Thursday, December 07, 2017

Estates, Death, and Relentless Republican Lies

by Neil H. Buchanan

The repeal (or near-repeal) of the estate tax is by no means the largest part of the Republicans' tax plans, but it is at the philosophical core of their anti-tax efforts.  Understanding how and why Republicans insistently lie about the estate tax provides a window into their longstanding effort to reward the wealthy simply for being wealthy and to punish everyone else for not being virtuous enough to be rich.

Untroubled by evidence and unencumbered by logic, the Republicans have been telling tall tales about the estate tax literally for decades.  Shamefully, many Democrats have bought into those lies, with the result that the estate tax is now a husk of what it should be.  Rather than full repeal, I suspect that the current political mess will leave an even smaller and less effective estate tax in place, thus allowing Republicans to continue to campaign against it -- and to continue to use it to raise funds from wealthy donors.

No matter whether my prediction turns out to be true, perhaps the most interesting and depressing aspect of the Republicans' anti-estate tax howling is that it shows how completely they are willing to put ideology before reality.  And they have been doing so for decades, long before Donald Trump's garish reality show allowed other Republicans to pretend to occupy a somewhat higher ground.

After briefly summarizing how the estate tax works, I will use Senator Chuck Grassley's recent arguments (and I use that term loosely) against the estate tax to illustrate the rank dishonesty and elitism of the Republicans' anti-tax crusade.

The estate tax is conceptually simple.  Upon a person's death, the executor pays various costs (funeral, administrative fees, and so on) from the estate and then distributes the decedent's tax-free charitable contributions.  An "exemption amount" that is also tax-free is then deducted from the remaining estate.  Only then is a forty percent tax levied on the remainder.

Consider an example: The surviving spouse of a couple dies in 2017 and leaves behind a $20 million estate, and after paying various expenses and making designated contributions to the spouses' colleges and other charitable organizations, $14 million remains.  Currently, the couple is allowed a nearly $11 million exemption, so there is only three million dollars to which the estate tax applies, which at 40 percent results in a $1.2 million estate tax bill on a total estate of $20 million, for an effective rate of six percent of a twenty million dollar estate.

Unfortunately, even fairly good newspaper reporters make bone-headed errors when describing the estate tax.  For example, in an otherwise fine article in The Washington Post this week, the reporter wrote: "The estate tax, often described by Republicans as the 'death tax,' is levied only on the very rich, passing on assets of more than $5.5 million for individuals and $11 million for married couples. The current tax on estates is 40 percent of an individual’s wealth at death."

No, the estate tax is most definitely not 40 percent of an individual's wealth at death.  The reporters' previous sentence itself shows that that cannot possibly be true.  Even if this is merely sloppy editing or a misguided effort to shorten a description that might make readers' eyes glaze over, the result is to vastly overstate the extent of estate tax liability.

And then there is the Republicans' "death tax" rhetoric, which The Post's reporter at least had the decency to put in scare quotes.  It has been extensively and repeatedly documented that the Republicans hired a public-relations firm in the 1990's to test various negative labels for the estate tax, and the one that the focus groups hated the most was "death tax."  Thus was born a political hobbyhorse.

Yet a recent article in The New York Times, under the heading "Will the death tax remain?" -- while acknowledging that "Republicans refer to [the estate tax] as the death tax" -- informs us that "[t]he Senate bill applies the death tax to fewer people."  Maybe the same reporter would have written something like this during last year's primaries: "Senator Ted Cruz, who Donald Trump calls 'Lyin' Ted,' is unhappy with Trump's slurs against Lyin' Ted's family."

In any case, if Republicans truly thought that the problem with the estate tax is that it is collected after death, then there would be a simple answer: Collect it during life.  That is called a wealth tax, and I would strongly prefer it to the estate tax.  But of course, the "death tax" label is merely a distraction, because Republicans' real objection is to taxing wealth at all.

Economists have been studying wealth taxes, and in particular the estate tax, for decades.  Even those who worry about "distorting" people's behavior through taxation (as if there is some pure baseline against which such supposed distortions could be measured) have concluded that the estate tax has the smallest likelihood of causing people to change what they would otherwise have done.  The prospect of having one's estate subject to a tax, it turns out, simply does not discourage people who can do so from accumulating wealth.

