For those who don’t pay attention to the news, Senator Chuck Grassley (R-Iowa) told the Des Moines Register that he fully supports the repeal of the federal estate tax but opposes a tax cut for poor and middle income people because non-millionaires “are just spending every penny they have, whether it’s on booze or women or movies.”
The estate tax is a 40 percent tax on wealth assessed at death and currently applies only to assets above $5.5 million for individuals and $11 million for couples — and is only paid by the wealthiest 0.2 percent of estates, according to the IRS. Grassley, like many Republicans, believes that repealing the estate tax will encourage ultra-wealthy people to invest, which he believes will create jobs.
Repealing the estate tax has long been a part of the Republican economic platform, and it has long been a fraudulent way of creating new wealth. Before explaining why repealing the estate tax doesn’t really help the economy, it is worth cherry picking a couple of examples that show how the current estate tax is actually beneficial.
As Allan Sloan at the Washington Post pointed out, under the current tax law the estate tax actually benefits the vast majority of U.S. residents because it allows descendants to sell houses and cars that they inherited without having to pay capital gains taxes.
The current estate tax model also encourages rich people to donate money upon their death instead of leaving everything to their children — those donations make up about 8 percent of all charitable giving, which accounts for about $30 billion, according to the Congressional Budget Office.
So, yeah there are some benefits to the current structure of the estate tax. Grassley’s statement, as tone deaf as it was, is perfectly in line with classic “supply-side economics,” an idea also called trickle-down or dynamic growth economics.
Supply-side economics, an idea made famous by President Reagan, can be summed up with the axiom that tax cuts for the wealthy create jobs by encouraging rich people to invest their money instead of saving it. This school of economic thought is why small savings accounts have offered almost no interest for the better part of the last decade.
Despite a plethora of literature contradicting supply-side economics, the idea has become enshrined in conservative thinking to the point that even trying to discuss another economic model ends the conversation. The problem with supply-side economics, as espoused by Grassley, is that the theory fails to understand the interconnected nature of the modern service economy.
Supply-side economics is concerned with the creation of new wealth, e.g. money that doesn’t exist in a certain community. Incentivizing investing is supposed to encourage people with money to take risks, to try and create the next Facebook, Whatsapp or Snapchat. Another way to think about supply-side economics is that it’s a start-up centered model.
The problem with a start-up centered economic model is that many, many jobs are in some way shape or form about serving people — and the vast majority of service jobs depend on the relocation of already existing wealth. Bartenders, wait staff, dog walkers, barbers, stylists, musicians, mechanics, etc. don’t create new wealth because their income is dependent on providing essential and non-essential services to other people. Since so much of the modern economy is service-based — a large chunk of tourism dollars flow into service oriented jobs — encouraging wealthy people to invest doesn’t really help a whole lot of people out.
For those who think otherwise, remember that VC firms, angel investors and anyone else who can help make the dog-powered washing machine a reality generally don’t take walk-ins. Additionally, if cutting taxes on the wealthy encouraged them to invest in small businesses, crowdfunding wouldn’t be a thing.
If the GOP really wanted to increase wealth in the country they would have passed a series of targeted tax cuts designed to increase the buying power of the poor and middle class through things like childcare tax deductions, expansion of the Earned Income Tax credit and making it easier to refinance student loan debt.
Freeing up the cash of lower and middle income earners generally benefits the economy as a whole because those are the people who put off big ticket items — like TVs, cars and appliances — along with home repairs. Additionally, increasing tax breaks for non-millionaires means that people are more willing to splurge on clothes, going out to eat, a new video game, fancy coffee or a night out with friends.
The more people who splurge, the more people in the service industry who get by, the more people are concerned about their incomes, the more they cut back on non-essential services — and since oil remains below $70 a barrel people in Houston, people aren’t spending like they used to.
Of course the whole discussion about incentivizing investing versus spending ignores what Grassley actually said, which is to equate low and middle income individuals with addicts, womanizers and spendthrifts. And the GOP has consistently viewed anyone with less than $1 million in the bank with suspicion, as if something is wrong if a person can’t — through sheer, pluck and determination — rise to be a part of the moneyed class.
Built into the Republican economic view is the old axiom “if you’re so smart why aren’t you rich,” which of course fails to acknowledge the reality that, maybe, the world just isn’t ready for the dog-powered washing machine.