Starve the Beast Theory "Is as Dead as the Dodo"

I agree with Bruce Bartlett. The current federal budget path is unsustainable and taxes will have to be increased at some point to put the budget on a sustainable path. Exactly how taxes should be raised is debatable, and I'm certain we would disagree on the need and desirability of expenditure cuts in areas such as social insurance programs to achieve balance.

Bartlett argues that a VAT is the best way to increase taxes. VATs are  regressive, but they're an important source of revenue for highly progressive tax-and-transfer systems, so their characteristics depend upon the details of the implementation. However, one thing I do know, making estate tax repeal permanent while introducing a VAT would be a nasty case of bait and switch:

Tax Cuts Don’t ‘Starve the Beast’, by Bruce Bartlett, Commentary, NY Times: ...Most conservatives believe that the best way to downsize government is to take away its allowance, as Ronald Reagan once put it. In other words, tax cuts will lead to spending cuts. This is a theory I once subscribed to. Back in the days when people cared about federal budget deficits, there was a case to be made that intentionally increasing the deficit by reducing revenues would put downward pressure on spending. Today, unfortunately, the evidence seems to point in exactly the opposite direction.

At the time that I drafted the Kemp-Roth tax bill, in 1977, the Republican Party still believed that budget deficits were evil. Republicans would often even support tax increases, such as in 1969, to balance the budget. But they came to believe that higher taxes only encouraged higher spending—until a politically intolerable deficit emerged, at which point they would again be pressured to support tax increases. Eventually, Republicans like Newt Gingrich would charge that their party had become the tax collector for the welfare state. ...

At this point, in the late 1970’s, a few conservatives like Jack Kemp ... said to heck with the balanced budget. Let’s just cut taxes and see what happens. Mr. Kemp predicted that economic growth would rise so much that revenues might not even fall.

Most mainstream conservatives didn’t buy Mr. Kemp’s strategy right away. But after Californians passed Proposition 13 in 1978, they could see that tax cutting was politically popular. They had also learned the hard way that trying to cut spending at a time when revenue was rapidly rising was politically impossible.

So Republican Congressional leaders and conservative economists like Alan Greenspan ... came to support tax cuts as a strategy to force spending cuts. David Stockman, who was ... director of the Office of Management and Budget under President Reagan, was among the most enthusiastic converts to what came to be called the “starve the beast” theory of taxation.

This led to a coalition of three groups — supply-siders who thought tax cuts would increase revenues, libertarians who were in favor of all tax cuts, and traditional conservatives who wanted to cut spending and balance the budget. Ronald Reagan, embodying all three perspectives, unified the Republican Party around the idea of reducing tax rates without specifying any complementary spending cuts (which would have cost him support among those who might have lost government benefits).

In the 1980’s, there was some evidence that the starve-the-beast theory worked. Almost every year, budget deals cut spending a bit, although tax increases were always part of the mix. Ultimately, President Reagan supported tax increases that took back about half of his 1981 tax cut.

Nevertheless, the idea that tax cuts would downsize government became Republican dogma. Today, most Republicans in Congress view tax cuts as the only thing needed to reduce the size of government—and the connection between deficits and spending seems forgotten. Now Republicans raise spending and cut taxes at the same time.

As a consequence, the old starve-the-beast theory has been turned on its head. ... I think that higher taxes are inevitable, as I have explained in previous posts. If conservatives recognize this reality, perhaps they can force meaningful spending cuts as their price for supporting them. In any case, the starve-the-beast theory is as dead as the dodo.

Comments

[Stormy]

VAT's can be regressive. Everything is in the details. Bait and switch has been the name of the game.

Nice to see your remark on dodo's. Mark, you are ahead of the curve.

A pleasure to read you.

[Winslow R.]

Bruce wrote:

"As a consequence, the old starve-the-beast theory has been turned on its head. ... I think that higher taxes are inevitable, as I have explained in previous posts."

Bruce still doesn't get it. As long as Bruce and his cronies are willing to 'save' all those extra dollars printed by the government, there will be no need for a tax increase. As long as the dollars are never 'spent' there is no 'need' to tax. Didn't he read the warning label when he accepted all those dollars?

[Andrew]

VATs are not, in general, regressive. They can easily be made progressive by pulling wages & salaries out of the business tax base, and taxing them at the individual level.

This transforms a VAT into a consumption tax. At this point, we can get progressivity in two ways:

1. Keep a single economy-wide tax rate, and adjust progressivity by adjusting the individual exemption level; and/or

2. Keep a single tax rate for business transactions, but apply progressive rates to wage and salary income only. This second option is the late David Bradford's "X Tax."

Either system would raise large amounts of revenue efficiently. And since most tax complexity in the federal income tax system is related to tax base issues -- what's Haig-Simmons income, when is it earned, what's a taxable event, etc. -- we'd get a lot of simplification by switching to a consumption base.

[ilsm]

The problem with tax policy is it had no impact, in practice, on the borrow and spend motives of Reagan, Bush I, and Bush II.

I wonder what to classify the Clinton and Bush I tax and balance process as?

