the huge complexity, persons in like situations are treated hugely differently — and worse, the return to planning to avoid it scales up with estate size. The result is that among estates large enough to owe the tax, estate tax is regressive.

    E.g.: IRS Statistics of Income for estate tax returns filed in 2007 show that 36% of all estates in the “largest” category — assets >$20 million, average $49 million, total assets $17.8 billion — owed and paid no tax, zip, nada, nothing, $0.

    And among only estates that did owe tax, the average effective tax rates by gross size of estate were:

    $3.5 million < $5.0 m ……. 20.2%
    $5.0 million < $10.0 m ….. 26.1%
    $10.0 million $20 million estates?

    To save $10 million in tax one will spend up to $10 million in planning costs — and they do, creating whole new realms of “tax engineering” to be audited and litigated.

    There are academic papers claiming these costs total up to more than the tax revenue collected by the govt from estate tax. Henry Aaron and Alicia Munnell once estimated that just the cost of complying with estate taxes cost $1 for every $1 of revenue collected.

    I don’t know about that, but it’s a dead sure thing that these costs are very significant and total up to far more than those that correspond for any other tax.

    So summing up, what have we got? A tax that confiscates capital, to fund consumption, at a time when we need that capital the most … that is as opaque as they come … that lands on people in like situations highly unevenly and inequitably … that regressively spares the richest, often up to 100% … and that has huge costs that significantly (at least) offset the revenue collected from it.

    And for all this, it collects a trivial portion of total federal revenue, 1% in 2008.

    Great tax!

    But Gates and Buffett like it as it is … because they aren’t going to pay a penny of it.. They’ve already fully “foundationed up”, just like the Kennedys and the Rockefellers, with their families able to live off the money for as many generations to come as the Kennedys and Rockefellers and Fords (how many more does anyone want me to name?) have, and will.

    Of course they’d choose again to be born in the US to live as billionaires, even with the existence of an estate tax they know they will never pay. ;-)

    Heck, they’d probably choose to be born in the US again to live as billionaires even if their estates were going to pay tax. But don’t get me onto the subject of their tax posing.

    Buffett plays the “simple country investor” routine the way Sam Ervin and Joe Welch famously played the “simple country lawyer” routine. In a knife fight any one of the three would have you gutted in a second.

  14. comment number 14 by: Jim Glass

    ….I don’t know why, but a chuck in the middle of my prior comment didn’t print, prehaps leaving my thoughts even less comprehensible than usual.

    As the “edit comment” function doesn’t exist here anymore, I will just add the section below. It should be clear where it fits in.
    ~~~~

    … E.g.: IRS Statistics of Income for estate tax returns filed in 2007 show that 36% of all estates in the “largest” category — that is assets over$20 million, average $49 million, total assets $17.8 billion — owed and paid no tax, zip, nada, $0.

    And among only estates that did owe tax, the average effective tax rates by gross size of estate were:

    $3.5 million to $5.0 m ……. 20.2%
    $5.0 million to $10.0 m ….. 26.1%
    $10.0 million to $20.0 m … 29.5%
    $20.0 million and over……….. 19.8%

    The richest paid the least. Add to that the 36% of tax-free “$20 million+” estates, and all of those most “extremely wealthy” estates paid 13.7% in total — much less than the merely moderately wealthy paid any way one dices the numbers.

    3) The estate tax is the most costly of all taxes for everybody.

    [] For the IRS, as a tax based mostly on property *appraised values* — on real estate, private businesses, illiquid securities, etc. — it consumes huge resources per dollar of tax received, compared to the other major taxes, to contest appraisal valuations and related technical issues and preferences (”loopholes”). Disputes can last years.

    Taxes based on subjective appraisals are by far the most inefficient for the tax collector. Payroll tax enforcement costs are nil. Income taxes have 1% audit rate, most of those are conducted by mail, and the percent going to Tax Court is teeny. But every single estate with over a million dollars in subjectively valued assets has ample reason to contest an assessment.

    [] For the federal fisc, estate-tax reducing strategies significantly reduce income tax collected. They removes income-producing assets from high-tax-bracket taxpayers who’d owe the tax, to low-bracket or zero-bracket individuals or trust arrangements or “charity” arrangements that the family lucratively exploits.

    [] Need I talk about the planning costs to individuals? Which range from real preventative costs incurred even by people who don’t own enough assets to owe tax today but who nevertheless must plan for doing so, in case they will in the future (through law change or financial success) … to the millions spent by those >$20 million estates?

    To save $10 million in tax one will spend up to $10 million in planning costs — and they do, creating whole new realms of “tax engineering” to be audited and litigated.

