TaxProf Blog

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

Sunday, September 16, 2012

Why Progressives Should Want to End the Estate Tax, Too

Huffington Post: Why Progressives Should Want to End the Estate Tax, Too, by Scott Drenkard (Tax Foundation):

[T]here is a large and growing body of research by economists that generally lean left-of-center pointing toward repeal of the estate tax....

Nobel laureate economist Joseph Stiglitz, who served as chairman on Bill Clinton's Council of Economic Advisors, authored a paper which argued that the estate tax actually increases inequality by reducing savings and driving up returns on capital (which largely benefit wealthy holders of capital).

Economist Larry Summers, former Treasury Secretary under President Clinton, co-authored a paper in 1981 that showed that the estate tax has severe impacts on the accumulation of privately held capital. Using Summers' methodology, a July 2012 study by the Joint Economic Committee Republicans showed that since its inception, the estate tax has reduced the capital stock by approximately $1.1 trillion. ...

Perhaps the worst aspect of the estate tax is how uneven its impact is in practice. By utilizing careful estate planning, many wealthy taxpayers are able to shield much of their income from taxation upon their death. The people that tend to get hit the hardest are those that die unexpectedly, or, like farmers, have their assets tied up in illiquid holdings.

The estate planning industry has grown in size over the years as estate law becomes more complex. Three studies have even found that the compliance costs associated with the collection of the estate tax are actually higher than the amount of revenue the tax brings in! Almost the entire estate planning industry can be thought of as economic waste, because it would not exist without the estate tax, and the high-skilled labor and capital utilized in that industry would be applied to other, more productive economic endeavors if the estate tax were repealed.

Upon careful examination, we find that at worst, the estate tax can break down family businesses and increase inequality, but even at its best, it simply creates large compliance costs, which are a drag on the economy.

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Let’s see if we can find all the fallacies in this Post

1. A study by the Joint Economic Committee Republicans . .. well that must be objective.

2. The old family farm argument, where the farm that has been in the family since the last ice age must be sold to pay the onerous estate taxes. Great anecdote, but no basis in fact or experience.

3. Compliance costs are greater than the revenue they bring in. Really, one imagines that almost all of the estate tax lawyers who view this Forum would disagree with that. Note the editorial in the Wall Street Journal this past Saturday talking about how Warren Buffet uses lawyers to escape the Estate Tax.

“As businesses and families get close to the federal estate tax threshold of $5 million, they are more likely to have hired lawyers to help them avoid the tax. (Think Warren Buffett.)”

Yes, Mr. Buffet is avoiding most of the Estate Tax, but not with clever tax lawyers but by donating almost all of his estate to charity. Bill Gates, another dastardly estate tax avoider is doing the same thing. But facts like that never get in the way of a good anti-Estate Tax position.

The reality of the Estate Tax is that it impacts only a very few families, families that are the extremely wealthy ones. It is true that the revenue generated is relatively small, maybe only 10 or 20 times the level of something like home heating assistance provided to very low income people, whose expenditure level had to be cut this past year because of pressure on the budget.

But the Estate Tax does serve an important non-economic purpose, putting a little bit of fairness into the tax code. But no one should delude themselves into thinking that repealing the Estate Tax will bring any real economic benefits. Exactly how does saving Mitt Romney’s heirs about $100 million do anything for the economy? If Mr. Romney’s heirs have $100 million less to spend and the government has $100 million more to spend the economic impact is a wash.

For all of those who will react virulently to this post I would ask you to do one simple thing. Demonstrate mathematically how a family’s fortune can be destroyed by the Estate Tax, that is how they can be left with less than five millions dollars after paying the tax. Or better yet, assume Mitt Romney’s net worth is $250 million and all of it subject to the Estate Tax. Show us how his heirs are financially devastated.

Finally, if the Estate Tax is repealed please tell us how the revenue loss will be dealt with. There are three choices.

1. Raise someone else's taxes
2. Reduce spending (yes, please tell us which programs)
3. Borrow the money

Posted by: David R. | Sep 16, 2012 8:02:20 AM

Just don't allow tax free roll-over of capital gains and we're all good.

Posted by: jmike | Sep 16, 2012 9:12:32 AM

An alternative to the estate tax would capital gains at death. There is an elegant case to be made for this. We tax gains when a capital investment changes hands and death means a transfer to new hands.

A reasonable question is also whether capital gains t death should be at a higher rate than lifetime gains. If we taxed gains during life at 15 percent (as we do now under the temporary Bush tax cuts) and at death at 25 percent (as with recapture on depreciated real estate) how would this effect lock-in and allocation of capital?

Seattle Times Publisher Frank Blethen, a leader in the fight to end the estate tax, says it is fundamentally unfair to repeal the estate tax unless untaxed gains are taxed at death (see Perfectly Legal). Advocates of estate tax repeal who do not also urge capital gains at death are really promoting a free lunch for wealth holders and pushing tax burdens down the economic ladder.

And David R., above, is right -- the family farm story is bogus. Anyone who makes it should expect to be held up to ridicule for promoting fantasy instead of dealing in facts.