It is the spending...............

As long as the fed prints it is okay to cut and spend.

[slink]

mark as usual a progressive intent shines thru

vat makes a nice reform option

ie med cost provision could all be switched to a vat basis
a nice case of health risk burden sharing by us all

but if we want to take a bigger bite
we ned ironically not to just restore estate
but do beyond a death tax
to a living wealth tax

i won't wonk it up here
how the details might work

but a net worth tax with say a million dollar
zero first bracket
has a nice tie in with our federal debt
and our overseas "security"

ie all wealth tax could be dedicated
to servicing the national debt
and all non home land defense as well
get the gimmick
here ????

tax free profits are ok
we want you to make it as fast as you can
and we'll borrow the difference
to meet expenditure needs

but you'll pay the carrying costs

many more wonky type nasty ideas here
once you start taxing wealth not income
al sorts of nice thoughts arise

suffice it to say
this one minor fruit

a tax on wealth increases savings
in ricardian text book models

[kharris]

The GOP is, itself, the proof that "starve the beast" doesn't work. Maybe if Democrats had been in power, the "beast" would have had less gall and would have responded.

But wait. Isn't that part of the plan? I know the "permanent majority" noise is popular, but don't wiser GOP heads realize a backlash is coming? Isn't the plan to force Democrats to alienate their own voters by cutting spending when the necessity finally becomes clear? If so, then "starve the beast" seems nothing more than a cynical plan to jigger the budget cycle in favor of the GOP. They behave irresponsibly (Bartlett certainly agrees with this part), leaving Democrats to clean up the mess, relying on voters to be so venal and benighted that they reward the GOP for its irresponsibility, punish Dems for responsibility. I'm pretty sure I'm not the first to think of this. For all that Bartlett has gotten fed up with Republicans' behavior, he still seems to see "starve the beast" as an ill-conceived effort to shrink the government, rather than an effort to make Democrats suffer for being the party of fiscal responsibility.

[pgl]

Bruce used to be a member of the starve the beast club. Glad to see he has joined the Reality Based Community!

[save_the_rustbelt]

I oppose the Estate Tax not on economic grounds but on the grounds it is really an unconstitutional seizure of private property. The primary beneficiaries of the estate tax are lawyers and life insurance companies. Both groups are telling clients to expect a return of the estate tax. They must know something.

Beyond that, I could support a VAT only because I have been stdying tax reform acts since the late 70s and it just keeps getting worse.

The VAT can be sculpted in many different ways and so does not have to be regressive.

[Winslow R.]

STR wrote:

"I oppose the Estate Tax not on economic grounds but on the grounds it is really an unconstitutional seizure of private property."

All public taxes shift resources from the private to public sector. What makes the Estate Tax special? Just asking.

[Bruce Webb]

Anyone who argues that VAT is not regressive needs to face the fact that for the most part the working poor are not paying income tax now. Sure they are paying FICA from the first dollar and are paying property tax via their rent check and paying state and local sales tax on much of what they buy. But they are not paying income tax. Any attempt to replace any portion of income taxes with a VAT represents a shift of the tax burden onto the working poor.

Same with any other version of a national sales tax, or a flat tax. Each and everyone of these provisions ends up cutting taxes at the top and imposing them at the bottom, in many cases on people who are not paying those taxes today.

Now I understand that some people don't like progressive taxation on principle. Fine just admit that you're open to screwing over the poor who are paying disproportionately more taxes in every other category and be done with it.

Republicans like Bartlett are not opposed to big government. As long as that money is spent on things like defence that ultimately result in big checks flowing to rich people. What they hate is any part of their money going to programs that benefit poor people. And those programs continue to be cut even while defence spending soars. They try to disguise this by pointing to increases in entitlement spending while ignoring the fact that entitlements have their own dedicated funding source, one by the way that draws exactly zero from earnings on capital.

Republicans are not opposed to estate taxes on any principle other than that they are a tax on rich people. The Right hates that and always has, and this is true across cultures and across history. In many ways you can understand 'class struggle' best as a struggle where to place the burden of taxation.

Republicans have become pretty adept at this, mostly by adopting the "we can't afford not to spend" on things like defence or homeland security while cutting money on heating oil for the elderly poor. Folks Gramma is a lot more at risk of dying of malnutrition because she is spending every dime on medication and heating oil than she is of getting blown up by a terrorist. But frankly the Right could give a shit as long as they are getting theirs via a juicy defense contract for weapons we don't even need.

[Robert]

Slink -

France and Holland have "Wealth taxes". And they are not so crazy as they go to the source of Winslow's gripe. But neither do they recognize "Trusts" and personal foundations, in France or Holland, so these easy escapes are not available. But practically, they do drive lots underground; also administrating it is a nightmare and policing less-than-effective. And they encourage other work-arounds (listed holding companies with greatly discounted valuations, etc.) since their object is to shield rather than create value. But for all her noble intentions, the loopholes at least in France remain enormous. Francois Pinault & Bernard Arnault, two of France's wealthiest men are reputed to manage not pay tax most tax they should.

