The right’s nutty claims about job creation–Gingrich and the estate tax
by Linda Beale
The right’s nutty claims about job creation–Gingrich and the estate tax
The right is busy selling its program for enriching the rich to the working class. As usual, the sales pitches are full of false and nutty claims pitched to fool hard workers who are uninformed about the facts.
Newt Gingrich, for example, pitched the claim that eliminating the estate tax that applies only to the biggest multimillion dollar estates–a large tax cut applicable only to the uberrich silver-spoon kids who do nothing to earn the largesse–will cause all kinds of wondrous economic changes. See “To create Jobs, abolish the death tax now” (The Newt Gingrich Letter).
These claims are based on a so-called “study” by the American Family Business Foundation (put in quotes, since this is a paid “study” by a propaganda tank that asks family businesses of the kind that might have to pay the tax whether they would create more jobs if they didn’t have to pay the tax, and gets the not at all unsurprising self-serving answer that “oh yes, we’d have more jobs with fewer taxes”.) So the study and Gingrich make pie-in-the-sky claims that
- the US government would actually take in more tax revenues by getting rid of the millionaires & billionaires’ estate tax–even claiming a specific number of $362 billion more in taxes. (It helps if the persons answering the self-serving survey give numbers that can be used to make these specific type of claims.)
- Gross Domestic Product would increase by 2.26% just by eliminating the tax
- New revenues from the “economic activity that would result from the elimination of the [estate] tax” would be twice as much as the revenue gained from the current estate tax;
- the economic growth from eliminating the estate tax would “create thousands of new jobs as families kept more small businesses running through mutliple generations and shifted their efforts from avoiding estate taxes to investing in America”
Balderdash
Eliminating the estate tax won’t create new economic growth, new investment in jobs, save family businesses or divert monies now spent on tax evasion to worthwhile domestic investments. Most of the claims in articles like Gingrich’s or in “studies” like the self-serving American Family Business Foundation are unfounded, based on absurd assumptions or simply made up.
- Estate tax reduction or repeal doesn’t lead to growth. We have cut taxes on estates enormously in the last decade and growth has stagnated, with none of the benefits going to the vast middle and lower classes. There’s no empirical evidence supporting the self-serving claims that such a tax cut helps growth. In fact, evidence on inequality in societies supports exactly the opposite conclusion–the more we allow spendthrift heirs to take over family fortunes tax free and accumulate even more wealth, the worse it is for economic growth and societal wellbeing.
- Estate tax reduction or repeal doesn’t create jobs. Money saved from taxes doesn’t automatically get plowed back into businesses in a way that creates jobs. It’s more likely to get plowed into private equity funds (that strip companies of their employees and load them up with debt in order to resell them at great gain for the equity investors and great loss of jobs) or invested in emerging market economies to diversify portfolios. Most use of excess funds by the wealthy, that is, benefits the wealthy at little or no good to society and in fact often with considerable harm to society in terms of job loss
- Estate tax repeal doesn’t “save” family businesses, because they aren’t at risk from the estate tax in the first place. Very Very few (if any) family businesses are lost to the estate tax. There is a provision in the Code allowing installment payments over 14 years to ensure that family farms can stay in business by paying the estate tax out of annual incomes. The argument about loss of family businesses is invented to appeal to those who do not understand the very limited number of estates subject to the tax in the first place (fewer than 2%).
- Estate tax repeal doesn’t prevent sales of family businesses upon death of the founder–and those sales are often a good thing! Many times, family businesses are sold upon the death of the founder because nobody in the family wants to run it anymore–they want to take their cash and go live their own lives. That’s probably not a bad result for the economy–new management will tend to see opportunities that the old business had ignored. All repeal of the estate tax would do would be to put more money in the hands of heirs who do nothing to deserve it.
- Estate tax repeal isn’t needed to avoid “double taxation.” Gingrich tries to make the case, quoting Petter Ferrara as follows:
“The [estate] tax taxes yet again a lifetime of savings and investment that has already been taxed multiple times. It is double taxation on top of double taxation, which often forces loved ones left behind to sell the family farm, ranch or business to pay the taxes just when they are suffering from their loss the most.”
