How Pete Peterson is driving the fiscal consensus

By Felix Salmon
April 20, 2012
Trudy Lieberman has a good post at CJR on the "surprisingly broad consensus" around the need to reduce the fiscal deficit in general, and to take aim at Social Security in particular.

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Trudy Lieberman has a good post at CJR on the “surprisingly broad consensus” around the need to reduce the fiscal deficit in general, and to take aim at Social Security in particular. “Social Security,” she writes, “is the one issue on which the electorate is not divided” — but that hasn’t stopped a bipartisan group of Washington grandees from preaching doom whenever it is brought up.

More generally, the idea of “fiscal responsibility” seems to have become as American as motherhood and apple pie — both parties preach it, and say the other guys are the profligate ones. The group of people saying “hey, we print our own money, interest rates are at zero, inflation is not an issue, the corporate sector isn’t borrowing, there are a thousand more important things to worry about right now, why on earth is everybody worried about the deficit all of a sudden” is in a decided minority.

The obsession about fiscal prudence is a new phenomenon, and can be dated, pretty much, to 2008, when Blackstone went public and Pete Peterson took his billion dollars in proceeds and decided to use it to found the Peter G Peterson Foundation. Wherever fiscal prudence is preached, Peterson’s money can nearly always be found.

On May 15, for instance, the PGPF is hosting the third annual Fiscal Summit, featuring fawning softball questions for Bill Clinton, John Boehner, Tim Geithner, Paul Ryan, Alan Simpson, and others. I myself was asked to moderate a discussion in New York a couple of weeks earlier, launching “A Curriculum for Teaching about the Federal Budget, National Debt, and Budget Deficit” called Understanding Fiscal Responsibility. Peterson’s going to be there, and the likes of Peter Orszag and Kirsten Gillibrand have been invited.

I’m decidedly dubious about the wisdom of teaching sovereign fiscal responsibility to high schoolers. For one thing, it’s inevitable that many teachers will resort to the personal-finance metaphor, and thereby teach something which is downright wrong. And if you look at the way these curricula are constructed, there’s an incredibly strong bias in favor of spending cuts and against tax hikes.

Take, for instance, the National Budget Simulation, a key part of many fiscal-responsibility lesson plans. Here’s how it works:

The new President of the United States has been elected on the promise of fiscal responsibility. He has promised the voters he will not raise taxes, and he will not reduce Social Security or Medicare…

Suddenly, the United States is subject to military attack — a turn of events not anticipated in the current budget. At the same time, a lingering recession reduces the government’s tax revenues and forces the government to increase its spending on unemployment benefits, welfare, housing assistance, food stamps, and other need-based programs. Because of the increased spending and reduced revenues, the nation falls into a projected deficit…

The President is committed to keeping his campaign promises, in order to maintain support for his reelection. He must protect the programs he promised to protect, and he cannot raise taxes, so he must cut spending on other programs… The President turns to you, his trusted economic advisor, for help.

One of the most annoying parts of the fiscal debate, at least for me, is the way in which it has become synonymous with spending cuts rather than tax hikes. Say “fiscal balance” and people start thinking in terms of means-testing Social Security, rather than, say, implementing a carbon tax or a financial-transactions tax. And so we get the likes of Paul Ryan being taken very seriously — Mitt Romney is positively gushing about him, these days — even as the idea of paying for expenditures by raising taxes becomes increasingly un-American.

Reasonable people can differ on the question of how important it is to balance the budget, but I think it’s fair to say that there are lot of screamingly important issues, from endemic long-term unemployment to global nuclear proliferation, which aren’t getting a fraction of the attention that fiscal policy is getting. Which only goes to show, I think, just how powerful Pete Peterson’s targeted millions can be.

52 comments

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Peterson is garbage. This crap is so wrong it does not deserve the civil treatment you just gave it Felix. It’s just another version of the idiotic Norquist garbage that has been peddled for years. That vicious ideologue is threatening to bring down our nation. “Drown government in a bathtub” insanity is not policy. It is future mass murder driven by deadly ignorance, or deliberate evil.