    There are academic papers claiming these costs total up to more than the tax revenue collected by the govt from estate tax. Henry Aaron and Alicia Munnell once estimated that just the cost of complying with estate taxes cost $1 for every dollar of revenue collected….

  15. comment number 15 by: B Davis

    Jim Glass wrote:

    Once again, just as there is a rationale for a tax on income, there is a rationale for a tax on wealth.

    Sure — the same one as for taxing corporations: “Hey, the money is right there in one spot so easy to tax (always the #1 consideration when imposing a tax) … plus we get the populist vote for doing it too!”

    If you’re going to quote me, please at least address my point. A rationale for taxing wealth is that government services (military, police, courts, etc.) provide protection of that wealth. In lawless third-world countries, wealthy individuals have to hire their own private security forces. As Theodore Roosevelt said, “The man of great wealth owes a particular obligation to the State because he derives special advantages from the mere existence of government”. Do you disagree with Theodore Roosevelt on this?

    Alas, there is precious little economic justification in either case. Corporations don’t pay any tax at all, only the people related to them (employees, customers, suppliers, owners, etc) do — but as the tax is opaque it’s impossible to say how much falls on whom in each case … so the taxers pretend no real people pay it.

    Corporations use government services so it makes sense that they pay some taxes to help pay for them. Certainly, those costs may be largely passed on to their customers. However, it makes far more sense to have those customers pay the cost than to have it paid by everyone, even those who do not consume the product.

    E.g.: IRS Statistics of Income for estate tax returns filed in 2007 show that 36% of all estates in the “largest” category — assets >$20 million, average $49 million, total assets $17.8 billion — owed and paid no tax, zip, nada, nothing, $0.

    What, you can only think of five ways to say zero? Seriously, can you provide a link to the source of those statistics? The reason I would like to see the actual numbers is that this MSN Money article states the following:

    Estate planning can reduce the tax bite. If you’re rich enough, however, your estate will eventually face taxes unless:

    * You die in 2010, the one year in which the estate tax is scheduled to be totally repealed, or

    * You give everything to charity, or

    * You give everything to your spouse

    Hence, I suspect that the chief way to avoid the estate tax is to give everything to charity. The heirs will benefit far less from such a scheme (even if they work for a foundation that the charity creates) than if the full estate taxes were paid and the money simply distributed to them. In any event, everyone is free to follow the same scheme or to lobby to end or limit the charitable deduction. However, those who complain about this never seem to do either. Hence, I suspect that the tears cried over this “injustice” are largely crocodile tears.

  16. comment number 16 by: B Davis

    (continued)

    There are academic papers claiming these costs total up to more than the tax revenue collected by the govt from estate tax. Henry Aaron and Alicia Munnell once estimated that just the cost of complying with estate taxes cost $1 for every $1 of revenue collected.

    I don’t know about that, but it’s a dead sure thing that these costs are very significant and total up to far more than those that correspond for any other tax.

    Not according to this article. Following is an excerpt:

    Studies find that all of the various public and private costs associated with estate tax compliance (http://www.cbpp.org/6-14-05tax.htm) — including the IRS’s costs of administering the tax and the cost that taxpayers bear in terms of estate planning and administering an estate when a person dies — equal about 7 percent of estate tax revenues. These costs are consistent with the compliance costs for other taxes. For instance, administrative and compliance costs equal about 14.5 percent of the revenue raised by the individual and corporate income taxes and about 2 percent to 5 percent of the revenue raised by sales taxes.

    This article directly addresses the Henry Aaron and Alicia Munnell study. Following is an excerpt:

    Notably, Aaron recently told the New York Times that he does not now believe that estate tax compliance costs approach estate tax revenue. He also noted that both he and Munnell “believe in principle that large transfers of wealth should be taxed,” especially because the estate tax serves as a backup to the income tax, levying tax on concentrations of wealth that might otherwise escape taxation altogether.

    That is another point that is often forgotten. Without the estate tax, a large amount of income will escape ANY taxation. Following is an excerpt from the MSN Money article:

    Currently, the estate-tax system comes with a great bonus known as the “step up” in tax basis. Essentially, the property and most investments in an estate get a new value for tax purposes when someone dies. It’s this value that the heirs use to determine their taxable profit when the property or investments are sold.

    This avoids the record-keeping problem of selling a stock that was bought by your great-grandfather, for example. If the estate tax is repealed, do you support abolishing this special “step up” treatment so that this untaxed income is fully taxed when sold?

  17. comment number 17 by: AMTbuff

    >If the estate tax is repealed, do you support abolishing this special “step up” treatment so that this untaxed income is fully taxed when sold?

    That’s exactly what the current law does for 2010. Step up is capped at $1.3M. That’s why the Republicans’ claim that they eliminated estate tax for 2010 was highly misleading.