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My item about how Congress accidentally repealed the estate tax in 2010 (and automatically imposed an extremely onerous version of the controversial levy in 2011) has gotten responses from Tim Carney and Jeff Jacoby; the latter of whom even has the temerity to call me a "class warrior" because of my support for the estate tax, a description with which our commenters will no doubt disagree. And indeed, I have no problem with the rich. I just don't see why the Paris Hiltons of the world should receive tax-free income they haven't earned. It's something of a truism that epithets are deployed when you run out of arguments, and both responses leave me rather unconvinced. First of all, on the issue of who's affected, this graph from the Tax Policy Center may be useful: It's the super-wealthy:The most recent studies of the tax say that fewer than 6,000 people will pay it in 2009; and while that number is smaller than it might otherwise be thanks to people who use the loopholes in the tax to avoid paying it, that's not really an argument that the tax is bad; it's an argument that people can exploit its loopholes. Jacoby brings out the family farms fallacy, but family small businesses and farms aren't really affected by the tax (see again the above graph, or check out this work from the Center on Budget and Policy Priorities, which demonstrates that of all the farms in the country, only 13 might be adversely affected by the tax). Nor does Jacoby deal with the fact that under this year's repeal, capital gains taxes actually have a much more troublesome effect on small businesses and farms. That's the real world impact of the repeal Jacoby celebrates.Given that the estate tax doesn't really affect family farms or small businesses but only the estates of the wealthy, I fail to understand why unearned income being received by an inheritor in excess of $7 million shouldn't be taxed by the government. To my original point about the broader problems of tax repeal, why does the Senate spend so much time trying to increase the loopholes that can be used to avoid this tax? Given every other issue facing the country, this seems like a subsidy to the wealthy to me. Surely the fact that heirs can only receive the first $7 million tax free isn't the most pressing issue of equity or liberty facing the tax code when a huge budget deficit looms, unless one is held in the ideological thrall of a tax-cuts-all-the-time mentality. Jacoby may think this tax rewards prudence and discourages profligacy, but it's the exact opposite: it rewards those who want to inherit a fortune rather than work for it. What happened to the conservative idea of meritocracy? There's a reason our society lauds the wealthy among us who make it their mission to give away their fortunes before they die; the Warren Buffets and Bill Gates of the world support this levy. Finally, the two critiques demonstrate perfectly the problem I was trying to highlight: how hard the much-needed tax reform conversation will be. It is impossible to do tax reform if any measure will be opposed without thought to how it actually works in practice. There's no need to be dogmatic about the estate tax on either side -- were I in the legislative committee room negotiating a deal on the subject, I'd be happy to jettison the estate tax in favor of adding a new income tax bracket for the super wealthy, a more progressive capital gains tax, getting a Value-Added Tax on the table in combination with more progressive social services, or eliminating corporate income tax loopholes. But it's hard to imagine that anti-tax dogmatists will be amenable to discussing how to fix the tax code when all they seem to support is eliminating it.
-- Tim Fernholz