I’ve seen government drowning in a bathtub. It looks like:
-Half the men in a city of 800,000 dead from suicide, homicide or starvation in five years.
-30% of a city’s adults with untreated syphilis.
-Police going unpaid for years, subsisting on bribes and graft.
-Physicians selling the window screens of their hospital in order to buy soap.
-Every apartment door with living residents in it replaced with minimum 1/4″ steel.
-Government offices with steel attack doors installed with mechanisms like hatches in naval ships. If attacked, office workers can wall off their wing to save themselves from the gang.

This was in the Russian Federation circa 1998.

http://quantiger.wordpress.com/2012/03/2 7/grover-norquist-flat-wrong-about-tax-c uts/

http://quantiger.wordpress.com/2012/03/2 0/grover-norquist-john-lott-debacle-foll owup-response-to-john-lott/

Posted by BrPH | Report as abusive

Maybe we’ve got PMS (Post-Modernity Syndrome) -

“French public life has been dominated for two or three centuries by the rationalist ideas of the Enlightenment… But these ideas, which we might describe as those that have shaped ‘modernity’, are now giving way to the ideas and values of ‘post-modernity’… Post-modernity, which is the condition our societies are moving into, is far more anchored around the emotional than the rational or intellectual.”

– Michel Maffesoli, sociology professor, Sorbonne University

http://www.bbc.co.uk/news/magazine-17775 249

Posted by TobyONottoby | Report as abusive

“He has promised the voters he will lower taxes, and he will not reduce Social Security, and will expand Medicare.

Suddenly, the United States takes on two wars — a turn of events not anticipated in the current budget.”

Much, much better.

Posted by GRRR | Report as abusive

This post is a public service. Now you need to figure out how to make the meme take off.

Posted by SamPenrose | Report as abusive

“The obsession about fiscal prudence is a new phenomenon, and can be dated, pretty much, to 2008 . . . .”

Disagree. Peterson’s been writing overly-long tracts about the evils of fiscal imprudence since at least 1987:

http://www.theatlantic.com/past/docs/unb ound/flashbks/budget/afterf.htm

His thinking hasn’t changed over the years, but the value of his levered PE investments has skyrocketed — thanks to assorted QEs, the Greenspan/Bernanke Put, the socialization of credit risk, etc. etc.

Now he wants to spend his largesse promoting his message — ‘Do as I say, Not as I have done’ — to a wider audience? God bless him.

Accept his invite. Introduce Pot to Kettle.

Posted by dedalus | Report as abusive

Good post, Felix. But you leave out one all-important part of Peterson’s influence. I give you Budgetball, the “innovative team-based sport that combines fiscal strategy and physical play” – http://www.youtube.com/watch?v=56MDSNXpP m8

Posted by PatrickSharma | Report as abusive

. From 1945 to 1980 income taxes averaged near 12% of GDP. Reagan reduced marginal tax rates so much that they fell close to 9%. Clinton increase them back to 12%; and Bush/Obama reduced them again to 9 %(and below). However, on budget expenses have remained 12%(+/-1%)) of normalized GDP throughout. The deficit in income taxes has been financed by borrowing, largely from the Social Security trust fund. But, not only can we no longer continue to borrow from the trust funds, we have to start paying money back as beneficiaries start relying on the trust funds. In the short term, we have to raise income taxes to 12%, simply to cover on budget expenses. In the long term, income taxes must rise above 12% in order to pay back the trust funds.

Posted by bmz | Report as abusive

If Peterson’s logic didn’t resonate with most people, his $millions wouldn’t matter. But it does and liberals, sadly, have failed to counter it effectively. Don’t blame the other messenger, get your own better message and the other won’t matter.

Posted by silliness | Report as abusive

While Peterson has been at this game for a long time (as others have pointed out above, this is also what happens whenever a Democrat is in the White House.

Posted by GregHao | Report as abusive

Silliness (at 7:41pm) is right on target. As flawed as Peterson’s message may be, like they say in poker – “You can’t beat something with nothing.”

The liberal message that’s been offerd to date is even worse. Right or wrong, citizens intuitively reject the liberal notion that a society can “spend itself rich”.

So, FS – please do accept the invite, and try to come up with something better than more of the same old liberal cant – that won’t fly.

Posted by MrRFox | Report as abusive

All this talk that implies Peterson is lecturing just democrats and liberals is silly – he was saying the same things when Bush was in office and the Republicans controlled congress. Anybody who thinks giant deficits are a Democrat problem must have landed in America less than 3 years ago, with no access to recent history.

