Douglas Holtz-Eakin, the former policy director for Senator John McCain’s presidential campaign, recently told Congressional Quarterly that conservatives needed a “‘Center for American Progress’ for the right.” His most recent research doesn’t bode well for his think-tank ambitions.
“Eliminating the estate tax would raise the probability of hiring by 8.6 percent, increase payrolls by 2.6 percent and expand investment by 3 percent…If small business payrolls were to rise by as much as 2.6 percent strictly through additional hiring, this translates to roughly 1.5 million additional small business jobs.“
This conclusion is very, very unlikely, relies on sensitive assumptions, leaps of logic, and dubious calculations. Here’s where the study goes wrong:
It severely overestimates the incidence of the estate tax on small businesses: Holtz-Eakin asserts that eliminating the estate tax would raise the wealth reported on estates by over $1.6 trillion. He describes this as an “increase in small business capital,” despite the fact that only 1.3 percent of the .24 percent of all estates who pay estate taxes are small businesses. In 2009, according to the Center on Budget and Policy priorities, only 80 (yes, eight-zero) businesses or farms nationwide will owe any estate tax at all. The average rate the heirs to these estates will pay will be 14% of their multi-million dollar inheritances.
It overestimate the distorting effects of the tax: Despite the staggeringly low incidence of the estate tax on the overwhelming majority of American small businesses, and after spending paragraphs asserting that the estate tax is broken because it is “far too easily legally avoided,” for the purpose of assessing the economic impact, Holtz-Eakin assumes that businesses will treat the estate tax as a “certainty.”
He transforms the 45% marginal tax rate on inheritance money over $3.5 million into an effective annual tax on the accumulation of capital. Using what he calls “results from literature” (his paper is quite methodologically opaque), he asserts that this effective decrease in the marginal tax rate on the accumulation of capital by eliminating the estate tax would spur job creation and entrepreneurship. His findings, however, are highly sensitive to the extent to which entrepreneurs and small business owners anticipate being subject to the estate tax. In two hypothetical scenarios, Holtz-Eakin assumes either that 5% of entrepreneurs and small businesses anticipate being subject to the estate tax, or 100% do. He does not reveal which assumption he uses to determine his economic impacts, but 5% is too high, considering only 80 firms paid estate taxes in 2009, and 100% is far far too high.
In essence, Holtz-Eakin is assuming that a primary concern of an entrepreneur making hiring and investment decisions is a 14% tax her heirs may or may not bear in decades assuming her business is wildly profitable and successful. Rather than provide empirical evidence that firms and entrepreneurs behave this way, Holtz-Eakin merely assumes this crucial point.
It assumes the revenue collected from the tax vanishes into thin air: What’s more, Holtz-Eakin assumes that the revenues from this tax on the wealthiest of heirs simply vanishes into thin air, taking jobs with it, rather than going towards government revenues for investment into government services, many of which support job creation, entrepreneurship, and small business ownership.
For example, the revenues from the estate tax could go towards President Obama’s priority of making affordable health care for all Americans. As Jonathat Gruber of MIT has pointed out, “a system that provides universal access to health insurance coverage…is far more likely to promote entrepreneurship than one in which would-be innovators remain tied to corporate cubicles for fear of losing their family’s access to affordable health care.”