The American Family Business Foundation, which was founded to promote repeal of the federal tax on the estates of millionaires, is at it again. AFBF, you may remember, commissioned two outrageous "studies" last year on the alleged economic benefits of repealing the estate tax, which provided the amusing subject of our report, Caviar, Cruises and Cocaine.
After the publication of our most recent estate tax report, which includes state-by-state figures, AFBF wrote in its blog that the "latest lies in the death tax debate comes disguised as a statistical study offered by a group called Citizens for Tax Justice."
"Research" that Assumes Government Collects Money and then Burns It
First off, AFBF says that it's misleading for us to say just how few deaths result in estate tax (just 0.6 percent in the most recent year for which data are available) while ignoring the broader economic impact of the estate tax, which AFBF says "reduced overall capital in the economy by $847 billion over a ten-year period."
Actually, the report they cite seems to say that $847 billion is the amount by which the estate tax has reduced capital during the entire time the tax has existed, since 1916. But putting that aside, keep in mind this figure came from the Congressional Joint Economic Committee (JEC) in 2006. Unlike the GAO, CBO, Congressional Research Service or the Joint Committee on Taxation, the JEC is not a non-partisan entity. It has a Democratic staff and a Republican staff who issue completely different (and conflicting) reports. This report was issued by the Republican staff when that party was in the majority.
The 2006 JEC study, using the methodology of a previous study but with updated data "estimates that the estate tax has reduced the stock of capital in the economy by approximately $847 billion, or 3.8 percent."
As is typical with "research" of this genre, it is assumed that the estate tax takes resources out of the economy and that those resources simply disappear. If you account for the economic cost of taxes but ignore that positive benefits of government spending in the economy, then obviously the only possible conclusion is that the tax in question shrank the economy.
In other words, these studies assume that the government collects taxes and does absolutely nothing with the revenue. In reality, tax revenue is pumped back into the economy as government spending, and most or much of it (and people will disagree on how much) is spent on investments that actually boost our economic growth. Education provides a productive workforce, roads make commerce possible, public safety and national defense ensure that your property in the U.S. won't be stolen or seized by anyone inside or outside this country. Even a federal program like Social Security that supports consumption at least pumps dollars back into the economy, which provides some benefit to businesses.
If the estate tax was repealed, some of these public services would have to be cut sooner or later to make up for the lost revenue, and the logical result could be less capital formation over time — perhaps a reduction much larger than the 3.8 percent reduction that the estate tax is claimed to produce.
Questionable Use of Data
AFBF argues that the broader economic impact is clear from research showing that repeal of the estate tax would "increase small business capital stock by $1.6 trillion and create 1.5 million jobs."
The study they cite is a February 2009 report from Douglas Holtz-Eakin and Cameron T. Smith, and it's one of the "studies" we felt compelled to refute in our Caviar, Cruises and Cocaine report. Here's what we said about this $1.6 trillion figure then:
There are more examples of how their analysis is extremely sloppy or just intentionally misleading. For example, Holtz-Eakin and Smith give us this gem:
"In 2004, individuals reported a total of $10.2 trillion in wealth on estate tax returns. Eliminating the estate tax would raise the wealth reported on estates by over $1.6 trillion."
First of all, if the estate tax is repealed, there will be no reason for anyone to report any estate value to the IRS so the “wealth reported on estates” will drop to zero.
But putting that aside, individuals did not report a total of $10.2 trillion on their estate tax returns in 2004. Actually, in 2004 individuals reported a total of less than $0.2 trillion in net wealth on estate tax returns. The amount of wealth reported on taxable estate tax returns was only $0.1 trillion.
The $10.2 trillion figure is actually an IRS estimate of the total value of the net worth of Americans with assets of more than $1.5 million in 2004. Almost all of these people were obviously alive in 2004, and their estates were not going to be taxed in any one single year.
Thus, the $10.2 trillion is more like an estimate of the value of wealth that existed in 2004 and that might, one day, be subject to the estate tax.
So when the authors go on to say that eliminating the estate tax would increase this wealth by $1.6 trillion, they presumably mean over a span of fifty years or longer, or however long it takes those who were millionaires in 2004 to die out.
It’s a little weird to speak about economic impacts in terms of half-centuries, but it’s certainly a way to avoid being called out when your predictions don’t pan out.
Compliance Cost for the Estate Tax Are Not Greater than the Revenue It Collects
Our recent report with state-by-state estate tax figures mentions that the effective estate tax rate for those 0.6 percent of estates that were taxable was 20.4 percent. AFBF takes issue with this because, they say, the only way wealthy people can use the deductions and credits that reduce or eliminate their estate tax is by "paying the bills for high-priced attorneys and estate planners." In fact, AFBF even claims that a former Clinton economic adviser found that the estate tax's compliance cost exceeds the revenue it collects.