And for this Felix comment:

“hey, we print our own money, interest rates are at zero, inflation is not an issue, the corporate sector isn’t borrowing, there are a thousand more important things to worry about right now, why on earth is everybody worried about the deficit all of a sudden” is in a decided minority.

Well put me in the minority. Not because I think it’s a good thing to do, but basically because cutting federal budget deficits will not make US exports more competitive, nor reduce our trade deficit. In fact, it will probably lead to the opposite, as it would further increase the value of the dollar. The dollar is not valued fairly, and as a result, we cannot compete with foreign manufacturers with low cost labor and/or under-priced currency. We are being punished, for whatever reason, by having the dollar in great demand, regardless of how many we print. If we cannot get our output fairly valued by the rest of the world, I don’t see why we should respond by lowering the standard of living for the segment of our population that is being displaced by foreign currency costs that are artificially lower than here. Further, even if you feel that’s it’s fair for those people whose skills put them at the mercy of cheap foreign competition, it’s unrealistic to believe that the damage will be limited to that segment – almost everyone here will be impacted by less people participating in the economy.

Posted by KenG_CA | Report as abusive

The thing that needs to be dragged to the bathtub and drowned isn’t the government, it’s the idiots who make such simplistic slogans.

Posted by borisjimbo | Report as abusive

1. Cut DoD and “all things security” to 2% of GDP; end wars, withdraw troops from all foreign bases.

2. Return personal and corporate income tax rates to the levels in the 1950s, adjusted for inflation.

3. Tax capital gains as ordinary income.

4. Cut healthcare spending and reimbursements to OECD ex-US levels.

PROBLEM SOLVED. There would even be money left over for education, universal health insurance and infrastructure.

Posted by upstater | Report as abusive

upstater, the problem with “ending wars” is that there are at least two sides to a war.

and I am sure if you look at every country that had a debt crisis that someone said something rather like this:

“hey, we print our own money, interest rates are at zero, inflation is not an issue, the corporate sector isn’t borrowing, there are a thousand more important things to worry about right now, why on earth is everybody worried about the deficit all of a sudden”

Posted by Danny_Black | Report as abusive

That’s the nature of debt. It is never an issue — you can always borrow more to keep up with payments — until suddenly one day you can’t.

Felix suggests that we will have sufficient warning to change our profligate ways. Does history bear that out?

Posted by TFF | Report as abusive

Felix is a young guy, and he seems to be fighting against the likes of Peterson. I’m surprised. After all, it is his cohorts that will get stuck with the bill.

He won’t get 60% of the Social Security benefits that the Boomers will get, yet he pays for them. By the time he is 65 Medicare will have been gutted. The accumulated debt and interest on it will eat him alive before he thinks of retiring.

Today we have 92% of the workforce working. It should be closer to 93%. 94% would be the most we could hope for. So we are 1-2% away from where we should be. It’s not correct to call the current status, “endemic long-term unemployment”. We are crapping in our pants over the wrong issue.

I think Felix should teach those kids about fiscal responsibility. They are are going to have their opportunities taken away from them. They should at least understand why it is happening to them.

Posted by Krasting | Report as abusive

There is something so insensitive as to be morally revolting in the sight of someone like Pete hectoring people who are barely getting by that they don’t save enough. If we took brown nosing off the table as a useful tool of business and financial advancement, PP might be a pauper! I speak as one who has known him for thirty years.
On the other hand, Pete’s concerns about the deficit go back a long time. I thought he was right back then, but context forces adjustments to thinking. The world and nation have suffered grievous change since he first mounted his deficits/entitlements high horse. You have to go where the money is. And do so without qualm if that wealth has been piled up with “carried interest” tax breaks. Why should our tax system act like someone turned away at a border crossing, and be forced to stop at the point where income becomes wealth?

Posted by midasw | Report as abusive

@ BrPH, I lived in the Russian Federation in 1998 (1 Kaluzhskaya Ploschad, Moscow, Russia, to be specific) and I’m calling bullshit.

@ Danny Black- really, that’s the best you can do? Does Greece have its own currency? Why don’t you check yourself before you wreck yourself (again)

Posted by johnhhaskell | Report as abusive

@midasw – How do you think Peterson would respond to a package of some spending cuts and a big time increase in the estate tax and a few other things?

