TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Wednesday, June 6, 2012

Caron Presents Occupy the Tax Code Today at Cincinnati

I am presenting Occupy the Tax Code: Using the Estate Tax to Reduce Inequality and Spur Economic Growth at Cincinnati today as part of our 16th Annual Summer Faculty Workshop Series:

Tax policy is ossified in Washington, D.C. Democrats, responding in part to the Occupy Movement, insist that any tax reform begin by increasing taxes on the 1% (through the "Buffett Rule" or otherwise). Republicans, responding in part to Grover Norquist and the Tea Party, reject *any* increase in taxes as inimical to job creation. As a result, tax policymakers fiddle while virtually every economist agrees that current tax law both exacerbates income inequality and retards economic growth. This Article proposes a path out of the current gridlock by re-framing the debate and focusing on the adverse consequences of income inequality on economic growth. Viewed in this light, increasing taxes on the 1% should not be seen as class warfare but instead as a tool for revitalizing the economy. Revitalizing the estate tax offers the ideal vehicle for doing so, because the tax was designed specifically to curb concentrations of wealth and in its heyday affected only 1-2% of decedents who died each year. The estate tax also is more efficient than the income tax and has less impact on savings, economic growth, and job creation.

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"Revitalizing the estate tax offers the ideal vehicle for doing so, because the tax was designed specifically to curb concentrations of wealth...."

Wait a minute. Who's presenting this idiocy -- Paul Caron or Paul Krugman?

Since when did tax policy objectives include bowing down to agitators engaged in class envy by "reducing inequality?" The estate tax was started so that the government could have more money to spend.

A Century of Soaking the Rich: The Origins of the Federal Estate Tax

In September [2006] the federal estate tax [turned] 90. As lawmakers continue to ponder repealing this aged but inflammatory levy, they should consider its provenance. The tax was not the brainchild of wild-eyed levelers intent on redistributing wealth. Rather, it was a revenue tool, designed to raise money, not remake society.

Nor, should it be a tool to remake society.

Paul, Glenn Beck comes on 55KRC in Cincinnati at 9:00 AM and is followed by Rush Limbaugh and Sean Hannity. Set your radio to get your reality update.

Posted by: Woody | Jun 6, 2012 6:45:21 PM

Don't be so naive Professor, its not a matter of reasoning with the teapartiers--see the post above. The wealthy don't want to pay and they have the means to make sure it doesn't happen, period.

Besides, how much would this raise? $50 billion per year? That ain't hay, but its still only about enough to pay for the Part D Medicare benefit,(passed to benefit the constituents of the politicians who like to complain about deficits the other 363 days per year) for example.

Posted by: jimharper | Jun 6, 2012 8:06:24 PM

Jim, I'm not a "teapartier," and whatever would get raised by the death tax would be gobbled up by political pork, like repaying union mob bosses for support, rather than applied to anything that's useful, as you implied. It would do nothing to "reduce inequality" or help the needy, and is political pandering to the class envy crowd (you?) by hurting those who have accumulated more than others, which sure doesn't include me, although I wish.

In my mind, fairness would dictate that families who have earned money, paid taxes on that money, and been good stewards of their finances should be able to keep it and pass it to their families without the government stealing part of it.

Paul isn't the first law professor to be wrong on this issue.

There's no defense for the estate tax
The estate tax violates common principles of justice and stifles economic growth.

In his [sic] July 6 [2010] Op-Ed, law professor Ray D. Madoff made a case for the estate tax, claiming that it promoted tax fairness and economic growth. Madoff is wrong on both counts. The estate tax violates common principles of justice and stifles economic growth. Congress should permanently lock in this year's special moratorium on the estate tax. ...

One standard argument against the estate tax is that the wealth of the estate was already taxed (perhaps several times over) while being accumulated. Madoff doesn't deny that the estate tax represents "double taxation," but he claims this is normal: "When a person earns $50,000 and then pays his mechanic $2,000 to fix his car, the mechanic cannot avoid taxes by claiming that the money was already subject to tax when earned by his customer."

That analogy misses the reasons many people consider the estate tax particularly unfair. When someone spends a lifetime working and saving and then wants to pass on the fruits of his or her efforts to others, that motivation is qualitatively different from giving money to someone in order to receive goods and services in return. People give gifts to their children. Nobody pays their children for the "service" of being heirs. Consider the gulf between that view and the terminology Madoff uses. ...

He writes that heirs and private charities that receive sums from estates this year — when the estate tax has been temporarily phased out — benefit from "Congress' largesse." The heirs and charities actually benefit from the largesse of those who chose to bequeath money to them. The U.S. government did not give the heirs and charities anything. ...

Beyond issues of fairness, Madoff claims that reinstatement of the estate tax will help the economy... ...studies show that taxing wealth, which is what an estate tax does, is particularly harmful to growth. ...

Madoff's snapshots of wealth concentration ignore the large turnover in these aggregate statistics. In other words, "the wealthiest 1%" is not the same group of people, year in and year out. If a sole proprietor who normally earns $45,000 a year comes up with a new product and suddenly earns $5 million, this wouldn't show up as a boost to the middle class. Instead, it would appear as yet more concentration of income in "the top 1%." ...

The U.S. economy features a large degree of mobility, and those who want to spread prosperity to the least fortunate should favor lower government hurdles to wealth creation.

Posted by: Woody | Jun 7, 2012 9:13:38 AM

The compromise position would be to assess capital gains on death to any unrealized appreciation in excess of, say, $5M. By definition this would not be double taxation. Current estate tax return procedures would be used to implement this replacement for the estate tax.

Is the problem with this compromise that it would raise too little revenue?

Posted by: AMTbuff | Jun 7, 2012 11:26:55 AM

ATM, they may still have to sell the family farm to pay taxes on unrealized gains. Your idea has merit, but, rather, simply make the decedents retain the same basis in the assets as the deceased and only pay the tax on appreciation when the assets are sold or some other date of election.

Posted by: Woody | Jun 7, 2012 12:07:16 PM