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Friday, February 1, 2013

Using the Estate Tax to Curb Inequality and Spur Economic Growth

Tax AnalystsAmy S. Elliott, Raising the Estate Tax Will Spur Economic Growth, Caron Argue, 138 Tax Notes 552 (Feb. 4, 2013):

Paul L. Caron, Pepperdine University visiting law professor and author of the TaxProf blog, said he has a proposal that will please right-leaning deficit hawks and left-leaning redistributionists, all while spurring economic growth. He suggests raising the federal estate tax.

Presented January 30 as the luncheon keynote address to tax practitioners attending estate planning sessions at the University of Southern California's annual tax institute in Los Angeles, the proposal was not roundly embraced. But its foundation -- that inequality hinders economic growth -- is intriguing.

The proposal is outlined in a paper by James Repetti of Boston College and Caron that was first presented at a January 18 symposium cosponsored by Pepperdine and Tax Analysts on tax advice for the second Obama administration. (Prior coverage here. The paper -- Occupy the Tax Code: Using the Estate Tax to Reduce Inequality -- is available here.)

In the paper, Caron and Repetti review 36 studies examining the relationship between concentrations of income and economic performance. Nineteen of the empirical studies examined a period of at least 15 years. All were published between 1992 and 2012. Thirty of the studies and all of the 19 long-term studies found a negative correlation between inequality and economic growth. In one study of 16 industrialized countries, the two countries with the highest inequality in 1980 (Australia and the United States) were also the two countries with the lowest labor productivity growth in the ensuing decade.

"We're hopeful that we can somehow get the left and the right to agree that it's in both of their interests to decrease inequality," Caron said. Doing so would not only reduce adverse health and social consequences such as low life expectancy, illiteracy, homicides, imprisonment, mental illness, and obesity, but would also contribute to economic growth, he said, adding that more tax revenue could help decrease the nation's debt. "Using the tax law -- especially the estate tax -- is the least painful way to achieve that," Caron said.

The paper cites a study suggesting that as inherited wealth (as opposed to self-made wealth) constitutes a larger fraction of a country's GDP, per capita GDP grows more slowly. Using IRS Statistics of Income data, it provides evidence suggesting that the estate tax significantly reduces the size of the nation's largest estates and therefore their ability to pass down that wealth to heirs. U.S. estates exceeding a value of $20 million transferred more than 13 percent of their gross values to the federal government in 2010.

The paper debunks the commonly held notion that the estate tax discourages savings, saying it isn't supported by either economic theory or empirical evidence. And it provides estimates by Massachusetts Institute of Technology economics professor James Poterba showing that the effective impact of the federal estate tax is very low -- between 0.1 and 0.5 percent -- during the period when a person is likely to create most of his wealth (under age 70).

While the paper does not specify how to raise the estate tax, Caron told practitioners that the most effective reforms would be those that are "grand and ambitious" -- like taxing capital gains at death and repealing section 1014 to eliminate stepped-up basis at death.

"Recent evidence would suggest that the time isn't right for that kind of a big deal," Caron said. "So a more modest approach would instead deploy what we already have with the estate tax and just go back to 2009, where the exemption was $3.5 million and the top rate was 45 percent."

Caron said that while that "more modest and perhaps more doable" approach would raise only about $125 billion over 10 years, "that's at least a start on both the revenue front and also the equality front."

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Comments

Who is this Caron guy? :)

Posted by: Rich Hofnann | Feb 1, 2013 4:47:53 AM

The paper states "We should care about this increase [in equality] because inequality contributes to a variety of adverse social consequences that persist across generations." I'm not sure that the paper actually shows that "inequality" so contributes; rather, it seems to state that poor people do worse on a variety of factors (health, etc.)--which is obvious. Moreover, even if that were shown to be true, I didn't see any evidence in the paper that lowering the inequality, whether through arbitrary forces, e.g., the economy tanking, or through deliberate means (through the estate tax, for example), would improve matters.

As to the estate tax, for which Caron suggests lowering the threshold to $3.5 million. Do those inequality effects really begin with people having an estate at death of $3.5 million? Is inequality lessened by encouraging wealth transfers (through deductions to the estate tax) from people to charities (that often serve as sugar daddies to those that run them)? How does wealth being locked up in 'charities' decrease inequality?

Posted by: daniel | Feb 1, 2013 5:07:30 AM

Didn't President Carter tell the nation if you made $25K/yr, you were "rich?" He was president in 1980. And during this time could it have been argued if Sweden were a state it would have been in the bottom 5 of the US? Who wants to be where Mississippi is? Although blue state Illinois is the worst state to live in. Illinois is working on redistributing the other 49 states' money to bail them out.

Posted by: Sandy P. | Feb 1, 2013 8:03:13 AM

Bravo. It takes a brave man to swim against the current. And the current has been to get rid of the "death tax" altogether. If only tax policy was determined by facts and statistics. Tax policy is determined by Washington and it does not operate on facts but on opinion, the more loudly stated the better and it does not hurt if it comes along with a sack of cash.

Posted by: George | Feb 1, 2013 8:57:52 AM

So what's to keep the incremental estate tax revenue from being used for more dysfunctional fighter planes (see F-22)?

The cause-and-effect claimed here (raise the estate tax, decrease inequality) has no basis in reality.

Raising the estate increases revenue, yes, raising the estate tax can somewhat limit concentrations of wealth, yes, but that is about all we can be certain of.

And yes, and it will be a welfare program for lawyers.

Posted by: save_the_rustbelt | Feb 1, 2013 4:46:15 PM

Rich, I've tried to educate this Caron fellow, but he's hopeless.

Posted by: Woody | Feb 1, 2013 8:03:37 PM