The Senate's Estate Tax Debate
Members of Congress across the political spectrum have had fun the past few weeks playing umbrage leapfrog regarding the bonuses to executives at AIG and other companies. Who can express more indignation over the spectacle of greedheads taking billions in government bailout money and then carting millions of it home in wheelbarrows?
Meanwhile, the Senate is considering what to do about the estate tax. It is scheduled to be abolished next year, in one of several landmines the Bush administration set to go off after it left town. Obama proposes to reinstate the tax, at a 45 percent rate, on estates worth more than $3.5 million. Since there's no tax on what you leave to your spouse, married couples could pass on $7 million before needing to pay a dollar -- or needing to consult a lawyer who can use loopholes to save millions more.
The House has passed this measure as part of the budget. In the Senate, there's trouble. Ten Democrats have joined the Republicans in calling for a $10 million exclusion and a 35 percent rate. This is amazing. The number of people who leave estates of even $7 million is minuscule. The number leaving more than $10 million is smaller still. Yet to save these very few very wealthy people a small fraction of their estates, these senators are willing to hand their party's president an embarrassing defeat. Why on earth?
Oh, small business blah blah blah. For the umpteenth time: Big businesses (such as General Motors) are mostly owned by people of small means (workers through their pension funds, 401(k)s and so on). To be affected by the estate tax, a business must be owned by someone of large means: at least $7 million. Small businesses come and go. Yes, they create jobs disproportionately. They also eliminate jobs disproportionately. There's nothing wrong with small businesses, but there is no reason of fairness or efficiency that they deserve special treatment.
There are philosophical arguments against the estate tax that aren't contemptible, though they also aren't convincing. My favorite is that money is only one advantage that parents can pass on to their children. If you reduce the role of money in determining where people end up, you aren't leveling the playing field. You're just tilting it in favor of other inherited qualities such as talent or intelligence. Why not tax these things, Arthur Laffer asked in the Wall Street Journal the other day.
Laffer invented the famous "Laffer Curve," which did so much fiscal damage over the past generation by convincing people that tax cuts can pay for themselves. His reason was that taxes discourage the activity being taxed; cut the income tax, and people work harder. But this, surely, is an argument in favor of a tax on inherited wealth (if you accept the premise that we've got to tax something or other). Lowering a tax triggered by your death is not likely to pay for itself by encouraging you to die sooner, or more often.
But why the populist fury over those AIG bonuses of a few million dollars while no one seems to care much about billions being transferred through inherited wealth? The obvious answer -- that there's a difference between what people do with our hard-earned money and what they do with their own hard-earned money -- isn't actually as persuasive as it seems.
Perusing the Forbes 400 list of America's richest people, it's striking how few of them made the list by building the proverbial better mousetrap. The most common route to gargantuan wealth, like the route to smaller piles, remains inheritance. The ability to pass money along to your kids may motivate many a successful executive or investor to work harder, but it can't possibly motivate those kids to inherit harder in order to pass it along once again.
Dozens of Forbes 400 fortunes derive from the rising value of land or other natural resources. These businesses are fundamentally different from mousetrap building. Land does not need to become "better" to increase in value, and that value increase doesn't produce more land. Yet other fortunes depend directly on the government. The large fortunes based on health care and pharmaceuticals would not exist if not for Medicare and Medicaid. The government hands out large fortunes even more directly in forms as varied as cable-TV franchises; cellphone licenses; drilling, mining and mineral rights; minority small-business loans; and other special treatment.
Most important, every American selling anything benefits from doing so in the world's richest market. An American doctor earns many times what the same doctor would earn in, say, India. This is not because he or she works many times harder. It's not even primarily because our government doles out hundreds of billions for health care each year. It's because we are a richer society, for reasons the American doctor had nothing to do with.
The debate over whether the estate tax should start at $7 million or $10 million is largely symbolic. That makes the push by those 10 Democratic senators for the higher amount even more mysterious.