If all estates were taxed at 99% after allowing a max of $1Mil to each direct descendant, that would generate min $200Bil/yr. It would also be perceived as “fair”, in that it levels the “equal opportunity” playing field much more than the status quo. (Isn’t a Mil enough for each kid?) We could fill a big part of the deficit hole if we couple that with an end to the carried interest preference, tax interest and divs at regular rates and tax corp profits held overseas.

How long can we go on spending like 25% of GDP at the Fed level and collecting like 15% in total Fed tax revenue?

Posted by MrRFox | Report as abusive

@MrRFox, you don’t think the wealthy will find ways around that? How much wealth has Mitt Romney already passed to his kids?

The major problem with the estate tax is that it rips apart family businesses (which can easily be worth a couple million). Tax family farms when they change hands and they end up as extended suburban developments. Tax family businesses and they are forced to sell out to corporate interests. Small businesses are not nearly as good as the wealthy at navigating these issues.

I would strongly prefer a consumption tax rather than an increased income tax. Tax one aspect of the economy too heavily and all you get is tax evasion. Tax the economy at multiple points and you get a more honest, balanced system.

Posted by TFF | Report as abusive

TFF, I was thinking the same thing about how the wealthy would avoid that kind estate tax – they will give it away before they die. However, we can still keep a stiff estate tax and not have one that rips apart family businesses by taxing inherited assets when they are sold by the heirs. If you inherit $1B in stock (even in a publicly traded company), you still aren’t benefiting from it until you sell the stock. And when it’s sold, it gets taxed at the estate tax rate, whatever that is (I’m in favor of a high rate).

I like a consumption tax as part of an overall tax system, but if the rate is too high, it becomes too onerous on the poor. If you exempt food, housing, education, and health care, it could be useful to reduce our trade deficit, which is a measure of how much more we consume than we produce.

But I am amused by MrFox suggesting a plan that would get him kicked out of the R.A.C. (it’s a club for rich people).

Posted by KenG_CA | Report as abusive

The estate tax is scheduled to rise next year, IIRC, to over 50% – that rate by itself compels the sale of just about any business; what business has that kind of cash hanging around? Also, you get a better price if you sell the whole company, not just a piece of it. Raising the rates changes the take, but not the fact of what happens.

There are already laws limiting gifts – $13k/yr max, as I recall. Why should family farms be different than any other business? This isn’t Ma & Pa Kettle’s shack we’re talking about, but multi-Mil$ stuff. The next generation can buy it – they have no “right” to get it for free. More to the point – in an alarmingly unequal society like ours, nobody has any kind of “entitlement” to anything he didn’t earn. Besides – Mom and Dad just might realize what ingrates their spawn really are, and decide to leave all the assets to the family cat – people do. Like that outcome, do ya’s? A Mil for each kid is enough!

OBTW: Mitt would make a much more admirable figure (ala Steve Jobs) if he’d earned all his money himself, wouldn’t he? So would Paris Hilton.

Posted by MrRFox | Report as abusive

Regarding the estate tax debate… Something I’ve never understood: How many “owners” of family businesses actually die while still the owners? Unless these people are dying young from overwork, I would hope that 80 something year olds would have already arranged a succession plan. And if they haven’t, well, they aren’t very good business people. So it seems to me all this talk about the estate tax destroying existing businesses is just silliness.

Posted by silliness | Report as abusive

“Why should family farms be different than any other business?”

Family farms often occupy “valuable” land that could be divided up into quarter acre lots and sold to developers. Quite easy for a 100 acre farm to be worth several million, but impossible to find somebody willing to pay that kind of cash who DOESN’T intend to subdivide it. Land trusts are only a partial solution to that dilemma.

As for Ma & Pa Kettle’s shack, have you tried pricing it out as an operating concern? A million dollars simply isn’t that much money — a $30k pension with adjustment for inflation is worth close to that.

“There are already laws limiting gifts – $13k/yr max, as I recall.”

Like I said, these laws don’t actually hinder the wealthy. Mitt Romney (legally) passed on many times this amount to his kids. But small business owners typically don’t have the lawyers needed to pull this kind of tax dodge, so they get hit.