Australia - as you suggest - marks everyone to market each year such that the holder of assets pays "the carrying cost" (as you call it), by paying some tax on the increase in the value of assets. And in both Holland & Aus its upon one's global assets...there is no squirreling away offshore. But in the USA for the great pools of wealth, real estate, and shares in listed and large-private companies, it is getting harder and harder to hide and cheat except where oases have been created (trusts, quasi-charitable foundations, etc.). Still the problem remains lawmakers who allow and create loopholes for friends who finance elections, and to overcome/do away with this, folks will need get out from in front of their TVs and into the streets in numbers greater than Civil Rights movement or Vietnam, or at least vote so overwhelmingly a sympathetic majority that there can be no backsliding.

[dryfly]

I oppose the Estate Tax not on economic grounds but on the grounds it is really an unconstitutional seizure of private property

I'm all in favor of the estate tax & I don't think it is any more unconstitutional than any other tax - my sis teaches law (tax & contracts & history of law) & has said so many times.

It can be an avoidance problem but then all taxes are avoidance problems when the numbers in play get big... so do we decide to stop taxing rich people as a result of their avoidance efforts or do we just enforce aggressively?

But I acknowledge the estate tax needs REAL reform. And just because we haven't recieved good leadership from our elected officials lately doesn't mean we should abandon civilization just yet. A better option would be to take back our gov't - both parties - but starting with the ones most in power since they really matter.

When I think of the ideal estate tax I think it needs to start with a 'personal exclusion' of say a million dollars... and not from the perspective of the total estate but rather from the the beneficiares' receiving the inheritancce. So given a million dollar threashold if one person inherits two million from daddy he'd get a million tax free and another million would face estate taxes. If daddy wills ten million to ten people - a million each... no estate tax period.

Number two I would treat the taxes owed exactly the same as if it was capital gains with a zero basis. Whatever the cap gains rate was so too should be the estate tax. Any transfers of funds prior to death into trusts to avoid estate taxes would face the same cap gains rate. Any gains in the trust woulf face the same tax burden upon either before or after pay out. A lot less mischief that way.

Item three is I'd allow heirs who get non-liquid assets to set up long term payment plans on tax they owe. Again similar to defered cap gains as as tock appreciates. I'm thinking mostly of farms & privately held companies where the heirs might be forced to sell assets to pay immediate tax bills (assuming borrowing is risky & it certainly is for farms as we learned in the 80s). Breaking up a farm or going public in a tightly held private firm can jeopardize the whole operation.

But once those non-liquid assets are made liquid then full payment would be due on the amount inherited and any dditional gain - again both combined at cap gains rates.

Note that few people would actually fall into ANY of these catagories if we allowed an immediate per capita exclusion of a cool million as few ever inherit more than that. The only people who would ever pay the tax could certainly afford to do so... they would have serious wealth (many millions likely).

The chief benefit of doing this isn't the money it raises but rather the leveling it does. It makes it much harder to form an aristocracy if every generation you trim some of the growth & spread what remains about. A million dollars tax free in todays money is PLENTY to give a kid a decent start... letting them get a few billion or more tax free creates royalty and we are perilessly close to that now (if not beyond).

I mean Lost you are always bitching about who owns the gov't & how they don't cater to people... how do you think it got that way? Wasn't an accident.

[anne]

There is an overarching budget problem that Bruce Bartlett and other conservatives appear incapable of addressing. We have fought a war and are fighting through an occupation having decided to borrow the money to do so. Beyond the moral lunacy of a war against a nation that could not threaten us and an occupation that may be better termed a colonization, we are spending $2 billion dollars a week on Iraq and could immediately and dramatically ease budget pressure by leaving immediately. Beyond leaving, there will be no tax increase to pay for Iraq for that would be the finish of Republican control of Congress and further cuts in middle class social benefit spending will simply not be politically tolerated.

[anne]

Essentially we have a mildly progressive tax system for middle to moderately wealthy America, and a mildly regressive system for the wealthiest. As investors should have understood for several years, and evidence shows, the fairer tax system of Bill Clinton's Presidency, a tax system that with no difficult burden generated a budget surplus, has been thoroughly undermined. Simply going gently to the system of the 1990's would be an enormous budget help, but there is no political chance at present.

[save_the_rustbelt]

"I oppose the Estate Tax not on economic grounds but on the grounds it is really an unconstitutional seizure of private property."

Assuming the estate tax is constitutional, it is still very problematic for a number of reasons.

1. It is a welfare program for lawyers and life insurance companies.

(Usually the only way to create liquidity for a family business or farm is to heavily insure the owners. The other option is a forced sale or liquidation.)

2. It warps economic decisions and succesion planning.

3. It generates huge professional fees (see #1) which are not really economically productive (except perhaps for BMW dealsers).

4) It is an afront to personal liberty (a quaint old concept to be sure).

5) It is subject to immense manipulation by those with enough money and sophistication (see #1 again).

6) It in administratively top heavy considering the amount of revenue raised.

7) The IRS is often arbitray and capricious in the administrative process, causing more work for lawyers and CPAs (see #1 again and again).

