April 14, 2005

Donny, You're Out of Your Element!

Sometimes, when someone has no idea what he's talking about, you just want to shout like Walter Sobchak. Dave Weigel writes :

I just don't see how you can conscience cutting taxes - especially taxes that effect only a few thousand very, very rich people - when you're fighting a war.
There are at least three incorrect assumptions packed into that one little sentence. (We'll just let breaches of standard verb usage slide.)

Incorrect Assumption One: That the estate tax only affects "only a few thousand... people." Wrong. Back in 2002 I linked to an excellent summary of an Institute for Policy Innovation policy paper reporting that "In 1995, 69,722 estates were required to file an estate tax return." Those are estates, not people. In most estates there is more than one person involved; sometimes there are dozens. And that was a decade ago; the number is probably higher now. Less than half of estates who file end up owing (at least that was the case in 1995), but even allowing for that, "a few thousand" still grossly understates the number of people affected.

Incorrect Assumption Two: Those affected by the estate tax are all "very, very rich." Wrong again. In 1995,

Over half (54 percent) of the $11.8 billion in tax was collected from estates valued at less than $5 million. Estates worth between $5 and $20 million paid 29 percent of the tax while those over $20 million paid 16.9 percent.
Bill Gates is "very, very rich." Three brothers splitting a $4 million dollar estate are not. That's true even if the estate is all liquid, but especially true in the many cases where it's not.
Estate taxes even threaten the middle class. Average Americans who purchased homes 20 or 30 years ago, own a farm or built up a family business could find their estates large enough to be taxed. And high marginal tax rates (from 37% up to 55%) often force heirs to liquidate assets to pay the estate tax bill.

Incorrect Assumption Three: Estate tax revenue is crucial because we are "fighting a war." But the estate tax is long-term loser for the treasury, and even in the short term it's an insignificant revenue source:

In 1995, the $11.8 billion in estate taxes amounted to less than one percent of federal revenues.

Second, the estate tax imposes extremely high compliance costs -- about as much as the tax raises. Tax compliance adds nothing to output and diverts resources away from productive activities that do.

Third, doing away with estate taxes would produce positive economic growth effects large enough to offset most of the static revenue loss.

Follow the link for the rest of that argument. The estate tax does affect "working families"-- economic growth affects everyone. Besides, millionaires generally make their money by working, too.

Posted by John Tabin at April 14, 2005 05:13 AM
Comments

I don't really care if I rhetorically cut short the amount of people effected by the tax, as my beef is with the idea that we should be cutting any source of revenue during wartime. Maybe we can talk about it when we're no longer paying for reconstruction in Iraq and Afghanistan, or when we have Osama bin Laden's head on a pike.

Now, if your third factoid is true, I'll step back. I'm only in favor of this tax on the assumption it pulls in revenue. But I blogged because I was hearing the House's floor debate, and the GOP arguments never touched on that notion. They were all about how the tax was unfair, or how it was Socialistic, or how it killed (unnamed and unnumbered) small businesses.

Posted by: Dave Weigel at April 14, 2005 11:56 AM

Dave:

Revenues go UP when taxes are low, and they go DOWN when they are high. Every study has confirmed this from Calvin Coolidge on. It is even admitted by most economists (quietly) that Roosevelt prolonged the depression. Estate taxes actually raise little if any money. For every dollar they raise a dollar is lost by the efforts to avoid or comply with the tax. (See "Paris Hiltonomics" in the ed section of the WSJ a few days ago). Dave, also remember that money can either be spent (which helps the economy or lent (invested) which helps the economy AND thus creates revenue. I do believe lots of liberals think revenue is being raised with the estate and other taxes and they were adamantly opposed to lowering the estate tax when there was peace. However, it is purely punitive. Sometimes I think the left would rather the poor be poorer if fewer people were rich. Henry Ford made a lot of money but he arranged so the average worker could buy a car.

Best,

Lee Tabin

Posted by: Le Tabin at April 15, 2005 07:59 AM

Mr. Tabin, you are a wise man! The estate tax IS purely punitive, and is designed solely to keep people from amassing wealth.

Posted by: Tim Birdnow at April 17, 2005 08:36 PM