Not so. Many estates have as their primary assets investment securities that represent considerable appreciation that has NEVER been taxed. Elimination of the estate tax means that even this “last chance” for getting a single tax bite would be eliminated. Many of the biggest estates represent passage of stock from one generation to another with almost no taxation along the way. Whereas workers pay tax on every single dollar earned and have little ability to use their salaries as collateral for big investment plays, wealthy heirs of financial assets can use their assets as collateral for loans to “monetize” their wealth without taxation. Most substantial family farms and ranches are now incorporated, with use of various schemes to zero out corporate income and pay no taxes (especially, e.g., depreciation of equipment and “salaries” for family members and corporate ownership of personal residences resulting in widespread ability to deduct personal expenses not possible to ordinary wage workers). Double taxation is a fabricated myth for most of these estates. As Leona Helmsley famously stated–only little people pay taxes.
And of course, as already noted, the sales are usually because they WANT to sell, since family farms have 14 years in which to use the income from the business to pay off any (usually small) estate tax due. Remember that the effective estate tax rate is usually very very low, given the very large current exemption amount. Only the estate above the multi-million dollar exemption amount is subject to tax, and the rate right now is inordinately low and there are numerous accepted and simple mechanisms, such as family limited partnerships and other devices, which result in much lower evaluations than fair market value under current warped rules.
Meanwhile, it is important to note the many beneficial effects of the estate tax:
- the estate tax provides revenues to help combat significant budget deficits. Those deficits have been substantially created by two problems–wars being fought without the normal tax increases to fund them, and tax cuts even when those cuts created hundreds of billions of dollars in annual deficits.
- the estate tax is a slightly redistributive mechanism to counter the upwards redistribution that is the norm in our current economic system. CEOs get golden parachutes for ruining companies, and bankers and managers take all the benefits of worker productivity gains. Ordinary employees are denied the right to form a union by every employer trick imaginable and by the right’s unwillingness to let card check become law. Workers therefore end up scraping by on a combination of devalued wages and debt.
Keeping the estate tax, and making it more progressive so that the estates of the uberrich are appropriately taxed under “ability to pay” concepts regarding the marginal utility of the dollar, is the fair thing to do. And it would have a stimulative effect on the economy by providing revenues for governmental infrastructure and other projects. Counter to Gingrich’s claim, repealing the estate tax would be a further step backward to the robber barons’ gilded age. Let’s not take that step.
November 01, 2011 in Estate Tax, Job creation, Right Wing Rhetoric | Permalink
Technorati Tags: deficit reduction, estate tax, family businesses, family farms,Newt Gingrich
2.26% hmm.
not 2.25% or (gasp) even 2.27%
it always amazes me how precise these predictions are.
i don’t know anything about taxes, but it seems to me there are fairly simple ways to avoid the estate tax if it’s a question of saving the family farm or family business.
and i just can’t imagine how paying a tax on accumulated wealth after you are dead prevents you from expanding your business while you are alive.
and of course the double taxation argument. what with the gummint taxing all this money over and over again, it’s amazin we have any left.
must be a miracle.
The whole thing is so crazy, we must talk about it because it is so crazy. If all of us don’t pay taxes, the economy would just lift off the ground and some spirits would come and pay all the bills with spiritual tax $$.
The thing is so absurd it is beyond any reasonable argument. not even a substance to argue about. We all know, the little family owned business can’t make it because the little dogs just can’t compete P***ing in the wind with the big dogs.
How does one have a reasonable exchange with a BS’r like Gingrich?
The best I can tell, regardless of how progressive the estate tax is or can become on paper, matters little to the uber-rich as they have plenty of trust accountants and attorneys to work around the tax – Bill Gates and Warren Buffet anyone?. I’m not suggesting that Gingrich isn’t full of it and or the comparative description of “burden” isn’t very burdensome for those subject to the tax, but within the stratification of families, businesses, persons who are subject to the estate tax, it seems fairly apparent that it’s those closest to the threshhold have much more difficulty avoiding the tax than those who far surpass it.
As for diversion of funds spent on tax avoidance (evasion implies illegal activity) – what exactly is the social value of all those trust attorneys and investment vehicles wrapped in life insurance (and hence tax deferred/avoided) policies if not for tax avoidance?
Linda:
Doesn’t Asset Protection Trust Funds established in Wyoming, Alaska, etc. also avoid the estate taxes?