“I would hope that 80 something year olds would have already arranged a succession plan.”

A succession plan for managing the business isn’t the same as a transfer of ownership. And besides, not everybody lives into their 80s.

I do agree with your other point, though. The estate tax has enough loopholes that sophisticated businessmen can drive a Mack truck through it. It is the “not very good businessmen” whose businesses get destroyed. Leaves us with those who know how to manipulate the system controlling all the assets. Is that what you want?

Posted by TFF | Report as abusive

“However, we can still keep a stiff estate tax and not have one that rips apart family businesses by taxing inherited assets when they are sold by the heirs.”

That’s an interesting idea, KenG. There might be a way of achieving something similar under present law (somehow encapsulating the business in a family trust?), but like most things with estate planning that would probably need to be done earlier rather than later. Your suggestion allows a similar outcome for those who didn’t properly plan ahead.

Would also caution those who see the estate tax as a cure for income inequality. Even if the existing loopholes were tightened, it is still a HUGE advantage to be raised in a family that has the resources to pay for a top-notch education. We plan to give that to our children, not mere money — which is exactly what our own parents gave us. You don’t think income inequality can be perpetrated this way?

Posted by TFF | Report as abusive

Since FDR there has emerged competing visions of government where there was but one before. There is the “big government/bureaucracy model with endless government control, employment and expense; and there is the “constitutional” vision where government is limited to certain very specific areas of authority and limited in cost.

“In the beginning”, all politicians were volunteers. They had to earn a “real” living and be successful at it before they could afford to serve in government. NO ONE could afford to be without income for the period so many in government today persist.

Just as farmers learned how to “farm the programs” when that became more profitable than farming the land, our paid (professional) politicians of today take care of their (best) interests BEFORE those of the country (or the state). Is it any wonder their salaries, pensions, health and other benefits are so different from the “rest of us” that they all become wealthy whether times are “good” or “bad”?

The single simple solution to the present woes of these United States is to have a final debate as to which “vision” shall prevail. If it is FDR’s, the present slide to economic oblivion will continue to it’s inevitable conclusion.

If we go back to a Constitutional model, politicians must accept fiscal limits and adopt appropriate priorities for a much smaller, more limited government. This nation remains able to afford anything it wants. No nation has ever been able to afford EVERYTHING it wants.

In the end, our “choice” should be an informed one. I hope the American people have it in them to choose wisely.

Posted by OneOfTheSheep | Report as abusive

johnhhaskell, yeah because being able to print their own currency would have saved them. Just like it did Russia, Iceland, Argentina, Korea, Thailand etc. Did a great job for Weimar.

With the US this is not a hypothetical. The US had to spend 150bn cash ensuring the Russians and Chinese – amongst other central banks – did not lose a significant portion of their cash reserves which would have caused them to dump US government debt. Just because this near-miss has got airbrushed out by “journalists” determined to find something to be outraged about GS doesn’t make it any less significant.

Posted by Danny_Black | Report as abusive

TFF, while I’m not that sympathetic to the wealthy who want little or no estate taxes, I’m willing to make this concession. An asset that produces an income stream will have that stream taxed, otherwise it’s a piece of paper, whether it is title to a farm or shares of Apple stock. I think I’d like to add some caveats to it, e.g., estate tax is due when an inherited asset is used as collateral for a loan. If cash is inherited, the inheritance tax is due immediately. I’d also like to eliminate any capital gains preference on inherited assets – if you inherit something, your cost basis is zero.

“Would also caution those who see the estate tax as a cure for income inequality. Even if the existing loopholes were tightened, it is still a HUGE advantage to be raised in a family that has the resources to pay for a top-notch education. We plan to give that to our children, not mere money — which is exactly what our own parents gave us. You don’t think income inequality can be perpetrated this way?”

i don’t think people who fight income equality have a problem with the wealthy being able to afford the best education for their children, and if they do, well, then they are effectively calling for socialism. I also think the anger over inequality is more directed at those who have extracted billions, or at least hundreds of millions of dollars out of the economy, primarily by trading pieces of paper, rather than people in your wealth/income bracket who can afford a top education for their kids, but have a net worth less than the monthly income of those traders. If you are advocating that providing a private education is perpetuating income inequality, doesn’t that mean your job as a teacher in a private school qualifies you as a co-conspirator?

