January 15, 2009

Extending the Death Tax: Obama’s Dumb Reaper

Contrary to popular opinion, the key line in understanding the movie Forrest Gump was not “life is like a box of chocolates.” It was “stupid is as stupid does.” For a stupid person, Forrest lived pretty smart. The so-called intelligent people around him? Not so much.

And if you want to understand the ongoing fiscal soap opera that is Uncle Sam, you need to grasp a derivative concept – “stupid is as stupid taxes.” And on that score, the Obama Administration is getting off to a less than stellar start, IQ-wise.

Stupid tax move number one: Turning the Internal Revenue Service into a welfare agency. Even before the stimulus plan, Sleek Barry was on a course to transform America into a minority-taxpayer nation.  Now, to finish the job, he is proposing to hand out new $1,000 credits to people who don’t pay taxes.

Stupid! Having more people take from than give to government is a recipe for disaster. It means no constituency for restraint, and that the taxpaying minority, sooner or later, will simply throw up their hands and quit working for the government. Didn’t anyone in the O-Ring read Wealth and Poverty?

Which brings us to an even stupider tax move: On the other end of the scale, Obama and his team are said to be planning to block the 2010 repeal of the estate tax – which was scheduled to last for one whole year in any event.

Everyone together now: Stupid! The death tax, according to the Congressional Joint Tax Committee (JTC), may well be the only tax that costs the government more than it collects.

Let me repeat that so it can sink in: The estate tax costs the government more than it collects. 

Again, the tax – because Congress is, well, stupid – was already scheduled for full reinstatement in 2011 after just one year of repeal. (Free advice to any elderly relatives planning a pleasant December 31, 2010 with prospective heirs: Watch your back.)

According to JTC, in the five years after its return, the Grim Reaper levy was expected to raise a grand total of $219 billion. But related tax avoidance was projected to deprive Uncle Sam of $281 billion in income taxes. 

You do the math. Uh, huh.

You see, the problem with the Fed’s exit fee – like most taxes – is not who pays it, but who doesn’t. Hint:  Really rich people have “estate planners,” most of whose work involves figuring out how to keep the government’s claws off the client’s accumulated life savings. It’s why the death tax sucks off a full dollar in compliance costs for every buckaroo it does bring in – about $30 billion each and every year.

But death planning also involves diverting further cash from productive, income-generating, job-creating investment into avoidance schemes. The JTC estimates that the estate tax has reduced the capital stock by nearly $850 billion. And if none of those schemes works, the way to avoid the estate tax is simply not to have any estate left to tax. Spend it all. Hence less income, less growth and lower overall revenues.

Not to mention that the estate tax flunks on every other conceivable justification for its existence. To the extent it has an effect at all, it may actually increase inequality and provide a barrier to charitable contributions. Plus the family farms and small businesses that have to be split up for no economic reason other than to satisfy the public’s blood lust to punish the “rich.”

Fortunately, Forrest Gump does offer one additional piece of sage counsel that 44 might apply the next time his team comes up with brain-dead economic plans like turning the tax system into a revenue scheme and extending the death tax.

“Run, Barry, run!”