If Republicans wanted to be consistent, this means that they should prefer the estate tax over other taxes.  Indeed, they would increase the estate tax and use that to reduce other taxes in the name of "pareto-efficiency."  Instead, Republicans' top priority is to get rid of the most pareto-efficient tax available.  Why am I not surprised?

All of which brings us back to Iowa's Senator Grassley, who was rightly mocked for making some revealingly stupid comments intended to justify repealing the estate tax: "I think not having the estate tax recognizes the people that are investing, as opposed to those that are just spending every darn penny they have, whether it’s on booze or women or movies."

Others have made plenty of hay about Grassley's idiotic comments, which really do make "the case for class war," as The Post's Alyssa Rosenberg put it.  Grassley essentially said that people who are not rich enough to have a taxable estate are irresponsible wastrels who lack the moral fiber to stop themselves from spending the twelve million dollars that would have put them into the estate tax's iron grip.

As ridiculous as all of that was, the truly revealing part of the tale is Grassley's subsequent attempt at damage control.  Here is what he said after having had a few days to try to clarify his muddled thoughts, which were supposedly "taken out of context":
"My point regarding the estate tax, which has been taken out of context, is that the government shouldn’t seize the fruits of someone’s lifetime of labor after they die.  The question is one of basic fairness, and working to create a tax code that doesn’t penalize frugality, saving and investment. That’s as true for family farmers who have to break up their operations to pay the IRS following the death of a loved one as it is for parents saving for their children’s college education or working families investing and saving for their retirement."
Grassley sees it as a matter of "basic fairness" that we cannot use the estate tax to "seize the fruits of someone's lifetime of labor after they die."  Why not?  The person who receives it did not do anything to create the fruit.  The dead person did.  We tax wages (even the wages of the poorest of the working poor), and we tax sales and plenty of other tax bases, but "basic fairness" says that we cannot take a fraction of what a dead person leaves behind?

As the great economist and moral philosopher Adam Smith (whose name is supposedly familiar to conservatives) once put it:
"A power to dispose of estates for ever is manifestly absurd. The earth and the fullness of it belongs to every generation, and the preceding one can have no right to bind it up from posterity. Such extension of property is quite unnatural. There is no point more difficult to account for than the right we conceive men to have to dispose of their goods after death."
Even if Grassley believes that all taxation is unfair -- an argument that other Republicans have made, by the way -- he offers nothing to tell us why the estate tax is especially bad, compared to the alternatives.  Maybe, just maybe, it could be that Grassley cares more about rich people's delicate sensibilities and their belief that their wealth is evidence that they are simply better than everyone else, both economically and morally.

But more importantly, Grassley insists on repeating multiple falsehoods.  He would have us believe that the typical estate tax bill is paid by an estate that was built up by a "lifetime of labor," but that is almost never true.  Most estates on which estate tax is due were inherited in the first place, and the recipient merely died without having frittered away the estate.

Aha, maybe they are more moral than the rest of us!  But that would merely mean that these estates should not be taxed because someone earlier in the line of succession managed to assemble an estate that has passed down through multiple generations.  The current generation's estate is not the fruit of their labor at all.

And it gets worse.  Grassley follows the Republican playbook by complaining about "family farmers who have to break up their operations to pay the IRS following the death of a loved one."  The problem is that there is not a single example of that ever happening.  Ever.  It is a favorite fable of Republicans, but it does not happen.  I am not saying that it is a statistically insignificant event.  I am saying that there is no evidence of this ever happening.  (And even if it did, it is not at all clear why that would be such a bad thing, because the family would still have millions of dollars to use however they wished, but never mind.)

It is important to remember that Grassley is an old hand in the Senate, having served since 1981.  He is no Ted Cruz or Mike Lee or Rand Paul, who claim to represent a new breed of true conservatives.  Grassley is the personification of the Republican establishment, and he is just as dishonest and ultimately elitist as the worst of them.

In a recent column, I joined the chorus of commentators who have noted that the Republicans' anti-reality approach to governing is not a new problem that was somehow caused by Trump's influence on the party.  Republicans have become ever more unhinged over the years, to the point where they now simply attack neutral arbiters like the Joint Committee on Taxation rather than accept unwelcome truths.