Have to agree with Linda on the jobs issue.
Other than that it is her usual slam of anyone who builds anything.
“All repeal of the estate tax would do would be to put more money in the hands of heirs who do nothing to deserve it.”
i know lots who heirs who worked their entire lives in the family business, what shrill b.s.
Rusty
somebody may have worked “all their lives” in the family business. But they don’t automatically deserve to inherit it any more than the paid, nonfamily employee who worked all of his life in that same business does. But the way the law works, the undeserving family member gets to inherit practically tax free and the long-serving employee doesn’t. In other words, “working your entire life in a family business” may be a “necessary” factor in thinking a person deserves to inherit it, but it surely isn’t determinative about the fairness of it or whether that particular person “deserves” to inherit.
Please don’t create strawman arguments. I don’t “slam” people who build. I celebrate them. I think those who start up new businesses are wonderful innovators who do the entire society a favor. But celebrating people who build has nothing to do with opposing the repeal of the estate tax. Assets from “builders” shouldn’t pass tax-free to another generation without an estate tax any more than assets from “destroyers” should. It isn’t really relevant. Let some minimum amount pass tax free, sure. Then tax progressively the rest of the estate, because the bigger the estate, the more benefits received from the state structure in which it existed and the better able to pay (in marginal utility terms) the recipient beneficiary is.
Run–sure, there are lots of mechanisms for avoiding the estate tax at state and federal levels. The point is that Congress (and the state legislatures) could, if they wanted to, easily stop the end-runs around the estate tax related to valuation discounts, trusts, and other mechanisms. The excuse for eliminating the estate tax–that it is too hard to enforce–is simply not true. There will always be some more aggressive taxpayers (and estate tax lawyers) and there will always be creative development of avoidance mechanisms. But a proactive Congress could eliminate much of that if they bothered to try.
Rusty,
Do you them for “children and idiots”?
Do you know them for “aristocracy and monarchy”?
Just a couple of ideas from Thomas Paine, Rights of Man 1792, about the time he was encouraging the French to water the tree of liberty with arostocrats and monarchs.
It is kharma, man!
Agreed, why not leave the business to a hard working manager?
I know a family business whose kids work in the shelter of what the parents built!
Fortunate for them, a good manager married in…………………………..
Fortunate new aristocrats.
Automatically deserve? – perhaps not, but if there’s an implicit (or explicit) agreement that the heir gets to inherit the business, then there’s a clear difference between the heir and the non-family employee.
And yes, the law treats the family unit differently.
ilsm
Tom Paine opposed execution of Louis XVI and almost lost his own head for his troubles.
But I think Rusty has turned a corner. If those little rich kids worked for the family farm, I hope they got paid. Maybe dad couldn’t afford a good tax lawyer.
I don’t like taxes much myself, but I do get tired of “don’t tax us poor rich people, we worked so hard to get rich and if you tax us we won’t give you anymore nice jobs.”
No. Remember that any asset put in a irrevocable trust is a gift and subject to gift taxes. Although the current regime has increased the lifetime gift tax exemption to $5,000,000 ($10,000,000 per couple). There were promoters that were pushing “The Alaska Trust” that supposedly moved assets out of the estate while still giving the grantor control of those assets. That didn’t quite hold up on audit.
Well,
the bestest reason I can see for an estate tax (progressive to be sure) is to limit the growth of a domestic aristocracy. Folks who live on other people’s work because they inherited ownership of the means of production.
No doubt we all want the best for our kids. But somehow I think we can manage that and still pay taxes.
it was the success of the French aristocracy in avoiding taxes that led to the conditions that led to the revolution and the guillotine, so that might be something to think about too while you are providing for your kids.
Linda,
Could you comment on this old report from an Joint Economic Committee Study that actually provides evidence to refute your assumptions? Your analysis not only seems short on facts but, provides no emperical evidence…why is this?
You seem so confident in your position, but it is so easily refuted by anyone who knows what they are talking about…why is this?