This isn't about revenue, this is about punishing success and redistribution. Advocates for the estate tax should be honest on those points.

[bakho]

Does Bruce need to reread Stockman's book? I actually read Stockman's book and the official conclusion from OMB in the mid 1980s was that Starve the Beast was an abject failure. Stockman knew this by the end of the first budget, even though many Republicans apparently are still in denial today.

Stockman wrote then (and it is still true today) that Republican plans for cutting government all involve MASSIVE cuts in social spending. Way back then, and even moreso in the uncertain times today, Americans are not stupid enough to dismantle what little safety net exists. Politicians hear this message and vote accordingly.

Stockman called this, "The Triumph of Politics", meaning that popular support for our safety net, defeated attempts by Republican Reactionaries to "Slay the Beast". Republicans, like Gaston, see government as "The Beast". Most Americans, like Beauty, see Gaston as the beast and the beauty in having a beast of a safety net.

It is and always has been an ideological pipe dream that the American public would let the most fortunate among us turn their greedy backs on the rest of us and retreat to their gated plantations. Those that have benefitted most from the flaws in the economic rules have a responsibility to give back to those most harmed by the same rules and to provide a safety net for the system that allowed them to benefit so magnificently.

[camille roy]

I enjoy Bartlett's commentary but I find it unintentionally amusing, because he assumes that his tribe ('conservatives') have policies founded on moral values and beliefs. That is, he assumes that is some other reason than greed that ties these policies together.

I used to assume that also, simply because I assume others at least try make sense in the way that I try to. But real world observation has taught me that contemporary conservatism is only about rewarding the short term interests of the wealthy base. They say they are fiscally responsible and in favor of individual responsibility. Is there any more dubious statement out there? I don't think they ever meant what they spout.

Conservatism is a rationalization of greed and exploitation. Conservative philosophy is a decorative frosting on the cake of privlege. It has nothing to do with social realities or the trade offs of policy. It requires denial and silence, because the social impacts of greed and exploitation need to be defused without being addressed.

[Holly W.]

"The Triumph of Politics", indeed. Isn't that also what happened in 1994? Gingrich and the Reps sailed into office believing that Americans were fully in favor of making spending cuts -- and they were, so long as those cuts were theoretical and going to affect someone else. But as soon as they started trying to come up with real cuts that affected real people, public sentiment turned directly against everything suggested.

[dryfly]

Rust EVERY SINGLE point you made applies to ALL taxes on the wealthy... if the wealthy plan to try and evade they will try to evade... and if that means paying fees & distorting so be it. All are 'invasions of liberty' or 'takings' as they see it.

As far as the IRS being 'capricious'... well do you think wealthy tax payers roll over easy? They sure don't. My sister was a prosecutor with the DOJ doing criminal tax evasion... she was 23-0... long bloody trials all over the country, 100% convictions, most not even close.

Every single case involved multi-millionaires. Not one 'average Joe'. It astonished her how clear the evidence was and how many chances they gave these people to back out & pay the tax & fines without a conviction. Or plead nolo - just pay and we all move on. They will still be rich & Caesar get his coin. But these rich folks believe they are above the law (gee, I wonder where they get that from).

As for administrative headaches... all taxes involving lotsa money become administrative headaches because people contest every penny both sides. It is no different with high income tax individuals. BTW - those convictions my sis brought in... not one involved a dispute over estate taxes... all were income tax evasion. That is where the REAL distortion is.

The only way you will get a system that isn't going to have attempts made to place 'administrative loop holes' for 'special interests' (ie well connected rich people getting favors) is if you just stop taxing rich people... then they will be more than happy to have a simple system as long as it doesn't effect them. That basically is what happened with 'estate'.

But if you want them included in the tax burden then you will have to fight them hammer and tongs in the wells of the legislatures, polling booths & eventually in the courts. After that the only recourse is to take it to the streets. That is always an option.

You have been drinking the Club For Growth Kool Aid if you think letting super wealthy families get richer and more entrenched generation after generation while wage slaves pony up VATs & excise taxes & 'wage based income tax' & FICA... then think an estate tax threatens peoples 'Liberty'. The reverse is FAR MORE true.

Take a look around & rethink that one after taking a deep breath.

[Winslow R.]

STR wrote:

"This isn't about revenue, this is about punishing success and redistribution. Advocates for the estate tax should be honest on those points."

Taxation is 'punishing' success?

An estate tax just makes those who have benefited the most pay the most or at least pay some. Remember it is possible to not pay any taxes if the estate tax is abolished.

Why should those with capital be able to pass it on from generation to generation without taxation? Why should capital that needs to be protected by government, not be taxed? I would agree to consider having the estate tax being replaced by a 'wealth tax' collected every year.

All taxes are redistributionary, I admit it. They 'redistribute' private resources into the public sector.

Taxation is a tool that government uses to allow money to retain it's 'value'. If government did not care about the 'value' of money it would just spend and not tax. The government has only self-imposed constraints on its ability to 'spend'. Government has no 'need' to 'borrow' or 'tax' in order to 'spend'. It's taxing you because people like the idea they are saving a 'hard' currency.