Posted by: David Cay Johnston | Sep 16, 2012 12:28:38 PM

FDR said it best: (

"The transmission from generation to generation of vast fortunes by will, inheritance, or gift is not consistent with the ideals and sentiments of the American people.

The desire to provide security for oneself and one's family is natural and wholesome, but it is adequately served by a reasonable inheritance. Great accumulations of wealth cannot be justified on the basis of personal and family security. In the last analysis such accumulations amount to the perpetuation of great and undesirable concentration of control in a relatively few individuals over the employment and welfare of many, many others.

Such inherited economic power is as inconsistent with the ideals of this generation as inherited political power was inconsistent with the ideals of the generation which established our Government.

Creative enterprise is not stimulated by vast inheritances. They bless neither those who bequeath nor those who receive. As long ago as 1907, in a message to Congress, President Theodore Roosevelt urged this wise social policy:

"A heavy progressive tax upon a very large fortune is in no way such a tax upon thrift or industry as a like tax would be on a small fortune. No advantage comes either to the country as a whole or to the individuals inheriting the money by permitting the transmission in their entirety of the enormous fortunes which would be affected by such a tax; and as an incident to its function of revenue raising, such a tax would help to preserve a measurable equality of opportunity for the people of the generations growing to manhood."

A tax upon inherited economic power is a tax upon static wealth, not upon that dynamic wealth which makes for the healthy diffusion of economic good.

Those who argue for the benefits secured to society by great fortunes invested in great businesses should note that such a tax does not affect the essential benefits that remain after the death of the creator of such a business. The mechanism of production that he created remains. The benefits of corporate organization remain. The advantages of pooling many investments in one enterprise remain. Governmental privileges such as patents remain. All that are gone are the initiative, energy and genius of the creator—and death has taken these away."

Note: If FDR were alive today he might have added, given recent Supreme Court decisions, that inherited economic power IS inherited political power.

Posted by: Bruce W. | Sep 16, 2012 1:08:04 PM

To David's list, one more factor, from real-world observations:

What happens toay, with increased life expectancies, is that parents in their late 80s are leaving estates to kids in their early 60s, many of whom have already accumulated enough assets to get them through the rest of their lives. The money never gets down to the generation that could use it for education, or working capital.

Repeal of the estate tax would remove one major incentive for gifts to grandchildren. For those who expect most fortunes to be wasted by the third generation, this might be sound policy. Also, for those who expect VoucherCare to require more savings by the elderly, $5 million is really not all that much healthcare. Nevertheless, in my practice I have many three-generation family clients, and it pains me to see the talented younger generation struggle because the stingy older generation hangs on to way too much cash.

Posted by: Bob | Sep 16, 2012 6:57:46 PM

The word "farm" in the estate tax debate is like the word "Holocaust" in most other political debates. Instant turnoff.

Posted by: Jack Bogdanski | Sep 16, 2012 9:47:04 PM

"If Mr. Romney’s heirs have $100 million less to spend and the government has $100 million more to spend the economic impact is a wash."

This has to be some of the most ignorant drivel I have seen on this site. The economic impact of direct consumers vs the government is FAR from equal. Perhaps you believe that the government's wisdom in the areas of investing (Solyndra) or putting money into "shovel-ready projects" (There is no such thing as a shovel-ready project) should be encouraged? How much waste are we, as taxpayers, willing to put up with?

Bottom line - if Mr. Romney's heirs waste their inheritance on cars, boats and booze, at least those industries have reaped a benefit. Maybe they will even be able to hire a few workers. When the government wastes our tax dollars on projects such as the above, only government cronies benefit while the taxpayers suffer.

Bureaucrats and politicians - doing nothing to benefit anyone while claiming to be doing something for everyone, "the public".

Posted by: Julie | Sep 17, 2012 12:51:16 PM

The estate tax is more a political statement than a revenue source. Compliance costs and revenue gained count for almost nothing on this issue.

Posted by: AMTbuff | Sep 17, 2012 1:28:02 PM

Julie is both right and wrong in her points

She is right in that how money is expended does have a differential impact on the economy. But she is wrong to assume the government always spends incorrectly, and that the private sector always spends correctly. For example if Mr. Romney’s heirs were to spend their $100 million Estate Tax windfall on foreign investments, (offshore accounts anyone) the money would have very little impact on the U. S. economy whereas were the Federal government to spend the $100 million on investing in education, infrastructure, cleaning up the environment, national defense, fighting crime etc it would have a very positive impact on the economy.

To take the position that all government spending is ineffective and wasteful and all private spending is productive betrays a prejudice that reduces rather than enhances the correct potion of the position, which is that how money is spent is as critical as the fact that the money is available to spend.

Posted by: David R. | Sep 17, 2012 3:42:02 PM

Am I the only one that sees the estate tax as an upper middle class subsidy? As others have noted, if there is no estate tax then there should be capital gains at death. The average taxable estate would have to go a fair amount into taxable territory (already a steep $10.2M without one bit of planning) before you offset the benefits of the step up in basis. By the way, as a middle class person myself, I think a middle class subsidy like the estate tax that rewards productivity and investment is a good thing. Also good is an incentive for family dynasties to stay productive and be charitable.

Posted by: Matt | Sep 18, 2012 9:32:36 AM