April 14, 2005
Donny, You're Out of Your Element!
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.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.
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.