I’d like somebody to get rid of the death tax. That’s what I want. I don’t want to get taxed just because I died. I just don’t think its right. If I give something to my kid, I already paid the tax, why do I do I have to pay again just because I died? Whoopi Goldberg
“This study confirms that the cost of the estate tax far exceeds any benefits it produces.”
So begins “Cost and Consequences of the Federal Estate Tax” published last week by the Republican Staff of the Joint Economic Committee, whose vice chairman, Representative Kevin Brady of Texas, continues to make his mark as a leader of the pro-growth wing of the House GOP. The report’s documentation of how the death tax fails as both fiscal and social policy stands as a timely rebuttal to the politics of envy promulgated by President Barack Obama and the leadership of the Democratic Party.
My conclusion: the death tax deserves the sobriquet: the “dumb tax.”
The first reason the death tax is the dumb tax: it reduces, rather than increases total federal tax revenue.
Taken in isolation, the death tax raises very little revenue. The most tax it ever collected in constant, 2010 dollars was $36.7 billion. That was in 2000 at the end of the great expansion and bull market that followed passage of the North American Free Trade Act (1993), welfare reform (1996), the capital gains tax rate cut (1997) and nine years in which federal spending fell as a share of GDP. However, the average annual revenue collected by the death tax in the prior two decades was only $20 billion, a period in which its top tax rate ranged from 55% to 70%.
Based on current law, which imposes a top 35% tax rate and provides a $5 million exemption, the Joint Committee on Taxation estimates repeal of the death tax would reduce revenues by less than $7 billion a year, or 0.2% of projected total revenues over the 2011-2020 period.
But, that estimate ignores increased tax revenues that, in the absence of the death tax, would flow from other sources. The cost basis of inherited assets would no longer be “stepped up” to their current value. That would lead directly to higher capital gains tax revenues when inherited assets are sold. In addition, those subject to the death tax are encouraged to consume, rather than invest. The reduction in capital reduces the overall tax base subject to the income tax by decreasing economic activity and wages.
According to a study by former Deputy Assistant Secretary for Economic Policy at the Department of the Treasury, Steven Entin, once these other sources of tax revenues are taken into account, repeal of the death tax would produce a net increase of $89 billion in tax revenues over that same 10-year period.
The second reason the death tax is the dumb tax: it fails to reduce income inequality.
The reason: Demographic factors, such as the number of income earners per household, being married, and working full time versus part time or not working, and a college education are the major contributors to the distribution of income. Only about 2% of income inequality can be attributed to inherited wealth.
Just as important, most of the studies on the distribution of income are snapshots in time and do not take into account income mobility – both upward and downward, which remains high for individuals, and even higher across generations. Between 1996 and 2005, for example, 58% of households moved to a higher income quintile, while 57% of the top 1% of taxpayers moved down one or more income groups.
The third reason the death tax is the dumb tax: it has little, if any effect on inequality in wealth.
Most wealthy households acquire their wealth through their own success. For example, 70% of those who were on the Forbes’ 2011 list of the 400 richest people in America were self-made. According to a 2011 U.S. Trust Survey, more than 75% of those surveyed with $3 million or more in wealth accumulated their riches through earned income from their occupations and investments. Only 27% received any part (Emphasis added.) of their wealth through inheritance.
Moreover, just as in income, there is a high level of wealth mobility over time. Only one in 5 children of wealthy families will be rich themselves upon retirement, while well above half the children in the bottom half of the wealth distribution will be in the top half by the time they retire.
Finally, the death tax may actually increase, rather than decrease inequality in wealth.
First, the death tax destroys family businesses and farms that seldom have enough liquid assets to pay the estate tax bill, forcing a liquidation of the business or sale of the family farm. That wipes out the source of modest wealth for many middle-class families, but leaves the truly wealthy, who have ample liquid assets and sophisticated estate plans, relatively untouched.
Second, by encouraging consumption and discouraging investment, the death tax reduces the total capital stock of the United States by an estimated 3.2%. This reduction in the supply of capital increases the returns on existing capital. Who benefits? The already rich who own most of the existing capital. If you have ever wondered why many of the very wealthy advocate the death tax, the reason is because it is in their self-interest – imposing the death tax on others helps the truly rich maintain their absolute and relative wealth.
There is a fourth reason the death tax is a dumb tax that is not covered by the report. The death tax is unfair because it is a double tax, falling as it does on whatever assets an individual has been able to accumulate after paying all of the taxes due on the income generated by their work and investments. It also is immoral because it empowers the state to seize private property without just compensation.
Given that the death tax is dumb, unfair and immoral, why are the governing elite so committed to its imposition? Because it is in their self-interest as well.
The death tax is an attack on the shop-keepers, the proprietors, the family farms, the small business men and women, the owners of capital, the bourgeoisie who since the 17th century have been the political force who supported the principles of constitutional government and natural rights. They ultimately overthrew the ancient regime of royalty and divine right, and produced the modern world. Today they stand, as they did then, independent of government, seeking the liberty to innovate, serve their customer, and engage in what the elites have always viewed as the unseemly business of commerce.
Then, as now, the governing elite were offended by the bourgeoisie’s ability to make money and to ascend into the higher classes. And, now as then, the wide spread accumulation of middle-class wealth and capital which the death tax seeks to disrupt, would diminish their own power and prestige.
The ascendancy of a wealthy middle class would demonstrate anew the virtues of self-reliance, and the passion and courage it takes to own and build a business. Moreover, the increase in middle-class wealth would increase the capacity of the private sector to take care of our social concerns without the heavy, debilitating hand of the welfare state.
Although charitable giving was widely expected to fall as the burden of the estate tax was reduced in the aftermath of the 2001 tax cut, just the opposite occurred. Surveys show that what drives charitable giving is wealth. Ninety-one percent of families surveyed said they would give as much or more to charities if there were no estate tax.
Thus, the JEC’s latest report provides timely support for Governor Mitt Romney’s unabashed call for the death tax’s repeal. Every Republican candidate for Congress or Senate should follow his lead. Supporting repeal of the “dumb tax” is a powerful rebuttal to the anti-success, anti wealth-creation, anti small business rhetoric of the Obama campaign and the leadership of the Democratic Party. By so doing, Republicans will be able to give not only their base, but also those who, like Whoopi Goldberg know the death tax is horrible, a reason to vote for them.
As Ms. Goldberg explained to the audience of The View: It doesn’t matter whether you have money or don’t have money. Once you paid your taxes, it should be a done deal. You shouldn’t have to pay twice.”
Why The Death Tax Is The Dumb Tax
July 30, 2012