[dryfly]

This isn't about revenue, this is about punishing success and redistribution. Advocates for the estate tax should be honest on those points.

Its both big estates generate big revenue. And it isn't about 'punishing success'... it only punishes wealthy rich kids who produced nothing except where their seed came from & who's uterus they attached to. Lotta skill & hard work goes into that.

If after tax they take the STILL SIZABLE remaining inheritance and produce even more... that gain will only face cap gains and or income tax like the rest of us.

It does redistribute wealth - hallelujah. It keeps this country from having 3 or 4 families owning everything after a couple generations & declaring themselves king. If we had a 50% tax rate on estates over a million dollars the Gate's heirs would still have more money than you... but only by tens of billions of dollars. Same with Buffet's & Walton's heirs. Life must suck being them if the estate tax comes back.

I am not going to shed tears for the constraints placed on their 'liberty'.

[slink]

what a nice thread gang

robert:
as usual clear sober astute

my only point

i'd love the fun of going after
those richy rich kats

" slink columbo here... irs "

reality dawning :

they ain't so smart
its easy
the system can be bought
at least most nites
and
so no matter what i
prez slink the good
set up

corruption will boot
its ass into the dumpster

i'm just day dreaming

too old to think about jessica simpson

[ilsm]

I have been a military person most of my life.

I get a real kick about people who do not want to fund the government.

If one owns property, and or has a bunch of money you have a huge stake in the success of the government.

If you have nothing or have no inheritance to look forward to you have little interest in who protects the propertied.

Much less desire to give your little bit earned from sweat and blood to secure the things of those who don't have much sweat involved.

So, what is expropriative about taxation which makes what you have yours?

I like the Danes who came to Anglaland in 850 and took what they wanted. I suppose the Angles and Saxon were happy to have never paid taxes.

[slink]

webbster :

"Any attempt to replace any portion of income taxes with a VAT represents a shift of the tax burden onto the working poor"

bravo
vat
only if its to replace payroll tax dollar for dollar

[slink]

rusty writes

"This isn't about revenue
this is about punishing success ...."
bravo
right word "punishing"
not "preventing "
opportunity to accumulat fast
is taxed by prog income taxes
not by a wealth tax
a wealth tax
should rate plateau
early
its aimed mostly
at stagnant portfolios
and privately held wharhol paintings

"and redistribution'

only of the tax burden
for public goods

and more directly
to fit the payer to the benefit

ie cost of foreign armed adventures
on the trans nat corporation owners

says...

ever wise winslow "

"The government has only self-imposed constraints on its ability to 'spend'. Government has no 'need' to 'borrow' or 'tax' in order to 'spend'"

beautiful

of course all gubs iz
subject to"removal from office
by various means "

[anne]

Notice that as estate taxes are lowered, there is increased reason to gather and hold assets with no turnover. Accumulating stock in a fine company or groups of companies, or accumulating real estate, with no turn over will mean never having to pay capital gains taxes during a lifetime and accruing no estate taxes on the capital gain. Essentially capital gains taxes on an index can be avoided forever, while a wealthy investor can use and pay 15% taxes on dividends gained.

[anne]

Then, as estate taxes are lowered we are able to amass assets that will become forever tax preferred or free save for dividends (which are tax preferred). I consider taxable stock holdings to be at least as desirable as retirement holdings for they will rarely if ever be taxed on capital gains.

[Robert]

"The government has only self-imposed constraints on its ability to 'spend'. Government has no 'need' to 'borrow' or 'tax' in order to 'spend'"

I would add to that:

...bounded by common sense, the desirability of "a good, fair, and just plan" (or three!) and honest men/women to steward it, and a recognition that the larger such G-spend, the increasing probability that it will encounter diminishing marginal returns upon its expenditure. Are we THERE yet?

Finally, in order that one not be thought of as reckless with one's words, one might, when speaking of the theoretical "ability" of Govt to Spend expansively without taxing, temper it with the some mention of the concept of "the optimal", if only in deference to the diminishing returns one is likely encounter.

[Movie Guy]

I beg to differ with Bartlett.

The Dodo is not extinct. I met three of them last week while attending a meeting. The Dodo has only changed form.

Today, we know them as human oxygen converters. And their numbers are growing.

[Winslow R.]

Robert wrote:

"Finally, in order that one not be thought of as reckless with one's words, one might, when speaking of the theoretical "ability" of Govt to Spend expansively without taxing, temper it with the some mention of the concept of "the optimal", if only in deference to the diminishing returns one is likely encounter. "

Point taken, our diminished return is of our own making and to achieve 'the optimal' requires an 'optimal' electorate.

To get the type of people you mention in office would seem to require a realignment of the political parties into those with the qualities you mention and those without. The Republicans want to spend on Iraq and the Democrats want a balanced budget. How about a party that can lead us to 'optimal' deficit spending?

[save_the_rustbelt]

"Every single case involved multi-millionaires. Not one 'average Joe'."