Posted by KenG_CA | Report as abusive

The intellectual dishonesty revealed on this thread is really quite depressing. Easy to understand now why FS never deigns to post in his own blog threads.

Posted by MrRFox | Report as abusive

“I’d also like to eliminate any capital gains preference on inherited assets – if you inherit something, your cost basis is zero.”

That is the reverse of the current system. At least for assets that fall under the exclusion, your cost basis gets stepped up to 100% of present market value. I much prefer your approach.

“If you are advocating that providing a private education is perpetuating income inequality, doesn’t that mean your job as a teacher in a private school qualifies you as a co-conspirator?”

One difference, at least, is that we provide that education to lower-income families. That is why I earn a small fraction (1/4?) of what I could in the suburban public schools. I realize that some people equate “private school” with “wealth”, but that isn’t a tight connection. Especially in places where the public schools are awful.

And our personal wealth derives from spending $40k/year on living expenses, rather than the $80k/year that might be more typical of a highly educated professional couple. Amazing what you can do with a $40k savings stream and double digit market returns!

Posted by TFF | Report as abusive

Here is another estate tax proposal, elegant in its simplicity: gifts count as income (except charitable gifts to qualified non-profits). No exclusions, other than a modest ($1k? $5k?) reporting exemption.

You might allow this income to be recognized (and taxed) over a five year period? That would allow small businesses to generate sufficient tax to pay for the associated inheritance tax. Large inherited sums would ultimately be taxed at a higher rate than small. And it is much harder to circumvent, since the received money would end up being counted as income sooner or later anyways.

Also, income for dependents is typically (?) charged at the parents’ rate. Ought to eliminate that dodge nicely.

Posted by TFF | Report as abusive

TFF, If I give a gift to my children over a certain amount, I have to pay a gift tax of 50% (last time I checked) on the amount – the recipient pays no tax. So effectively there is a tax on the very wealthy giving large amounts, although it is only 33%. There are annual exclusions ($22K or so) and a lifetime limit of $1M or thereabouts, but those aren’t numbers that need to be addressed. It’s when people inherit tens or hundreds of millions or billions of dollars that should be taxed higher.

My college son is a dependent, but I recently had him start filing a tax return on his own income. I don’t know if it’s much of a dodge, as the amount he earns is a fraction of what it costs to put him through (an expensive private) college – which while expensive, will provide no advantage over a state-supported university towards maintaining our family’s wealth inequality. I don’t believe the school he goes to will give him a leg up on students at public schools, only that it will probably be a more enjoyable experience.

Posted by KenG_CA | Report as abusive

In an ideal world Steve Jobs’ kids would have no more advantages in life than the spawn of a single-mom ghetto dweller. We can’t attain that optimal outcome, but that disability hardly seems to justify allowing the Jobs kids to get over $6Bil (wholly or partly) tax free, does it?

Mr. and Mrs. Jobs earned the money – good for them. The same is not true of the children. A Mil$ and the advantages of growing-up “rich” is enough, isn’t it?

Any tax revenue collected from the dead is that much less that has to be taken from the living.

Posted by MrRFox | Report as abusive

Uh, “spawn”?!?!?!?

@MrRFox, you might revisit and reconsider some of your language? Smacks of thinly veiled racism. Am quite angry about your wording — cannot even begin to respond to you on that!

@KenG, you want to explain how Mitt’s kids managed to slip their millions of dollars through the system? Definitely seems to me that there are some loopholes that DO need to be addressed.

And the school attended is only one piece of the persistent income inequality. But that is getting off topic.

Posted by TFF | Report as abusive

Oh please, TFF – check my post of the 21st at 11:55am, and confirm that I use the term generically, and mockingly, to all classes and races.

Posted by MrRFox | Report as abusive

TFF, you establish trusts for the kids when they are infants, and can contribute, tax-free, over $20K per year to the trust. You can give assets that appreciate, also, so if their trusts received shares in one of his LBO funds that performed real well, the gains made in that fund would not be subject to gift tax. It can add up to millions of dollars over 25 years or more, all transferred without estate or gift taxes.

