Response to Comments: A&F, Naked, and the Death Tax
I like the format of responding to comments in a new post instead of writing it as another comment. If you haven't noticed, I am straight ripping this idea from the Becker blog, but hey, the man is considered a genius for a reason. Let's spread the wealth.
Man, I didn't actually think anyone would talk to me about the death tax. A tax! Yes, I'm a little surprised. But hey, I was planning to do a post pretty soon on my views on affirmative action. This probably bodes well for that.
Most of the criticisms were very good as well. I especially like Raghu's counter to my Paris Hilton. Touche. As for the economic criticisms themselves, most were spot on in terms of some of my own doubts about this tax. I suppose I should have put a bit more meat or detail into the original post and addressed these concerns there, but - well - I didn't want to make a post on taxes any longer than it had to be. Now on to responses.
By the way, I don't find the argument that I have to defend redistribution to be very compelling in a society with social insurance schemes and oodles of public services.
I will spend the rest of the time dealing with the claim that I am not considering taking care of families who seek income for the familial unit and Kuru's somewhat related comment on familial businesses. Kuru, you are absolutely right in that the commenter's notion of a familial unit vs. my notion of an individual creates conceptual friction in the way income is thought of. That said, however, I do think that there are a few compelling reasons as to why(s) he can still jump ship without abandoning the family.
First, we must realize that we are not talking about families that are scrounging up to keep the family together. We are talking about families with a per capita income placing them within the top 1 to 2% of wealth. They are the creme de la creme.
Second, it is important to see that there is a second way in which the tax is not a double tax. Contained in the estate tax is a tax on unrealized capital gains. This has, by definition, never been taxed before. So while my individual monetary circulation example explains as to why I think the notion of "double taxation" itself is silly, I think that this provides more compelling evidence for those who disagree with me in that view. By the way, unrealized capital gains tend to be huge in these families. They comprise nearly 40% of the value of all estates subject and nearly 60% of the value of all estates from which a significant tax is levied. Yes, this does imply that a large number of estates are levied a very small tax. And that the super-rich do pay a bulk of the tax - as they do in terms of income tax as well.
Third, (and Kuru - this responds to your point as well) for various reasons that I don't want to get into, the way the law is structured, small family business and family owned farms do pretty well. It might be easier to show you the data. For example, a TPC study recently demonstrated that only 37% of cases have any demonstrable trace of family business/farm value, and of that 6% were significantly comprised of the family farm/business. That means that families with significant business constraints are only 2% of all of the estate tax cases.
But wait, it gets better. Of these 2% of cases in which the family owned business is significant, over 43% are levied only an ETR (effective tax rate) of 1.6%. Just under 25% more are taxed at approximately 9.5%. This means that over 70% of these guys are being taxed peanuts. But here is the kicker, the bottom 93% of these guys pay under 20% of the overall amount collected from family farms/businesses, meaning the top 7% of these wealthy family businesses pay nearly 80% of the tax. But even with them, their ETR never exceeds 23%. This means that these exceedingly wealthy folk (already in 2% of overall wealth as well as in the top decile of family business) aren't taxed too badly either - in relative terms, anyway.
Lastly, I think it is very important to keep in mind the revenue generated by this tax at all times. $70 bn/year is quite a hefty sum. I still don't understand if critics just want government revenue to contract by $1 trillion over the next decade or if they have an alternative.
Oh yah. I should probably add this in: The Bush administration has a policy to drop the tax rate incrementally and until 2010 in which case they completely eliminate it that year. (What, are all the old guard rich folk going to die in one year?) Then it is reinstated in 2011. Strange.
Man, I didn't actually think anyone would talk to me about the death tax. A tax! Yes, I'm a little surprised. But hey, I was planning to do a post pretty soon on my views on affirmative action. This probably bodes well for that.
Most of the criticisms were very good as well. I especially like Raghu's counter to my Paris Hilton. Touche. As for the economic criticisms themselves, most were spot on in terms of some of my own doubts about this tax. I suppose I should have put a bit more meat or detail into the original post and addressed these concerns there, but - well - I didn't want to make a post on taxes any longer than it had to be. Now on to responses.
