Superficial Analysis of Death Tax Draws Inaccurate Conclusions

by Adam Nicholson - No Comments
Posted on October 27th, 2010 10:22 am

Benjamin Disraeli once aptly noted that “there are lies, damned lies, and statistics.

The latest lies in the death tax debate comes disguised as a statistical study offered by a group called Citizens for Tax Justice.

AFBI finds that like other anti-repeal “studies,” this one fails to explain the context of many of its statistical findings and its “conclusions” are consequently superficial and misleading. We break out why below.

Myth 1: Only a Few Families Pay the Death Tax

Supporters of the death tax love to claim that few families will be affected by the estate tax. This claim is based on the simplistic observation that the estate tax is directly paid by – and thus affects only – a small minority of Americans.

This doesn’t consider that the same family pays the tax every generation, not just once. And more importantly, it impacts a family business’ workers and the community’s economic growth.

There is little disagreement among economists that the estate tax impacts the larger economy. Congress’s Joint Economic Committee found that the estate tax reduced overall capital in the economy by $847 billion over a ten-year period.

For small businesses, this is money that cannot be used to buy new machinery and equipment, expand operations, and hire new workers. By reinstating the death tax – even at the so-called “compromise” rate of 45% - Congress will reduce small business employment by over 1 million jobs. On the other hand, permanent repeal will increase small business capital stock by $1.6 trillion and create 1.5 million jobs.

More jobs mean more Americans returning to work, paying their bills, and taking care of their families.

Myth 2: Effective Rate of Death Tax is Not Large

The study notes that the effective rate of the death tax was “just 20.4 percent in 2009.” What exactly is the “effective rate”?

According to the study, it is the “fraction of the value of the net estate that must be paid in taxes after accounting for deductions and credits.”

How does a family business owner or farmer account for “deductions and credits”? By paying the bills for high-priced tax attorneys and estate planners.

Family businesses are forced to pay these outrageous fees in the hopes of reducing their estate tax liability and saving the farm or business. This tax planning is never guaranteed, but it what accounts for the death tax’s “compliance costs” – the costs of minimizing the estate tax burden through various complex tax-planning strategies.

According to President Clinton’s economic advisor Alicia Munnell, the estate tax’s compliance cost exceeds the revenue it raises and is proportionately the highest of all taxes.

Hence, the “effective rate” of the death tax is low in no small part because the compliance cost is so high.

Myth 3: Most of the Value of Taxable Estates Would Not Be Taxed

It is often suggested that the estate tax is the only way that greedy, fat-cats are taxed. This line of thinking assumes that if it were not for the estate tax, the assets of the rich would gradually increase in value and provide profit to the owners while escaping taxation.

This formulation is not true. Under capital gains tax law, assets which increase in value are taxed whenever they are sold. If an asset is not sold, it is not taxed – but neither does it provide a tangible reward to the owner.

For example, consider a family that passes a piece of expensive artwork between 4 generations, during which time the artwork substantially increases in value.

Is the art taxed?

Of course not. The family paid taxes on the income that purchased the art. If and when they choose to sell the art and realize their profit, they will once again pay taxes.

To misconstrue the estate tax as the only means to tax the wealthy demonstrates ignorance of U.S. tax law.

Myth 4: The Estate Tax Only Hits 100 Farms and Small Businesses

This myth, which AFBI has amply refuted, is based on a straw man definition of small business.

By defining small business as one which has $5 million in total assets or less, critics of repeal claim that only 100 small businesses would be subject to the death tax if it were reinstated at the 2009 law of a $3.5 million exemption and 45% exemption.

However, this definition has zero basis in reality and is not even considered accurate by the Small Business Administration, which provides its own size standards for small business.

Finally, the study claims to include the years 2000 through 2009, yet it excludes 2001 and 2003 from its analysis. Why is this? The authors offer no explanation for this omission.

From top to the bottom, the latest “study” opposing repeal is riddled with poor analysis, superficial observations, and outright distortions.

Is it any wonder that the American people aren’t buying the death tax hype? By a two-thirds majority, surveyed voters support permanent repeal.

Voters know the facts: the death tax harms family businesses and farms and destroys jobs.

Who supports that?

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