Posted by KenG_CA | Report as abusive

@KenG -

All these schemes for the inter-generational transfer of wealth in quantity have to be swept away. IMO, we’re seriously in danger of creating an hereditary, landed aristocracy that controls an ever larger share of the nation’s wealth. This isn’t healthy. But it probably can’t be changed without some sort of disaster/revolution. The rich run everything, and will always resist such changes with all the powers at their command.

Posted by MrRFox | Report as abusive

MrFox, I don’t disagree with you, I was just pointing out how it’s done under the present gifting system. But I think you have to allow some kind of gifts, e.g., I have given my parents money to help them, as social security just isn’t enough – should I have to pay tax on re-distributing income that has already been taxed? Helping a sibling who is unemployed?

“we’re seriously in danger of creating an hereditary, landed aristocracy that controls an ever larger share of the nation’s wealth.”

I think that has already happened.

Posted by KenG_CA | Report as abusive

@MrRFox, still not a polite phrasing (they are “children”), and with CERTAIN classes and races the term carries a far more negative connotation than with others.

@KenG, that’s basically my point. The present system allows the sophisticated paper-pushers to pass along tens of millions of dollars, while the unsophisticated small business owners get shafted when he tries to pass along an auto body shop to his son.

MrRFox seems to believe that you can somehow improve the system by loosening the inheritance rules, as long as you place a punitive tax on top of that. I wonder if he is familiar with offshore tax havens? Almost certainly could set one up to convert an inheritance into an income stream if you have enough liquid wealth to bother. (Much harder to offshore Joe’s Body Shop, or Ma and Pa’s Farm and Produce stand.)

I would take the opposite approach. Instead of aiming for a punitive tax rate, *tighten* the inheritance rules. Tax the transfer as income to the heirs (at the parents’ rate if they are still dependents), and most of the dodges disappear.

Posted by TFF | Report as abusive

@KenG, is it possible to make a distinction between transferring investment wealth and paying a relative’s living/education expenses?

Posted by TFF | Report as abusive

TFF, the auto-body shop owner doesn’t really get shafted – the estate tax exemption is currently over $5M, and even if no new law is passed, it will revert to $1M – keeping MrFox happy. Well, not totally happy, because the tax on the amount over $1M will be 55%, not 99%. But very few small businesses are worth more than $1M.

“is it possible to make a distinction between transferring investment wealth and paying a relative’s living/education expenses?”

I try to pay relatives’ health/education expenses directly to avoid that question, but it’s not always feasible. You can try to carve out exceptions in laws to allow certain “good” causes, but exceptions are often turned into loopholes.

I’m in favor of a stiff estate tax (maybe not 99%, but over 50%), combined with an equivalent gift tax to prevent gaming the system, and an exemption that is indexed with inflation and maybe regional cost of living factors. You could inherit the family home in middle class neighborhoods around here that are worth more than $1M, and be forced to sell the home to pay the taxes on it. That will no doubt not go over well. But if homes and actively managed businesses are kept in the family, they should be exempt from taxes until they are sold, as we discussed earlier.

Posted by KenG_CA | Report as abusive

@KenG, perhaps an auto shop falls under $1M. I know a couple family farms in the area which are surely worth much more, though. Hopefully they have already sheltered the property from development in a land trust. (Also knocks its sale value back by 90% or more.)

“exceptions are often turned into loopholes”

That’s a major problem with the current law. If you can think of a way of structuring it to reduce/eliminate the loopholes (I liked your earlier idea), then that would be a positive. I just don’t think much of a system with nominally high tax rates but large loopholes. And doesn’t that describe the present situation pretty well?

Homes are relatively easy to borrow against (to pay the tax). And if they come with an attached mortgage, then the inheritance is not the full value of the home. Businesses — and especially farms — are harder to mortgage.

Posted by TFF | Report as abusive

I’m having a hard time seeing any need or ethical justification for making exceptions for family farms or other businesses. The methodology is easy enough -

During life Mom and Dad sell the business to the next generation, providing seller financing and taking a mortgage or other form of security. (Cap Gn tax will be payable for this transaction.) That, coupled with annual gifts below the limit can effectively pass the business on without the need of bank financing. At death, the government “inherits” the mortgage and becomes the secured creditor until it’s paid.

