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

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