A farmer in this area with 1000 acres of land (a relatively small farm) can be a multimillionaire at estate tax time, as is a family owned manufacturing business.

Many of you seem to think the estate tax applies only to Kennedys and Gates and etc. Guess again.

The estate tax creates a gigantic industry of estate planning which primarily benefits lawyers and life insurance companies. Any owner of a farm or medium sized business who does not do elaborate planning risks the possibility of the business (and jobs) being destroyed.

An estate full of public stocks and bonds is easy to manage and can easily create liquidity, while an estate in which 80% of the assets are the family farm or business is very difficult to keep liquid while continuing operations.

The business world is not quite as simple as some of you seem to think.

[Bruce Webb]

"The business world is not quite as simple as some of you seem to think."

Fair enough. But then again some of us are not so simple as you seem to think (and express openly).

[Winslow R.]

STR wrote:

"The business world is not quite as simple as some of you seem to think."

Would you answer a simple question? Should wealth be taxed?

[yartrebo]

save_the_rustbelt: 1000 acres is a large farm - that's about 1.5 square miles and if the land is halfway arable, worth a pretty big sum both. It would be a good idea to tax it in an estate.

If you think a few million for 1000 acres is expensive, suburban land goes for about half a billion dollars per 1000 acres for more desirable areas.

What is it with farmers? Why do they get any special treatment and not developers or factory owners? They also take land as an input, cause lots of pollution, are generally run by corporations, and produce goods or services.

[dryfly]

Farm land around here is about $3K/acre right now... that 1000 acre farm would fetch at least $3 million... not chump change at all.

However even if we boosted the exclusion up to an estate of $10 million or more... don't even start taxing until it gets there... I could live with that. I just don't want the wealth to concentrate so tightly that a handful of families end up owning all like a giant banana republic. They can stay rich... but every generation we prune enough to keep them from owning it all in a few generations.

Meanwhile helping to fund gov't some. Good for democracy & good for the budget. Win-win.

[ilsm]

Rust:

"The business world is not quite as simple as some of you seem to think."

The term 'buy the farm' is from WW I. The GI insurance paid the bank note on the family farm if the GI "bought" it in the trenches.

Famers have been an economic anomoly since there were banks to liquify the land value.

A wise farmer had enough life insurance to cover estate taxes and maybe close the production note.

I agree agrarian gentrification is not as simple as us folks who never lived on a multi million dollar farm in fly over country think.

It is a wonderful idea to leave the farm to Dick or Jane, just like a wonderful idea to have a living wage for every one in America.

Some wonderful ideas make little sense.

[RW]

In regards to the estate tax I've been struck by how incoherent the arguments against it tend to be yet how passionately they are held none the less. Or perhaps they are passionate to compensate for the incoherence, I don't know. There are numerous ways to plan an estate appropriately and minimizing taxes is part of that process yet the estate tax is called unfair by people who must simultaneously ignore the logical contradiction of the values they espouse, values that extol careful planning and wealth creation but then apparently demand that wealth be protected even when planning is neglected.

While it is certainly true that the foes of the estate tax scored a public relations coup by dubbing the levy a "death tax" (the phrase evokes ghoulish tax collectors slipping their hands one last time into the pockets of the deceased as they lie in their casket), this is just a PR talking point that does little to distinguish why a gift after death should be fundamentally different than a gift before death. I'm not arguing that it can't be - such distinctions are often made on the basis of cultural values even when they appear completely irrational to the casual bystander - but that foundation does not appear to be established in this case.

In fact it is not a tax on "death" - it is a tax on the conveyance of assets, however many months or years that takes after the value of the assets is established. It is certainly more straightforward from an administrative standpoint to tax the estate itself rather than pursue individual heirs after they have received their respective windfalls. Not that efficiency is the end-all and be-all of course but it is certainly easier for everyone including the heirs to take care of all taxes before conveyance.

In addition the notion that somehow the estate is taxed twice lacks foundation as well. In fact most estates convey capital gains which have never been taxed and current law gives beneficiaries a further gift there because the tax stipulates the cost basis be set at the time of death, not the real cost basis at the time(s) the assets were actually purchased. Rather than a double tax, the beneficiary receives a double benefit.

So the question remains, what is the foundational distinction between the two gifts - one from a living donor or one from an estate - and why should a government respect that difference above all others rather than, say, adjusting boundaries, protecting specific business assets, or any number of other things a government might do to balance the desires of its citizens with its need for revenue in the pursuit of its business which, it should hardly need to be pointed out, includes enforcing laws and regulations designed to protect and convey property in an orderly fashion?

[save_the_rustbelt]

"Should wealth be taxed?"

In my opinion, no.

At the federal level, income should be fairly taxed. Additional taxes should have specific purposes (gasoline taxes to build highways).

[save_the_rustbelt]

"save_the_rustbelt: 1000 acres is a large farm - that's about 1.5 square miles and if the land is halfway arable, worth a pretty big sum both. It would be a good idea to tax it in an estate."

So where do you get the cash to pay the tax?

