Monday, June 05, 2006

Estate Tax Commentary Update

Jim Maule summarizes a plan he previously outlined for repealing the estate tax in exchange for the income taxation of unrealized appreciation in the decedent's propert. The original plan is set forth here. His summary is set forth here. At the end of the summary, he sets forth the most concise and compelling reasons to oppose the current efforts to abolish the estate tax:
The debate over the estate tax, and the various proposals, including mine, plays out against a backdrop that is very disconcerting, and if it isn't, it ought to be. Most advocates of estate tax repeal refuse to accept the idea of taxing unrealized appreciation at death. They want a system that taxes investment income at low or zero income tax rates and to the extent accumulated, escapes estate taxation. Likewise, they want growth in investment assets to escape taxation. Whatever wonderful arguments can be paraded out in favor of exempting investment income from taxation, the upshot is that the burden of paying for government shifts to wage earners. That shift has already started. Considering the decline in real wages, the payment of low wages to undocumented workers, and the difficulty for wage earners to accumulate sufficient post-taxation discretionary income to move into the investor class, the ability of the nation to sustain itself by seeking all necessary revenue from wage earners is at risk. Many who reply that the solution is to cut government spending are among the first to object when a specific government expenditure is nominated for termination.

There's an undercurrent to the taxation debate that transcends taxation. It goes to the heart of whether this country will continue to have a middle-class, one of the significant indicia of genuine freedom and democracy, or whether it will atrophy into another of the "many ruled by a few" arrangements that have dominated human history. This question is even more provocative when one considers the ways in which the few have made their way into the elite. Though it is important that discussion of these issues be done in a manner that permits the entire citizenry to understand what is at stake, I have serious doubts that it will. The rhetoric accompanying the small estate tax repeal slice of the much larger question about what sort of nation we are, want to be, and will be, reinforces my doubts.
(Emphasis added.)

Linda Beale takes on the WSJ op-ed of Nobel Laureate Edward C. Prescott (which can be found here by subscription only). Astonishingly, Prescott does little more than restate the standard arguments in favor of repeal which have repeatedly been shown to be factually false (e.g., there will be no impact on charitable contributions, the tax hits hardest on small, entreprenuerial businesses, the cost of compliance is roughly equal to the revenue raised, the tax is levied on income that has already been taxed, etc.). (Aside: When a Nobel Prizewinner relies on arguments that, in the main, are well-known to be factually untrue, shouldn't a recall of the Prize be in order?) All of Prescott's empty empirical arguments, however, are nothing more than garnish around his quasi-religious philosophical argument that:
[W]e can only grip the neck of our vibrant economic goose so tightly before it eventually dies and quits laying those golden eggs. And many of those golden eggs come in the form of capital that allows descendents to keep family businesses intact, or to begin new businesses that fuel our economy.
Beale cuts through the foliage and states:
The analogy is colorful, but off target. We are not gripping the neck of our goose at all tightly--we have in fact one of the lowest tax burdens of any of the developed world. Further, estate taxation doesn't prevent descendents from keeping the family business intact--with current exemption levels at $2 million for individuals and $4 million for couples, few businesses are threatened with the tax. While the heirs may diversify their investment and continue to make good as ongoing entrepreneurs, there would likely be room for more entrepreneurial activity without those dynastic families.

Prescott's conception of fairness shortchanges the important function of the estate tax to level the playing field at least somewhat for children born into poverty compared to the richest few. This redistributive function is important, and it should not be disregarded.
In a very real way the fight over the estate tax transcends the details, pro and con. At the bottom, Maule and Beale get it right: It's about about what sort of nation we are, want to be, and will be.

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