The Select Congressional Deficit Reduction Committee, also known as the Super Committee, is quickly approaching its November 23rd deadline for suggesting methods of trimming $1.5 trillion from the US budget over the next 10 years. Nearly everyone has assumed the committee would be suggesting cuts in expenditures, such as USDA’s farm program safety net, more cuts on crop insurance and conservation, and maybe some in nutrition and rural development. But a new concept has been proposed to achieve 30% of the needed cuts, and a concept that will be endorsed by nearly all of agriculture. It does not touch any farm programs, and it does not call for increased taxes. How do you trim the budget without doing either of those? There is a way. Here it is.
Agriculture has shed a tremendous amount of blood, sweat, and tears over the expected cuts from the Deficit Reduction Committee. And since the new proposal calls for neither increased taxes or cuts in expenditures, agricultural interests may likely push hard for consideration of the proposal by economist Stephen Entin. Under the name of the American Family Business Foundation, Entin calls for, elimination of the federal estate tax.
That is correct, Entin’s proposal is certainly nothing new to agriculture, since it has been at the top of priority lists for nearly all farm organizations. The curiosity is how can elimination of revenue reduce the budget deficit? Entin finds that relatively easy to explain; in a way that many rank and file farmers can explain to their Members of Congress.
Entin says, “Federal revenue estimators show the tax as contributing revenue to the Treasury, and report that reducing or eliminating the tax would raise the deficit. They get this result by assuming no change in the economy as a result of the estate tax reduction, ignoring the economic gains that would accrue.” But he says that is not the case, as he calculates. Entin says the estate tax destroys investment and employment and actually reduces federal revenue by eroding the tax base.
The estate tax was phased down, and finally out in 2010, but re-established by Congress in 2011 at a rate that was less than scheduled under the sunset and sunrise provisions. For 2011 and 2012, it will be 35% and a credit that shelters $5 million per individual. But for 2013, it returns to a 55% rate with only a $1 million exemption. Entin says when the federal tax experts estimate the results of the estate tax; they only count elimination of the estate tax as an elimination of revenue, and not providing any benefit by its non-existence. The official term for that is “static scoring,” but Entin says there should be “dynamic scoring,” which allows for changes in the gross domestic product.
Entin looked at four different scenarios:
Scenario #1: No Estate Tax (but retention of the gift tax). Entin says, “Under our dynamic analysis, we estimate a 2.26% gain in GDP that would lead to an offsetting increase of $812 billion in federal revenue gains from growth over the period. GDP would be nearly $3 trillion higher over the period, up by $538 billion at an annual rate in 2021.”
Scenario #2: A top rate equal to the top rate on long-term capital gains (top estate tax rate of 15%, credit offsets tax on $5 million). Entin says, “GDP would be more than $2.5 trillion higher over the period, up by $464 billion at an annual rate in 2021. There would be a net increase in revenue of $284 billion totaled over the period on a dynamic basis, with an annual revenue gain of $72 billion in 2021.”
Scenario #3: 2011-2012 levels (top estate tax rate of 35%, credit offsets tax on $5 million). Entin says, “GDP would be over $2 trillion higher over the period, up by $367 billion at an annual rate in 2021. There would be a net increase in revenue of $225 billion totaled over the period on a dynamic basis, with an annual revenue gain of $57 billion in 2021.”
Scenario #4: 2009 levels (top estate tax rate of 45%, credit offsets tax on $3.5 million). Entin says, “GDP would be $1.7 trillion higher over the period, up by $312 billion at an annual rate in 2021. There would be a net increase in revenue of $233 billion totaled over the period on a dynamic basis, with an annual revenue gain of $55 billion in 2021.”
His conclusion is that any decrease in estate taxes would lead to substantially higher GDP growth over a decade ranging from $1.7 to $3 trillion over the period from 2012 to 2021. Entin says, “Elimination of the estate tax is as close as one gets to a free lunch in economics.”
Typically, elimination of a tax results in reduced revenue for a governmental entity. However, the estate tax has the capacity of diminishing investment and increasing employment, both of which would combine to bolster the economy. In this case, elimination of the estate tax actually increases gross domestic product and increases revenue.
Source: FarmGate blog