1) liquidate the farm on the IRS's schedule (don't die before a recession or when interest rates are high)

2) carry large amounts of expensive life insurance

3) enter a 15 year partnership with the federal government with an installment plan

4) put the heirs deep into debt, probably guaranteeing they lose the farm

Which would you prefer?

[anne]

Then either let's all buy lots of land as an estate shelter or let those who own ample amounts of land take mortgages and invest the proceeds as they should be doing in any event.

[save_the_rustbelt]

"are generally run by corporations,"

Not exactly, but the estate tax is one reason for the consoldidation of larger and larger farms tending to be owned by large corporations.

Whether you think that is inherently good or bad, it is a side effect of the estate tax.

The same consolidation effect has happened in the construction and manufacturing sectors in our region.

Again, you may think this is good or bad or neutral, but it is to some extent an unintended consequence of the estate tax.

Taxes often have economic consequences beyond what is directly intended.

[Winslow R.]

Rust wrote:

""Should wealth be taxed?"

In my opinion, no."

Could you explain your opinion?

"At the federal level, income should be fairly taxed. Additional taxes should have specific purposes (gasoline taxes to build highways)."

This part seems reasonable.

[Winslow R.]

Just thinking...

The 'liberal' segment of the population accepts that the government has the 'right' to tax and work to make the resulting tax burden 'fair'. Sounds like STR is a bit liberal.

The 'conservative', 'internationalist' and 'libertarian' segment of the population submit to the government's legal authority to collect taxes and work to minimize 'the burden'. Sounds like STR is a bit conservative.

Is excessive deficit spending the result of 'freeloaders' who don't believe they should be taxed on income or wealth and therefore cheat? Or is deficit spending just the result of bad tax policy and an inability to reach a compromise where taxes are low and fair?

[save_the_rustbelt]

"Is excessive deficit spending the result of 'freeloaders' who don't believe they should be taxed on income or wealth and therefore cheat? Or is deficit spending just the result of bad tax policy and an inability to reach a compromise where taxes are low and fair?"

Both. More the latter.

And an unwillingness of politicians (both parties) to deal honestly with the citizenry.

[anne]

Wealth however if not turned to income through realization of capital gains is free for a lifetime, then is there no capital to be taxed in an estate? What about $5 million or $10 million in estate value? Should there be a tax at some level? Also, remember assets can be and are easily mortgaged to afford taxes.

[Winslow R.]

STR wrote:

"Both. More the latter."

As Robert points out, 'savers' are not necessarily those that are cheating on their taxes or even 'excessively' well to do. It is not 'fair' to 'savers' that deficit spending is an inflation of the money supply and can lead to a loss in purchasing power. If deficit spending is sufficient to overwhelm saving desires, as Japan is proving, inflation will 'tax' savers disproportionately. It is in their interest to work for a better tax policy with low deficit spending.

Cheating is large,

"According to the latest estimates, as much as $353 billion in taxes--16% of the total owed--went unpaid in 2001"
http://www.epinet.org/content.cfm/bp160

If the cheaters were bought to justice, the deficit would dissappear but would 'fairness' in the 'liberal' sense be achieved?

As STR points out, the estate tax is redistributionary. Is there a limit to the differential in wealth American liberals are willing to tolerate? Dragonfly says 10 million.

Personally I don't think I care how much the 'rich' have unless it limits opportunity for the rest of us. If someone is born with the abilities to be a nobel prize winner but is denied the opportunity to maximize those skills because of a lack of education, abuse and neglect, a liberal would consider it a system failure. A conservative would consider it 'tough luck'?

I do believe government can limit or enable the natural abilities of its people. There is a point in wealth consolidation where the wealthy withdraw from public education, parks, and police protection. This sends me the signal the disparity has grown too large but would seem to be a pretty low threshold. Below dragonfly's 10 million assuming a 5% return on capital. Is there a better way?

It seems that wealth is not taxed except for real estate through property taxes so the farmer in STR's example is already paying wealth taxes. I'm not a tax expert, but I don't believe owning the right to movies, books, patents, most capital equipment, etc. is taxed just the income stream from these forms of wealth. Taxing them encourages their use or dispostion maximizing economic activity. Taxing income discourages economic activity.

[save_the_rustbelt]

"Wealth however if not turned to income through realization of capital gains is free for a lifetime, then is there no capital to be taxed in an estate?"

"Also, remember assets can be and are easily mortgaged to afford taxes."

Wealth is not the same as liquidity, and liquidity is the problem.

Mortgaging assets to pay estate taxes may not bode well for the future of the assets, at least not for businesses and farms.

There may be one possible compromise solution for those dying with significant amounts of appreciated public stocks and bonds. On the final income tax return tax the capital gain as of the date of death, sell the portion of the stocks and bonds needed to pay the taxes, and give the remainder through the estate with a stepped up basis.

That doesn't work for non-public investments though, due to the difficulty in selling any of the asset for liquidity. It is difficult to sell the stock in a famly business and etc.

[dryfly]

That doesn't work for non-public investments though, due to the difficulty in selling any of the asset for liquidity. It is difficult to sell the stock in a family business and etc.

