Momentive, Boeing, Oil and the Estate Tax

One of our readers asked me to speak about some tax issues, and today I'll be taking a look at the estate tax in particular.  But first, a few miscellaneous items:

The Momentive strike may be coming to some resolution.  It looks like the union won't be getting its ass handed to it as badly as the company had hoped, but it sure doesn't look like a bed of roses for the Momentive workers.  A $2,000 bonus and a cumulative 4% salary increase over two years is guaranteed by the settlement, but the same settlement also includes cuts in health and life insurance benefits, cuts in vacation accruals, and the guaranteed year-long use of non-union workers in the Building 71 facility specifically. Twenty-seven workers fired during the strike may or may not get their jobs back through an appeals process.

Upstate Dem political leaders are leaning heavily on the union to ratify the settlement and declare it a victory.  If it is a victory, I'm not sure it's a rousing one.

In other union news, South Carolina Boeing employees are voting tomorrow on whether or not to unionize.  They face considerable hostility from their employer, who is doing its best to depict union organizers as a hostile outside force trying to "get between" the workers and their bosses:

Still, the campaign faces considerable obstacles. A local business group tied to the South Carolina Manufacturers Alliance, of which Boeing is a member, has been running advertisements on local television, including one depicting a thuggish casino boss urging people to roll dice at a craps table. The message is that the union wants workers to gamble away what they already have.

Boeing implies that a vote to unionize would mean inserting the union into the relationship between workers and managers, something the union says is false. Organizers say that union stewards would be available when workers felt they had been mistreated, but that otherwise workers would be left to interact with managers as they saw fit.

It will be interesting to see how, if at all, the President weighs in on the Boeing vote (and whether or not the Boeing vote succeeds - far from a given due to the cultural hostility to unions prevalent in South Carolina).

In other economic news, OPEC is cutting its oil production, in conjunction with Russia, and they seem to be sticking to their guns.  Gas prices at at the pump are already up 7% since the oil cuts were announced.  For those who fear a return to high gas prices, the United States, Canada and Brazil may come to the rescue by pumping out oil of their own.  I would not stay up at night in fear of higher gas prices, but I could always be wrong.

Janet Yellen is testifying before Congress today - I'll try to do a full report tomorrow.

Now! On to the estate tax.

Here are ten facts you should know about the estate tax, by the Center on Budget and Policy Priorities, an organization founded by a former Carter administration official, so in other words, they are filthy communists.  Nonetheless their analysis is not bad.

The key point is bear in mind is: the first $5.4 million dollars of a given estate is exempt from the estate tax.  So the worst case scenario, if you are the child of loaded parents, Ma and Pa can at least leave you $5.4 million.  That's not chump change.

You hear a lot from the GOP about the urgency of repealing the estate tax, which is odd, given than less than two-tenths of one percent of all estates will pay any estate tax.  In other words, the estate state is simply not an issue at all for most Americans.  Those estates that are taxed generally pay about one-sixth of their value in taxes.  And then, of course, there are loopholes:

For example, some estates use grantor retained annuity trusts (GRATs) to pass along considerable assets tax-free.  The estate owner puts money into a trust designed to repay the estate the initial amount plus interest at a rate set by the Treasury, typically over two years.  If the investment — typically stock — rises in value any more than the Treasury rate, the gain goes to an heir tax-free.  If the investment doesn’t rise in value, the full amount still goes back to the estate.  Such techniques have been described as a “heads I win, tails we tie” bet.

The estate tax only generates around $27.5 billion per year, about 1% of all federal revenue.  So eliminating the estate tax would not cause budget income to run dry.

However, claims advanced by proponents of estate tax repeal that it would lead to increased capital investment are in all likelihood quite wrong, and here's why (emphases added mine):

The reason is simple:  while repealing the estate tax might lead some people to save more, it also would lead the government to borrow more to offset the lost revenue.  Government borrowing “soaks up” capital that would otherwise be available for investment in the economy.  In the case of estate-tax repeal, the added government borrowing would more than outweigh any added private saving, leaving the economy no better off and quite possibly worse off.

Regarding the above: the premise that government borrowing "soaks up" or "crowds out" investment is really only feasible when there's strong economic growth, low unemployment, and the private sector is firing on all cylinders, which it most certainly is not doing quite yet.  With that said, the idea that large estate holders freed of the estate tax will go invest their saved capital, as opposed to just stashing it in this or that bank, is wishful thinking that does not stand up scrutiny.  (As I have to say far more often: this is a complex issue that deserves its own blog post).

Estate tax repeal would generate quite the windfall for Donald Trump and his cabinet, several of whom are billionaires.

What about the concept that lowering the threshold for the estate tax would destroy the family farm, a claim that often circulates when discussion estate tax repeal?  It appears to be total rubbish with no basis in reality.

I am having an awfully hard time finding estimates of what would happen if the estate tax exemption threshhold was lowered below $5.4 billion.  That's kind of depressing, as it suggests that such a possibility is so politically verboten that no analysis has been done.

It's worth pointing out that as of 2014, six of the ten wealthiest Americans had inherited, not earned, their wealth (this includes famed villains of the left the Koch brothers, as well as the Waltons of Walmart).  According to Forbes, the number of self-made millionaires is on the rise and the number of millionaires who inherited their wealth is on the decline over the course of the last 30 years.

That sounds like an American success story to me, and I'm not sure why we should want to help reverse that trend by repealing a tax that levels the playing field (well, if you count inheriting 5.4 million bucks "level") at least somewhat.