In its desperation to head-off Republican tax cuts, the Clinton administration has taken to playing games with numbers, designed to scare people into thinking that the proposed tax cuts are too large and will bust the budget. The truth is quite different.
In his Saturday radio address on July 15, Bill Clinton charged that the plan to repeal the estate tax, which passed both the House and Senate with significant Democratic support, is "fiscally irresponsible." "Its costs would explode to $750 billion after 10 years," the president charged.
A casual listener would reasonably think that the president meant $750 billion per year after the year 2010. In fact, this is not the case at all. Treasury Secretary Lawrence Summers correctly stated the administration's revenue estimate in a July 10 op-ed article in the Washington Post. "The estate tax repeal measure passed by the House would cost about $750 billion between 2011 and 2020," he wrote.
In other words, the $750 billion figure is a cumulative figure over 10 years, or $75 billion per year on average. Thus, the true figure is one-tenth the amount implied by Mr. Clinton.
But even the $750 billion figure is disingenuous for several reasons. First, it is far higher than other economists have estimated. The very liberal Center on Budget and Policy Priorities, a group very much opposed to estate tax repeal, puts the "cost" of repeal at just $620 billion between 2011 and 2020. Thus the Clinton Treasury's estimate is more than 20 percent higher.
It seems clear that the CBPP estimate simply assumes that estate tax revenues will rise at the same rate as the economy after 2011, assuming that the economy continues to grow at the same rate as the Congressional Budget Office expects it to between 2006 and 2010. This is a perfectly reasonable approach. By contrast, a Treasury spokesman could not explain to me how Treasury arrived at its estimate or supply me with any details on it.
The second major problem with both the Treasury and CBPP estimates is that they are totally out of context in terms of the overall economy. The average citizen hearing such large numbers, whether it be $620 billion or $750 billion, undoubtedly will think such tax cuts are enormous, given the size of today's economy, which is about $10 trillion. However, there will be very substantial growth in GDP between now and 2010 and thereafter. When looking at these numbers in terms of the future size of the economy, they shrink to almost nothing.
The Clinton administration estimates that GDP will equal just over $16 trillion in 2010, a 60 percent increase over today. It also estimates that GDP will grow at a 4.9 percent average annual rate between 2006 and 2010. If one assumes a continuation of this growth path afterwards, GDP rises to $26 trillion in the year 2020. In short, the economy will be 2.5 times larger than it is today, meaning that the relative size of any tax cuts will be 2.5 times smaller than they appear to be.
If one adds up all the GDP between 2011 and 2020, one comes up with a cumulative total of $211 trillion. Taking the Treasury's $750 billion revenue loss figure at face value, it equals just 0.3 percent of GDP over this period. Thus this huge number that Bill Clinton and Larry Summers are using to frighten voters from supporting estate tax repeal, turns out to be so small it can barely be measured when put into proper context.
Finally, neither the CBPP nor the Treasury take into account the significant tax increase included in the congressional legislation. Right now, heirs do not pay capital gains taxes on any increase in the value of inherited assets during the life of the decedent. However, after 2010, the congressional bill would require them to pay capital gains taxes in lieu of the estate tax. This is the system Canada has for taxing estates.
Thus if someone buys some stock for $1 per share, never sells it, and it is worth $100 at his death, estate tax would be paid on the $100, but no capital gains tax would ever be paid on the $99 increase in value. An heir inheriting the stock and later selling it for $110 would pay capital gains tax only on the $10 increase since the death of the person originally acquiring the asset.
Under the congressional plan, after 2010, an heir would have to pay capital gains taxes on all the increase in the price of the stock since it was originally purchased. This is called carryover basis, because the tax basis is carried over from one generation to the next. In this case, an heir would in the future pay capital gains tax on the total $109 increase in value of a stock since the decedent originally bought it.
Demagogues like Washington Post columnist Michael Kinsley continually rail against estate tax repeal, citing the current tax treatment of capital gains at death as a loophole that would remain. But in fact, the loophole is being plugged, which will also recoup much of the revenue loss from estate tax repeal. Neither the Treasury nor the CBPP include the revenue gain from carryover basis in their estimates, although the latter concedes that it could raise $5 billion to $10 billion per year.
It may perhaps be a sign of desperation that opponents of estate tax repeal find it necessary to distort the numbers to make their case. Such desperation may be justified. A new Gallup Poll finds that 60 percent of Americans favor estate tax repeal, with only 35 percent opposed.