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Watch a Harvard professor attack the estate tax because it's just so hard on the rich

Watch a Harvard professor attack the estate tax because it's just so hard on the rich
Tax-exempt heirs? Ivanka, Eric and Donald Trump Jr., whose father wants to reduce the estate tax to zero. (Donald Trump Jr.)

"Let me tell you about the very rich," wrote F.  Scott Fitzgerald. "They are different from you and me." Among the distinctions he didn't mention in his story "The Rich Boy," where this line occurs, is that unlike the poor, they can summon Harvard economics professors to justify their tax breaks as the essence of fairness.

The latest example of this dynamic comes from N. Gregory Mankiw, a Harvard professor and former chief economist for the George W. Bush administration. Earlier this month (we were traveling and missed it in real time), Mankiw wrote an op-ed for the New York Times attacking the estate tax. At the outset he dismissed the tax as little more than a "perennial political football" that yields a measly $19 billion a year, or about a half-percent of federal tax revenue. But that raises the question of why he then spends nearly 900 words essentially arguing for its repeal.

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Mankiw is correct in identifying the tax as a political football. Republicans have been trying to demonize the levy for decades, propagandistically relabeling it the "death tax." Mankiw's patron, George Bush, managed to achieve a one-year repeal in 2010, but the next year it reverted to a 35% tax on couples' estates over $10 million—leaving in its wake, I observed recently, "only a "Law & Order" episode about rich families plotting to kill off their elders during the moratorium."

The estate tax is a bad way to tax the rich.


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The rate today is 40% of couples' estates in excess of about $10.9 million. Donald Trump wants to eliminate the tax entirely, which might be very good for his children. Hillary Clinton advocates raising the rate to 45% on estates over $7 million.

But it's where Mankiw tries to explain what's wrong with the estate tax that he goes off the rails. As James Kwak of the University of Connecticut law school wrote, his case "was so weak I'm not even sure he convinced himself."

The essence of Mankiw's argument is that the estate tax makes an invidious distinction among rich families, benefiting those that spend their fortunes wildly and penalizing those who save. He says this violates the principle of "horizontal equity," which holds that "similar people should face similar tax burdens." That means "the estate tax is a bad way to tax the rich."

To illustrate the point, Mankiw introduces two couples that each have raised nest eggs of $20 million by selling their family businesses. The "Frugals," he writes, "live modestly. Mr. and Mrs. Frugal don't scrimp, but they watch their spending." Their goal is to leave something for their kids and other heirs. (He doesn't identify the dividing line between "scrimping" and "watching their spending," more's the pity.)

The "Profligates," by contrast, "eat at top restaurants, drink rare wines, drive flashy cars and maintain several homes." Their goal, as the adage has it, is for the last check they write in their lives to bounce.

By Mankiw's reckoning, the Frugals get a raw deal, largely because the substantial estate they leave to their legatees will be taxed. The Profligates, leaving nothing, will pay no estate tax. "To me," he writes, "this does not seem right."

Just two-tenths of 1% of all estates will owe tax this year.
Just two-tenths of 1% of all estates will owe tax this year. (Joint Committee on Taxation, via CBPP)

Kwak rightly deconstructs this argument into smithereens. To begin with, he observes, "the Profligates and the Frugals are not 'similar people.'" They have similar nest eggs, sure, but "vastly different consumption habits." He adds that the Frugals aren't paying more tax than the Profligates. The levy applies to their estate, and will be imposed at a point when they don't care, since they'll be dead. The estate tax won't have any impact on their own spending.

Finally, Kwak notes that Mankiw gives away his own game: "Only an economist, and an economist of a certain type, could evaluate the fairness of the estate tax by comparing two wealthy families." The people we're supposed to feel sorry for — the Frugals' heirs, are still the richest people in the story — they come away with more than $16 million, after tax. "It's a little peculiar to profess to care about equal treatment and then proceed to talk solely about rich people," Kwak writes. "What about Mr. and Mrs. Poor and their children, who far outnumber the Profligates and the Frugals?"

The truth is that the estate tax is a political football because the very wealthy have moved heaven and earth to eliminate it, largely by suggesting that it applies far broadly than merely to themselves. The Joint Committee on Taxation has calculated that only two of every 1,000 estates will owe any tax this year.

Critics intimate that the tax hits small businesses and family farms, but this is a sham. As the estimable Barry Ritholtz observed in his own critique of Mankiw, the $11-million exemption immunizes genuine small family businesses and farms from the tax. Only 20 small business and farms nationwide owed any estate tax in 2013, the latest year for which figures are available, and their average liability was just 4.9% of their value.

In sum, what we have here is an example of a distinguished academic carrying water for the most rarefied stratum of American wealth owners, at the expense of the rest of society. Fitzgerald had their number, writing of the rich that they think they're deserving and everyone else is not, "in a way that, unless you were born rich, it is very difficult to understand…. They think, deep in their hearts, that they are better than we are because we had to discover the compensations and refuges of life for ourselves." And they want us to pay.

Keep up to date with Michael Hiltzik. Follow @hiltzikm on Twitter, see his Facebook page, or email michael.hiltzik@latimes.com.

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10:42 p.m.: This post has been changed to render the Fitzgerald line with greater precision.

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