A report from the Center on Budget and Policy Priorities discusses research finding that the total compliance costs of the estate tax, including collection efforts by the federal government and planning costs for individuals and families, comes to about seven percent of the total estate tax revenue collected, which is comparable to the compliance costs of other taxes.
One reason for misunderstanding about the compliance costs of the estate tax is that most of the costs associated with estate planning have nothing to do with the estate tax, and yet many people assume that avoiding the tax is the only purpose of estate planning. Anyone with any assets and who has any interest at all in controlling what will happen to those assets in the future and who will inherit them will do some estate planning. No one has suggested that the estate planning profession will disappear if the estate tax is repealed.
Misunderstanding Capital Gains Taxation
There seems to be some confusion about how capital gains are taxed on inherited assets. In our recent estate tax report, we pointed out that more than half of the value of taxable estates is capital gains income that has never been taxed. As we explained,
Most large estates include assets such as real estate, stocks or bonds. Any increase in the value of these assets is capital gain income that would be subject to the income tax if they were sold during the owner’s lifetime. However, this type of income is not subject to the income tax if the owner dies and leaves it to an heir. In other words, without the estate tax, a huge amount of income would never be taxed. Over half the value of inherited estates is capital gains income that has never been taxed.
AFBF responds in a way that seems to misunderstand tax law or simply miss the point:
This formulation is not true. Under capital gains tax law, assets which increase in value are taxed whenever they are sold. If an asset is not sold, it is not taxed – but neither does it provide a tangible reward to the owner.
For example, consider a family that passes a piece of expensive artwork between 4 generations, during which time the artwork substantially increases in value.
Is the art taxed?
Of course not. The family paid taxes on the income that purchased the art. If and when they choose to sell the art and realize their profit, they will once again pay taxes.
Our point was that if your grandfather bought that art in 1920 (to stick with the art example) for $1,000 and then left it to you when he died in 2009 when it was worth $20,000, you would not have to pay income taxes on that gain of $19,000. But if your grandfather sold the art the day before he died, he would have to pay the income taxes on that gain of $19,000. By leaving it to you, your family avoids the income taxes on that capital gain. The estate tax is therefore not double-taxation on this income — which is most of the value of taxable estates.
The Estate Tax and "Small" Businesses
Our recent report also cited figures from the Tax Policy Center (TPC) on small businesses.
Late last year, the Tax Policy Center provided estimates that defined small business estates as those in which farm and business assets represent at least half of the gross estate and total no more than $5 million. Using this definition, it was estimated that only 100 farms and small business estates would have owed any estate tax this year if the 2009 exemption levels had been in effect.
AFBF cites its work that allegedly "refutes" this. First, AFBF simply disagrees about the definition of a small business.
The standard small business definition is 500 employees, though some small businesses can be as large as $175 million in gross assets and have over 1,500 employees, according to the Small Business Administration.
For people who have a business with, say, five employees, it probably comes as a shock to learn that when conservatives talk about "small business" they actually mean companies with 500 or even 1,500 employees. So much for the owner of an auto shop or corner grocery store.
Then AFBF again cites the JEC (Republican staff) report to claim that 115,000 small businesses paid the estate tax between 1996 and 2005. This is based on the number of estates with any amount of assets in any business that is not a "C corporation." That means that if a person has a stake in a company that is huge but not a business that pays the corporate income tax (say, the Tribune Company) and only has a tiny stake so that it makes up small portion of the estate, this person's estate is counted as a small business estate.
And of course, AFBF does not bother here to mention that the estate tax has been drastically cut back since the 1990s and that no one in Congress is considering allowing it to revert fully to the pre-Bush rules.
Misleading Use of Figures and One-Sides Analyses Hide Philosophical Opposition to Estate Tax
We could go on about the ways that AFBF has produced countless distortions about the estate tax but this is really beside the point. The only rationale for opposition to the estate tax is simply a deep-seated belief that society has no right to ask for more from the rich than it does from everyone else. We believe that the rich could not have made their fortunes if not for the protection of property, the facilitation of commerce and the countless other public services that taxes make possible, so it's reasonable for the rich to pay a little more in taxes. Others simply disagree.
It would be much easier to have this philosophical debate if our opponents did not hide behind supposedly complicated economic models that mystify the lay audiences who are unaware of their one-sidedness and their convoluted logic. It would be much simpler if our opponents simply told us why they think the rich should not pay more in taxes than anyone else.