Robert Rubin and Julian Robertson follow up the arguments they made in the conference call covered here July 21 with an op-ed piece in today's Wall Street Journal under the headline, "Bring Back the Estate Tax Now."
A few points in response. First, if people managed their personal finances the way that Robert Rubin managed Citigroup (whose market capitalization collapsed on his watch) and the Harvard University endowment (which also collapsed while he was involved in its management as a member of Harvard's governing Corporation), there'd be lot fewer estates subject to the tax, because everyone would have a lot less money.
Second, Mr. Rubin and Mr. Robertson refer to a "revenue problem" and argue, "Our country is losing revenue that, with its stressed fiscal conditions, it can ill afford to forgo." But the Congressional Budget Office reports that the gift and estate taxes "have historically made up a relatively small share of total federal revenues—accounting for 1 percent to 2 percent of total revenues in most of the past 60 years."
Mr. Rubin and Mr. Robertson write, "Failure to restore a permanent and strong estate tax for this year has already cost billions of dollars in federal revenue." But if you take estate tax and gift tax revenue together, as many analysts do because they are related (give your children money while you are alive or after you die, you are still giving them money), the CBO analysis projects total gift and estate tax revenue going to $15.4 billion in 2010 from $22.3 billion in 2009. In the context of the $3.55 trillion federal budget for 2010, this $7 billion isn't much money.
Mr. Rubin and Mr. Robertson also don't mention that, along with the estate tax repeal for 2010, the law provides for something called "adjusted carryover basis" rather than the "stepped-up basis" that had applied in prior years when the death tax was in effect. As this blog post from the American Association of Estate Planning Attorneys explains, that means that the heirs of, say, George Steinbrenner, the Yankees owner who died in 2010, won't pay estate tax, but they do face a much larger capital gains tax bill if they sell the team, because the capital gains tax will apply to Steinbrenner's original basis rather than what it was worth when he died. Here's the way the estate tax lawyer blog post explains it:
Let's assume that Steinbrenner's only asset is the Yankees and it's worth $1.15 billion. Every indication right now is that the franchise will stay in the family, but if the Steinbrenner heirs decided to sell, they'd be income taxed on the difference between the value of the team at the date of sale and the adjusted basis of $11.3 million (the $10 million Steinbrenner paid when he purchased the team in 1973 plus $1.3 million in additional basis which his executor can allocate to assets Steinbrenner owned at his death in 2010). Thus, if the heirs sold the team they would owe capital gains tax on $1,138,700,000.
If Steinbrenner had died next year, his estate would have owed estate taxes at 55%, or $632.5 million. Instead his heirs might owe $227 million in capital gains taxes (at a 20% rate).
Steinbrenner hit a home run in 2010 by avoiding the potentially huge amount of estate tax or GST tax that might have been levied on his estate, but it wasn't a grand slam… his heirs lost the step-up in basis that they would have gotten in any other year.
Finally, Mr. Rubin and Mr. Robertson write, "the estate tax is grounded in powerful philosophical underpinnings. Our nation views itself as a meritocracy and a land of opportunity and we have a proud legacy of upward mobility. An estate tax helps us promote this legacy, by avoiding the accumulation of inherited economic—and political—power that is antithetical to this historical vision of our society and to the vitality and dynamism that has contributed so much to our success."
Look, we're all for vitality and dynamism and meritocracy around here. But an estate tax can't totally erase inherited economic or political advantages. One of Mr. Rubin's own political heroes, John F. Kennedy, had his political power made possible in part by his father's wealth. Nor is this a brand-new phenomenon; from John Adams to John Quincy Adams, Theodore Roosevelt to Franklin Roosevelt, political families have been part of our nation's history. Nor is inherited economic power — which, in friendlier terms, might simply be called a "family business" — necessarily inconsistent with vitality and dynamism. Why, Mr. Rubin himself launched his career down the road to fame and fortune at a firm called Goldman Sachs, which, before Mr. Rubin took it over, was run by a man called John Weinberg, whose father, Sidney Weinberg, had also run Goldman Sachs.
Estate tax or no estate tax, parents will have the power to pass along to their children their genes, their values, and their knowledge, and to pay for private school tuition or for a home in a district with good public schools. These are probably a more important and valuable inheritance than any estate, and there's little the levelers can do about it.
Even without an estate tax, preserving the value of capital over time is a hard task. Ne'er do-well descendants may squander it the way that Mr. Rubin squandered Citigroup and the Harvard endowment. Businesses that appear strong, like General Motors or Lehman Brothers or Bear Stearns, may collapse. Inflation may erode the value of investments held in fiat currencies. New fortunes, such as those of the Google founders, may dwarf old ones, such as those of the Rockefellers. Some rich people may voluntarily give their money to non-profit institutions rather than to their children.
Preserving vitality and dynamism in America is a worthy goal. But there are lots of ways to do it — immigration, education reform, lower taxes and less regulation come to mind. It's not clear that taking assets away from people who die and giving the assets to politicians to dispense is the big boost to vitality and dynamism that Mr. Rubin and Mr. Robertson claim it is.