Dead Wrong

The estate tax doesn’t double-dip, and they know it. 

Jonathan Chait pointed out recently in the New Republic that the press maintains a bizarre double standard about factual assertions by public figures. When the subject is someone’s personal life, reporters will go to great lengths to establish that he or she is lying. But on matters of public policy, journalists become radical agnostics who refuse to classify any statement as untrue.

If some politician declares that two plus two is five, reporters might note that this position is not without controversy. Indeed there are critics, including politicians of the opposite party, who contend that two plus two may actually be four. Then perhaps they’ll wind up the discussion by citing yet another pol who is confident that a compromise can be struck when the bill goes to conference. Or they will quote an anonymous aide who says that the differences are still too great.

Or sometimes the lie is permitted to lie completely unmolested. There was a nice example of this phenomenon Thursday. Wednesday’s Washington Post and New York Times had carried an ad from a group of black businessmen supporting repeal of the estate tax. The group was organized by Robert L. Johnson, chairman of Black Entertainment Television. The ad declared: “The estate tax is unfair double taxation since taxpayers are taxed twice—once when the money is earned and again when you die.”

A Times article Thursday about the ad noted correctly that this “repeats one of President Bush’s familiar themes.” Indeed it is probably the most tediously repeated sound bite of the estate-tax debate. It is also false. Not “controversial” or “disputed” or “misleading,” but out-and-out false. Most of the accumulated wealth that is subject to the estate tax was never subject to the income tax.

This is so obviously, overwhelmingly true that anyone with the slightest business or financial experience surely knows it. Even George W. Bush. Well, probably even Bush. Yet he keeps on repeating the lie. Bob Johnson—a real businessman—must surely know it, since he is a walking example of wealth accumulated without the handicap of  taxation. I don’t mean to suggest that Johnson has done anything wrong or even sneaky. The point is the opposite: The rules are such that Johnson would have had to go out of his way—way, way out of his way—if he’d wanted his wealth to be taxed as he accumulated it. The same is true of almost every fortune large enough to qualify for the estate tax, probably including that of every other signer of that ad. If they read what they were signing, they knew they were signing a public lie.

Bob Johnson is a billionaire, or close to it. He started BET in 1980, with $500,000 of mostly borrowed seed money, and sold it to Viacom late last year for $2.5 billion plus the assumption of around $500 million in debt. Johnson owned a majority of the company. The sale to Viacom took the form of an exchange of stock: Viacom got all the stock in BET and issued new shares of Viacom to give to Johnson in return. An SEC filing by Viacom describes the sale as a “tax-free transaction”—which is precisely why mergers and buyouts are often done this way.

If Bob Johnson has paid income tax on even one tenth of the money that would be in his estate if he died tomorrow, it would be astonishing. And under current law, that accumulation of wealth is wiped off the books for income tax purposes the moment he passes on. This so-called “stepped-up basis” rule means that when and if Johnson’s heirs sell their Viacom stock, they would pay income taxes only on any gain in value since the stock became theirs.

Under the plan approved Wednesday by the House, the “stepped-up basis” would be replaced with a “carryover basis.” When Johnson’s heirs sell their stock, their profit for tax purposes would be computed exactly as Johnson’s would have been if he were still alive. Well, not exactly. This showy sop to the fairness nags exempts $1.3 million of assets in any estate, plus another $3 million when it’s being passed on to a spouse. All told, a married couple would be able to protect $5.6 million from the indignity of the income tax. Lawyers have already figured out various gimmicks to protect even more. Indeed repeal of the estate tax will herald a new Golden Age of tricks for avoiding the income tax, complex but futile regulations to prevent this, and lawyers all around. (The House bill postpones the new rule until 2011, along with full estate-tax repeal, in a slapstick attempt to hide the cost by pushing it beyond the 10-year time frame used in reporting budget numbers.)

You can argue that this is how it ought to work: that there’s nothing wrong with a tax system in which even a minimum-wage worker pays a stiff FICA tax on every dollar she earns (and gets nothing from President Bush’s proposed tax cut) while a billionaire pays no income tax at all on his accumulated fortune (and no estate tax either, if George W. has his way). You cannot argue this persuasively, in my view, but at least there is an argument.

But there is no argument that all or even most of the accumulated wealth that gets hit by the estate tax already has been hit by the income tax. It’s not an argument: It’s a factual assertion. And it’s simply wrong.