“There is no empirical evidence to support the view that the estate tax is effective at reducing inequality. In fact, much of the research which suggests that the estate tax is a poor tool to address inequality has been done by economists who themselves are generally sympathetic to issues of income inequality”
http://www.house.gov/jec/fiscal/tx-grwth/estattax/estattax.htm
Rusty
Whether someone deserves an inheritance or not is not the issue. When property is transfered to the financial benefit of the recipient it is subject to taxation. This is a rule of law that goes back hundreds of years. The family business or a vault full of cash, stocks and bonds that belong to the estate owner are not the property of the heirs until the point of transfer, and then only by designation by the estate owner. What if pop had said to sonny boy, “Thanks for all the good ideas and all your efforts at growing the firm, but I’m getting married to my secretary and she’ll need it all when I’m gone. So here’s a tip and you can scram.” So much for a life time in the family business.
The point is that no one has claim to an estate and the inheritance is income to the heirs. Income is subject to taxation. It’s a simple concept. It the hard working heir had any good sense he or she would be working out a deal with dad or mom (uncle or what ever) to pay stock bonuses each year reflecting their value to the family business as employees. In that manner, and I’m sure it is being done all over the country by those with the assets to transfer, the family members who do work the business become owners before the death of the estate owner. Either way it’s earnings and it is subject to taxation.
It appears that Gingrich and Obama agree on one thing…gut the estate tax. The Obama regime had a chance to to lower the exemption to $1,000,000 and put the top rate at 55%…but they didn’t. Not only did they seriously increase the exemption and lower the rate, but they increased the amount that can be transfered tax-free via a gift to a historically unheard of $5,000,000. Maybe Newt is just doing some reasearch/groundwork for the current regime.
Tax the idle dead!
Sit back and ponder just how incredible it is that just one percent of the country has such a firm grip on the controls fo the government. This issue, estate taxation, seems like it should be a no brainer for many reasons that some have described above. little john’s point is well taken as he points out that it isn’t a partisan issue. The entire political class is in on the scam. And a scam it truly is given that the rationale for estate taxes is virtually self evident. Yet someone with as little expertise and authority in this area of economics has a platform for his wholly dishonest presentation. It is truly amazing how tight is the grip on the throat of the governed by that minute group, and how complicit is the government itself.
This tax isn’t aimed at struggling small family businesses or hard-working people who personally sacrificed to make a small business work. It’s aimed at the legacied idle rich, who pass on generational wealth while doing everything possible to avoid paying their fair share of taxes. It’s aimed straight at the modern-day Medicis, not Mr. & Mrs. corner-store shopkeeper.
Next time at least try reading the article before posting the usual right wing talking points.
Is there really any difference between a Monarchy, the passing of wealth and power by blood line and what the right is creating for the uber rich here in America?
And for caving in to right-wing demands (again), Obama’s reward is to be repeatedly called a Socialist/Marxist radical and redistributionist.
I dunno really. Might be worth going and looking at the work of Sir John Mirrlees really. He is after all the economist who got his Nobel for in part exploring the effects of capital, corporation and inheritance taxes.
His views arte, needless to say, distincly different from those of Linda.
Tough one, who to believe really. Nobel Laureate on his subject of expertise or blogger on the internet?
Apparantly that’s the pattern in Japan. To the point where the owner will adopt the adult manager to leave hime the firm.
Apparantly that’s the pattern in Japan. To the point where the owner will adopt the adult manager to leave hime the firm.
Apparantly that’s the pattern in Japan. To the point where the owner will adopt the adult manager to leave hime the firm.
Min
a slogan for our times!
Tim
you may have noticed that Obama got a Nobel Prize too. Good to know the Nobel folks are so objective and perspicacious.
maybe we should all turn our brains in at the cloak room, and let the Nobel committee do our thinking for us, like some constant commenters on bloggers on the internet.
Ned
I took a look at the report. Seems to me to be a political argument and not very compelling. I suspect, you, and perhaps I, like what we read when it agrees with what we want to believe.
“Might be worth going and looking at the work of Sir John Mirrlees really. He is after all the economist who got his Nobel for in part exploring the effects of capital, corporation and inheritance taxes.”
Tim, old man, I suspect that you mean James Mirrless, not John. Certainly a respected name in the “science” of economics. It is clear that Sir James is regarded as having contributed to the study of optimal tax systems and rates of savings. It is not clear that his work in any way negates what Linda has discussed. Why don’t you be a bit more specific rather than contributing to yet another instance of asymmetrical information.