Posted by MrRFox | Report as abusive

MrFox, what if Mom and Dad decide to sell the business to their kids at a huge discount? Who is going to value the business for them (maybe the people who marked AIG’s illiquid holdings to market?)? What if their business is worth $5M, but they “sell” it to the kids for $1M (avoiding not just estate and gift taxes, but most of the capital gains exposure), how will the IRS know? And who knows if they will do it right, in either direction? Do you trust them? I didn’t think so.

And I think I could guess where the government being the secured creditor would lead in this political climate – they would have to sell the mortgage to a company like BankofAmerica., or Citi, at a further discount.

TFF, If you inherit a $1M home and have to pay 55% tax, you will need a $550K mortgage. Not every heir will qualify for that mortgage.

Posted by KenG_CA | Report as abusive

KenG – since it’s not an “arm’s-length” transaction, but one between “related parties”, the transaction would have to be identified as such on the sellers’ return, and the “fairness” of the reported price would have to be documented by a credible, professional appraisal, and very likely there would be an audit of the sellers in the year of sale.

No doubt, people will try to find ways to beat the system – they always make the effort no matter what you do. The IRS just has to keep up with them and close gaps as they are uncovered. That’s what they do now.

OBTW: If you inherit a $1Mil home you wouldn’t have any estate tax, absent some prior gifts or the like.

Posted by MrRFox | Report as abusive

MrFox, we’ve seen the handiwork of “professional” appraisers in the last few years (they play an important role in all real estate bubbles), and if we’re given the option of a system that can be gamed by individuals without 3rd parties, and one that requires 3rd parties, I’ll take the former. It’s more efficient at exploiting loopholes.

Yes, the $1M home would not create an estate tax liability, but I was making the point that the exemption needs to be indexed to living costs. The numbers we are talking about apply today, but maybe not in 5 years, or ten. We need an adaptive system that does not leave everyone at the mercy of politicians in need of financing from special interests (like the AMT has become).

Posted by KenG_CA | Report as abusive

KenG – If you’re looking to create a system that’s easy to game, then you and I are working at cross-purposes.

There actually aren’t that many of these multi-million dollar family estates to cope with. The big money is in the top 100 deaths (in the future possibly – sales) each year – where billions can be claimed. It’s a small enough number that IRS can watch them closely while giving more routine scrutiny to estates under $10Mil.

This tax alone stands to generate over $200Bil per year for the Treasury. Even if IRS spent $1Bil a year on enforcement of this program alone, the payoff is still huge. We need the money – bad.

Posted by MrRFox | Report as abusive

“This tax alone stands to generate over $200Bil per year for the Treasury.”

I’m seriously skeptical. Do you have support for this number? What are current estate tax receipts? If your proposal relies on a 100% marginal tax rate, then I’m pretty sure the wealthy will find ways to game it — such as off-shoring their wealth.

Posted by TFF | Report as abusive

Apparently the present system ($1M exemption and rates up to 55%) is expected to presently generate about $60B/year. I’m not at all clear how you expect your LOOSENED proposal to more than triple revenues. When you shift from “$1M exemption” to “$1M exemption per direct descendant”, you are multiplying the exemption many-fold. Two children, four grandchildren, and a couple great-grandkids before you finally kick the bucket. Times two, for yourself and your spouse.

Moreover, the proposed 99% marginal tax rate (why not 100%?) will drive revenues to zero. People will do ANYTHING with their money before they give it all to the government. You are so far on the wrong side of the curve, it is Laffable!

Posted by TFF | Report as abusive

MrFox, I don’t want a system that’s easy to game, I’m just saying that relying on the accuracy and independence of appraisers will not prevent that from happening. But it sounds like you’re not that worried about this happening, or if it does, you don’t care that much? I realize the big money is in the ultra-wealthy, but if you’re going to only care about them, then you’ll have to align yourself with the OWS group, which I just don’t see happening.

I’m with TFF on questioning that $200B revenue. With a 100% tax on the top 100, that implies an average $2B estate for each of the top deaths. There aren’t that many billionaires in the U.S. to allow for 100 to die each year. And that would put a bounty on their heads, as militant socialists would be seeing their deaths as a way to re-distribute wealth. I know the idea of violent revolution doesn’t seem to both you, but can’t we avoid that and just tax them while they are in parasite mode?

Posted by KenG_CA | Report as abusive