Again, however, this has been going on for decades, and the estate tax non-debate is perhaps the most longstanding example of Republicans' stubborn insistence on ignoring both evidence and logic.  They start from their conclusion and work backward: "Taxing wealth is unacceptable, because ... um ... it breaks up family farms!  Yeah, that's the ticket."

Is it any surprise that they are so good at saying that tax cuts pay for themselves, or that cutting corporate taxes will increase wages, or that their tax bill will lead to increased economic growth?  They are used to saying that war is peace, freedom is slavery, and ignorance is strength.  Look at how far willful ignorance has taken them.

5 comments:

Larry Lennhoff said...

One thing that might help is to have a catch alternative to the 'death tax'. A political action group I was associated with came up with the alternative of the 'dynasty tax'.

Shag from Brookline said...

If increasing income taxes on businesses might result in increases in prices for a business' products/services, might a decrease in such taxes result in decreases in such prices? In the latter situation, competition might suggest lower prices. In other words, businesses factor in taxes in pricing, n'est par?

David Ricardo said...

Good post, but I would argue the Estate Tax is not a wealth tax, but a transfer tax. It is imposed when a set of assets is transferred at death. This is the reason why the tax is Pareto efficient. Since its imposition does not affect the transferor and does not impact the transferee since he/she has not had access to the assets it has the least impact on economic activity, and hence is largely neutral, which is what conservatives have said they want in a tax regime.

Of course the fact that there is a difference between what conservatives say they want and what they do is not news.

Greg said...

Shag, my high school level of economics says that while you're right on the face of it that lower taxes should result in lower prices, it's not that simple. Decreasing business taxes will increase the supply curve, but not 100% efficiently. Businesses tend to increase supply with some of the savings, but they also do pesky things like return some of the savings to the shareholders as dividends.
If governments taxed their citizens and then burned the money (as some Republicans seem to believe) this would be the end of the story. However, there is also a demand effect to lowering taxes in that the government now has to reduce spending to make up for the reduced revenue. This results in a reduced demand curve. The government effect is likely to be stronger, since governments do tend to spend 100% of what they take in, or give that money to people who do.
Overall, an increased supply curve combined with a decreased demand curve will result in lower prices, but not necessarily more quantity (in this case, overall economic output) or higher long-term profitability for the businesses.

Shag from Brookline said...

PBS Newshour had a feature on Kansas yesterday examining its cuts in business taxes and the impact over several years on Kansas' financial situation, ending up with tax increases to address basic governmental needs that had been cut because of revenue losses from the Brownback tax cuts. Economic is complex. Business competition comes into play on pricing changes. Kansas had to make cuts in its various support programs to offset the revenue losses from tax cuts. These cuts over several years were quite deep. There were infrastructure, health, education, etc, cuts in programs until finally Kansas legislature realized the tax cuts were not growing revenues and raised taxes. That state experiment is important. While businesses in Kansas benefitted from business tax cuts, that did not result in increased revenues. In addition to this state experiment, the evidence at the federal level level with increasing tax revenues resulting from cutting taxes is also weak. So after several years of the situation in Kansas, are Kansas businesses better off because of the tax cuts? Both Brownback and federal level tax cuts have as a goal starving the beast, to make government smaller. What federal programs will have to be cut to make up for lost tax revenues? Yes, economics is complex. But the Trump/GOP tax "plan" is rolling the dice at a time when the international situation is in chaos, not to mention the political chaos in America. How will business in America fare if the tax "plan" does not pay for itself? Keep in mind that long needed infrastructure has yet to be addressed by the Trump Administration and the Republican controlled Congress. And then the Baby-Boomers! The Bush/Cheney Great Recession of 2007/8 is well within memory, exploding the Dow 30,000 mantra. But is that mantra back? Business profits are high. Unemployment is low. Interest rates are still low but are expected to rise, impacting the housing market. Also, the housing market would be impacted by the tax "plan" with the loss of certain deductions. Add to this the impact of the tax "plan" on health. There haven't been hearings with expert testimony on so many issues impacted by the tax "plan." It's political Hari-Kari.