There are plenty of possible work arounds that could be part of an estate tax reform bill that won't give the super wealthy a free pass to generation-after-generation aristocracy status & yet doesn't threaten the eight or ten 'family farms' still remaining. I already posted a number of them vetted by my tax accountant & my tax attorney sister... things like high exclusions or base the tax on amount received per person & not total estate size.

They would work too - make sure super wealthy pay and get leveled one a generation) but won't ruin Elmer Fudd's son - but because they would work won't see light of day by GOPers who want all or none to 'save Bill Gate's farm'.

Most of this 'family farm' crap is poster child arguments by the Club For Growth to make sure Bill Gates can pass it all on tax free.

[Robert]

"If deficit spending is sufficient to overwhelm saving desires, as Japan is proving, inflation will 'tax' savers disproportionately."

Winslow, Japan is proving many things, and though ZIRP may have been responsible for many well-appointed homes in Greenwich, CT, I would argue that Japanese' new-found penchant to "invest" in additional condos and undertake additional capex, and treat themselves to a new Vuitton something-or-other, has stemmed more from the spilllover effects of its large neighbor, both directly and indirectly than its YEN printing presses. Cause/effect attribution is never easy, but I reckon all ZIRP did was to enrich speculators who survived '98, further delay needed US adjustment, and indirectly subsidize domestic employment through their exporters by uglifying the YEN at every turn - the cost for which we will only know with hindsight 10 years hence (but I bet it will be higher than MoF planned!).

[Winslow R.]

Robert wrote:

""If deficit spending is sufficient to overwhelm saving desires, as Japan is proving, inflation will 'tax' savers disproportionately."

**note deficit spending not ZIRP in my quote?

Winslow, Japan is proving many things, and though ZIRP
may have been responsible for many well-appointed homes in Greenwich, CT, I would argue that Japanese' new-found penchant to "invest" in additional condos and undertake additional capex, and treat themselves to a new Vuitton something-or-other, has stemmed more from the spilllover effects of its large neighbor, both directly and indirectly than its YEN printing presses.

**The ZIRP has a very loose connection to deficit spending once loan demand has been met. Deficit spending creates tsy secs. BOJ purchases tsy secs to create reserves. Once interest rates hit zero (no one wants to borrow reserves already created) , no more reserves need to be created. No more tsy secs need to be purchased.

**At this point the BOJ is powerless to steepen the yeild curve. As 'savers' continue to pull Yen from circulation 'real' interest rates will invert (nominal long term rates may be 0% but deflation will cause 'real return' of say 2% if deflation is 2%). Government deficit spending sufficient to overwhelm saving desires (currently about 7%) is required to keep the amount of Yen in 'circulation' from falling. Reserves in a CB are not in 'circulation'.

"Cause/effect attribution is never easy, but I reckon all ZIRP did was to enrich speculators who survived '98, further delay needed US adjustment, and indirectly subsidize domestic employment through their exporters by uglifying the YEN at every turn - the cost for which we will only know with hindsight 10 years hence (but I bet it will be higher than MoF planned!)."

**I agree the ZIRP had little effect. I would argue that China may allow for higher savings rates of Yen as less is spent on incomes in Japan and more in China. China would use its trade balance to save Yen just as it uses its trade balance with the U.S. to save dollars.

This is from 2001 don't know if it still holds but would guess it did.

"The Japanese trade balance with China has now turned to a deficit for the first time in history.
"
http://www.wwwms.info.ro/GEFdata/digests/20010726-thu.html

Chart shows Japanese gov deficit spending.
http://www.esri.cao.go.jp/en/stat/data/p027en.pdf

[Bruce Webb]

"Most of this 'family farm' crap is poster child arguments by the Club For Growth to make sure Bill Gates can pass it all on tax free."

Bill Gates is not the poster child here. In fact his father William Gates Sr is a leader in the attempt to keep the estate tax as is.
http://www.usatoday.com/money/industries/technology/2003-01-12-gates_x.htm

And is joined in this with Warren Buffett and David Rockefeller. I think the uber wealthy get it, your kid is not going to suffer because his trust fund only has $100,000,000 in it rather than the billions it could have.

[save_the_rustbelt]

dryfly:

If we are going to have an estate tax then you are quite right, in the current system the Kennedys escape and Joe Schmoe who owns a machine shop gets blasted.

By the way, within 20 miles of my house there are at leat a hundred "family farms," they are bigger than in the past but certainly viable.

[save_the_rustbelt]

"Then either let's all buy lots of land as an estate shelter or let those who own ample amounts of land take mortgages and invest the proceeds as they should be doing in any event."

For the life of me, I can't figure out what you mean with this. How would you use land as an estate shelter (buy farm land and do a rental or share crop arrangement with a farmer?).

And if you buy land and mortgage it where does the cash flow come from to pay the mortage payments and real estate taxes?

[The Beast]

don't give rise to the nwo. don't receive the beast mark. no one wants to be the lone defender of the beast, no one wants to fight psychological and spiritual warfare. join her in hell, are we already there. non-earth, non-issues, non-people, non-employment, non-compliance, non-existence???...???