The NY Times editorializes (registration required) in favor of the estate tax, whose permanent repeal was passed yesterday in the House of Representatives. Unfortunately for the Times their arguments were addressed by an editorial in yesterday's Wall Street Journal (subscription required), in Paris Hiltonomics.
The House proposal would cost the federal government a whopping $290 billion through 2015, according to estimates by Congress's own budget agency. And that's just the start; the costs after that would be explosive.
Well, doing the math that the Times doesn't want you to do, that's 29 billion per year, about 1% of the federal budget. That's right, 1%.
Repeal would shield the estates of the very wealthiest Americans from the tax. That's the same group that already benefits the most from Mr. Bush's tax breaks for dividends and capital gains.
Ah, the "tax cuts for the wealthy" argument. But the WSJ piece makes the case that it's the "just wealthy enough" who get hit hardest. This argument rests not on who has to pay it, but whom of those that pay the tax get hurt the most. From the Journal:
In any case, what liberals call the aristocracy of wealth already exists, despite the current tax, because super-rich families like the Hiltons have always found ways to avoid or mitigate it through offshore accounts, tax-sheltered foundations, and so on. It is the heirs of the not-so-super-rich -- the thrifty dentist, the canny investor, the small-business millionaire -- who are typically devastated by the tax.
The Times continues:
Repeal of the estate tax was deemed too expensive in 2001, when the government was still enjoying the Clinton-era budget surplus. So it stands to reason that it's out of the question today, as America's enormous deficits weaken the domestic economy and the country's international economic leadership. But to its proponents, estate-tax repeal is the holy grail of the Republican anti-tax crusade.
Remember that the "Clinton-era budget surplus" existed only briefly, not in the sense that $5 trillion in the future was guaranteed to show up. It was a projection only. The end-of-Clinton-era recession got in the way, as did 9-11. Or did they forget? In addition, I would hardly call this the "holy grail of the Republican anti-tax crusade." More like a necessary component for fairness, especially considering it disappears for one year, then magically reappears if nothing is done. As for the view that we can't afford it amid deficits the WSJ points out:
This is hard to credit coming from the same people who also opposed eliminating the tax during the surpluses of the late 1990s. In any case, in 2003 the estate tax accounted for only about 1.1% -- some $22 billion -- of federal revenues.
The Times continues:
The most commonly heard argument against the estate tax - that it represents unfair double taxation - is specious. First, the estate tax does not even kick in until the assets left at death exceed $1.5 million, or $3 million per married couple - and those exemption amounts will more than double by 2009.
This actually makes the point that the money is in fact taxed a second time. It says that some, above a cutoff, will be taxed a second time. And it's convienient that they picked 2009 for the exemption increases, because after the tax disappears in 2010 it returns - at it's previous level of $1 million - in 2011.
Second, much of the wealth transferred at death has never been taxed. That's because capital gains on assets like houses, stocks and bonds are not taxed until the asset is sold. Obviously, if you inherit, say, a house, its owner didn't sell it, so never paid any capital gains tax on it.
This is flat-out wrong. The person who inherits the house/stocks/bonds obviously didn't pay taxes on the asset, nor did the original purchaser. The original purchaser did, however, pay taxes on the income that purchased the asset. So the asset itself has not been taxed, but the income that was earned to purchase it was taxed - that is where to look for the double taxation.
Another popular argument against the estate tax - that the rate is so high the government is basically confiscating your property - is also a sham. Estate tax rates currently top out at 47 percent. But those rates don't even start to apply until an estate tops the multimillion-dollar exemption.
At an exemption of $1M, which is what it returns to in 2011, anyone who inherits a home or farm runs the risk of paying the usurious tax, currently 47%, previously 55%. If the heir doesn't have the cash, they are forced to sell the home or farm to pay it, regardless of their desire to keep it. That is the essence of confiscation - forcing you to lose property against your will.
The estate-tax foes' real beef is not with the estate tax per se. It's with the principle that the more you earn, the more taxes you should pay and, specifically, with the idea of taxing capital gains. Those debates are as old as the tax system itself.
I'm going to give the Times a small math lesson that demonstrates that principle. Let's assume that we have three individuals in a flat tax system where one makes $40,000, one makes $240,000 and one makes $1,040,000. The exemption is $40,000. The rate is 20%, no deductions. The first individual pays...nothing. The second pays $40,000. The third pays $200,000. Doesn't that produce a more-you-earn/more-you-pay outcome? So the argument isn't really about that, is it?
The Senate must stand firm for an estate tax that provides an ample exemption of up to $2 million per person, but with a top rate, 45 percent, that ensures that a reasonable amount is actually paid to the government.
Now I wonder where the Times came up with these numbers? Did they research the economic statistics for the population and formulate policy that would produce the desired outcome? Did they assess the distribution of estates with values above and below $2M in worth and choose a fair break point? Did they consult the House Ways and Means committee on exactly how much revenue this tax would generate? No, they just pulled the numbers out of their ear.
The Wall Street Journal has the final word.
Democrats and their media allies like to point out that only a tiny fraction of Americans -- the despised rich -- will ever pay estate taxes. Yet according to a survey by pollster Frank Luntz, 64% of Americans favor a complete repeal of the tax. They understand that the death tax isn't just about economics. It's about justice, and no policy that penalizes the thrifty and busts up family businesses belongs in our tax code, whatever its effects on Paris Hilton.
UPDATE: More on this from Instapundit Glenn Reynolds, who takes a more philosophical approach. I don't know if I'd refer to paying the tax on your loved one's estate as "giving back." More like "handing over." Nonetheless I'd agree that the slogan "f**k the small businessman" is unlikely to generate a huge following. If you go to that link and read the remainder of the content, it's not much better.