Tuesday, September 21, 2010

More money that Democrats think belongs to the government

The WSJ has a lovely phras - "the Senate Redistribution Caucus." And their new target is the estate tax which they want to increase. The members of the Redistribution Caucus are Bernie Sanders (Vermont), Sheldon Whitehouse (Rhode Island), Al Franken (Minnesota), Sherrod Brown (Ohio) and Tom Harkin (Iowa). The estate tax is now at zero, but they want to raise the federal death tax to 65% on large estates. In their mind, it's not enough to tax the money earned in a person's lifetime, the government should also take just about 2/3 of what he or she wants to leave to heirs. And that isn't all. They want to make the tax retroactive to January 1, 2010.

The WSJ explains why, despite its inherent unfairness, this is such a bad economic idea.
t's not merely the super-wealthy who will pay these rates unless they shelter their assets in foundations the way that Bill Gates and Warren Buffett have. Estates with as little as $1 million in assets would get hit at the reinstated 55% rate. That $1 million has not been indexed for inflation, so each year more and more middle class families would pay when mom or dad dies. For hundreds of thousands of families, $1 million can easily be the value of the family home, furniture, jewelry, cars, plus a 401(k). All of this would be fair game for IRS confiscation.

The ability to transmit wealth from one generation to the next is a core motivation for Americans to save, reinvest in the family business or accumulate wealth. A 1980 study co-authored by White House economic adviser Larry Summers on savings and capital accumulation in the first three-quarters of the 20th century found exactly that: Americans continue to save even as they get older so they can pass their lifetime legacies on to their kids. But if you can't take it with you, and you can't leave your lifetime earnings to your children or grandchildren, the motivation is to spend down wealth to zero at the time of death.

As for breaking up billion-dollar empires of wealth, this tax doesn't even achieve that. A 2010 report by the American Family Business Institute found that the estate tax has the effect of consolidating wealth because so many owners must sell in short order at time of death to pay taxes. The study found that every 4.5 percentage point increase in the estate tax "results in an additional 6,000 small firms being eliminated or absorbed by large firms each year."

Former Congressional Budget Office director Douglas Holtz-Eakin found in a study released last week that raising the death tax rate to 55% will mean a permanent loss of 1.4 million jobs because the tax "lowers capital, savings, and long-term growth." Call it an antistimulus.
But reality doesn't figure in when there is wealth redistribution to be done.