By the way, I don't find the argument that I have to defend redistribution to be very compelling in a society with social insurance schemes and oodles of public services.
I will spend the rest of the time dealing with the claim that I am not considering taking care of families who seek income for the familial unit and Kuru's somewhat related comment on familial businesses. Kuru, you are absolutely right in that the commenter's notion of a familial unit vs. my notion of an individual creates conceptual friction in the way income is thought of. That said, however, I do think that there are a few compelling reasons as to why(s) he can still jump ship without abandoning the family.
First, we must realize that we are not talking about families that are scrounging up to keep the family together. We are talking about families with a per capita income placing them within the top 1 to 2% of wealth. They are the creme de la creme.
Second, it is important to see that there is a second way in which the tax is not a double tax. Contained in the estate tax is a tax on unrealized capital gains. This has, by definition, never been taxed before. So while my individual monetary circulation example explains as to why I think the notion of "double taxation" itself is silly, I think that this provides more compelling evidence for those who disagree with me in that view. By the way, unrealized capital gains tend to be huge in these families. They comprise nearly 40% of the value of all estates subject and nearly 60% of the value of all estates from which a significant tax is levied. Yes, this does imply that a large number of estates are levied a very small tax. And that the super-rich do pay a bulk of the tax - as they do in terms of income tax as well.
Third, (and Kuru - this responds to your point as well) for various reasons that I don't want to get into, the way the law is structured, small family business and family owned farms do pretty well. It might be easier to show you the data. For example, a TPC study recently demonstrated that only 37% of cases have any demonstrable trace of family business/farm value, and of that 6% were significantly comprised of the family farm/business. That means that families with significant business constraints are only 2% of all of the estate tax cases.
But wait, it gets better. Of these 2% of cases in which the family owned business is significant, over 43% are levied only an ETR (effective tax rate) of 1.6%. Just under 25% more are taxed at approximately 9.5%. This means that over 70% of these guys are being taxed peanuts. But here is the kicker, the bottom 93% of these guys pay under 20% of the overall amount collected from family farms/businesses, meaning the top 7% of these wealthy family businesses pay nearly 80% of the tax. But even with them, their ETR never exceeds 23%. This means that these exceedingly wealthy folk (already in 2% of overall wealth as well as in the top decile of family business) aren't taxed too badly either - in relative terms, anyway.
Lastly, I think it is very important to keep in mind the revenue generated by this tax at all times. $70 bn/year is quite a hefty sum. I still don't understand if critics just want government revenue to contract by $1 trillion over the next decade or if they have an alternative.
Oh yah. I should probably add this in: The Bush administration has a policy to drop the tax rate incrementally and until 2010 in which case they completely eliminate it that year. (What, are all the old guard rich folk going to die in one year?) Then it is reinstated in 2011. Strange.
posted by arun at 9:06 AM
3 Comments:
The reason why it goes away for a year, and then come back is classic DC politics. First, it's budget trickery so both sides (that support it) can downplay the impact on the deficit. Second, the intent (of the GOP) is that if they can ever get a tax to completely disappear, it'll be A LOT harder to reinstate. Imagine the howls, "Them liberals are tryin' to raise taxes again." Thus, the hope is it'll die forever. Sunsetting is one the go-to tricks both parties use when they wish to punt on an issue.
So can we expect a sudden increase in heirs poisoning their rich parents' tea as 2010 approaches?
While I'm comment-whoring...
The only study I've happened to see on this, Poterba & Weisbenner (2000) gave similar, if slightly lower figures. Unrealized capital gains made up 56.4% of estates worth in excess of $10 million in 1998. There are additional reasons to suspect that these estimates are on the conservative side. I'll check NBER tomorrow.
I'm amazed someone would actually have an objection to redistribution simpliciter. I mean, it just takes a little -- only a leeeetle -- bit of belief in the diminishing marginal utility of wealth to drive a stake into the heart of distribution neutrality.
Anatole French once said something relevant...
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