Economic Reporting Review

A project of FAIR and CEPR

July 17, 2000: Estate Tax Cuts; Stock Market Oddities; Copyright
Misunderstandings

By Dean Baker


TAX CUTS

"Senate Takes First Step on Repeal of Estate Tax" 
Richard W. Stevenson 
New York Times, July 11, 2000, page A14 

This article reports on the progress of legislation in the Senate which would repeal the estate
tax. In the last paragraph, the article asserts that "the issue has become politically potent as the
76 million members of the baby boom generation, their wealth swollen by the strong economy
and stock market, has begun estate planning." 

It is unlikely that the 76 million baby boomers are a major force behind the repeal of the estate
tax for two reasons. First, the average age of baby boomers is still only 45. Many have just
begun planning for retirement. Most probably have not begun making plans for passing on their
inheritance just yet. 

Second, very few of the baby boomers will have to worry at all about the estate tax, in spite of
the strong economy and booming stock market. A couple that survives to 2006 will be able to
pass $2 million dollars onto their children completely tax-free. This is in addition to $10,000
per child per year that can be passed on tax free. This means that an estate planning couple that
expects to live for 30 more years and has two children can pass $2.6 million onto their heirs
without paying any estate tax whatsoever. Far less than 1 percent of baby boomers have more
assets than this. 

See also Outstanding Stories of the Week. 

"The Senate Rejects a Suspension Of the Federal Tax on Gasoline" 
Lizette Alvarez 
New York Times, July 14, 2000, page A1 

This article reports on the Senate's defeat of a measure that would have temporarily suspended
the federal tax on gasoline until after the November election. At one point the article refers to
"cries from voters for relief from record-high gasoline prices." 

Actually, adjusted for inflation, gasoline prices are very low compared to their levels of the past
40 years. It is only compared to the extraordinarily low levels of the prior two years that
current prices appear high. 

"Bill on Pension Rules Moves Forward in House" 
Richard W. Stevenson 
New York Times, July 14, 2000, page A18 

This article reports on the approval by the House Ways and Means Committee of a bill that
would raise the amount that can be contributed to a 401(k) from the current ceiling of $10,500
per year to $15,000 per year. The article did not note that very few workers currently
contribute the maximum allowable amount to their accounts. Only a very small minority of
highly paid workers would be able to benefit from this change in the tax code. 

The article also refers to regulatory changes in the bill. The proposed regulatory changes would
reduce the link under current law between pensions provided to higher-paid executives and
lower-level workers. This will make easier for companies to provide generous pensions to
high-paid executives without giving the same benefits to other workers. It would have useful if
the article had provided more information about the distributional impact of the proposed
changes in this bill. 

[Top] 

STOCK MARKETS

"Asian Oddity: Economies Up, Markets Down" 
Wayne Arnold 
New York Times, July 8, 2000, page B1 

This article discusses the recent declines in several East Asian stock markets. It incorrectly
asserts that stock markets should be expected to move in the same direction as the economy. 

The article begins by noting that "Southeast Asia's economies are growing again. Its stock
markets are getting smaller. If that contrast sounds odd, it is." While there is always a large
psychological component to stock prices, in principle stocks reflect the future value of
corporate earnings. This can decline even as an economy grows if there is a shift from profit to
wages. 

Such shifts are not uncommon. For example, from 1969 to 1979 the United States economy
grew by 37.4 percent. The real value of the S&P 500 fell by 46 percent over this period. By
contrast, the economy grew by 34.9 percent from 1979 to 1989. The real value of the S.& P.
500 grew by 87 percent over this period. While there was a redistribution of income away
from corporate profits in the '70s, there was a redistribution towards corporate profits in the
'80s. These shifts partly explain the disparity between the path of the stock market and the
economy. 

"Profits May Not Be Enough to Offset Fed's Drag" 
Jonathan Fuerbringer 
New York Times, July 11, 2000, page C1 

This article examines the near-term prospects for future stock prices. It notes that stock prices
have been fairly flat even though earnings growth has been strong . It contrasts this situation
with the prior four years, when earnings growth was not as strong, but the S.& P. 500 gained
more than 20 percent each year. 

This contrast should not be a surprise. Stocks cannot consistently rise more rapidly than
corporate earnings. A period in which stock prices have grown significantly more rapidly than
earnings is likely to be followed by a period in which stock prices grow less rapidly than
earnings. 

It is also worth noting that the measure of earnings used in the article is very different from the
one used in national income accounts. The article reports that in the first quarter of 2000,
corporate profits were 23.6 percent higher than in the first quarter of 1999. Much of this
increase was due to inflation: Since prices had risen over the course of the year, firms were
selling items in their inventories for higher prices. It is misleading to treat these gains as true
profits, since the replacements to the inventories will cost more. When the impact of inflation is
corrected (the inventory valuation adjustment in the national income accounts), after-tax
corporate profits were just 5.6 percent higher in the first quarter of 2000 than the first quarter
of 1999. 

[Top] 

COPYRIGHTS

"A Binge on Music at State U." 
Matt Richtel 
New York Times, July 9, 2000, Section 3 page 7 

This article presents a reporter's account of his discussions with college students at Berkeley
over the ethics of downloading music off of the Internet. According to the article, the reporter
asked several of these students whether he could take some of their personal possessions, such
as their shoes or their toaster. While the reporter apparently believed that he was demonstrating
some point with these questions, he is primarily demonstrating his failure to recognize the issue
posed by copyright protection. 

The consumption of digitally recorded music available over the Internet is non-exclusive. This
means that any individual's decision to download music does not affect any other person's
ability to consume the same music. By contrast, if this reporter were to actually take a student's
shoes or toaster, that student would no longer be able to use these items. 

The question posed by the development of digital technologies and the Internet is finding the
best way to support the production of recorded music, videos or other non-exclusive goods.
Copyrights are one way to support this work, but there is no reason to believe that a form of
property developed in the 16th Century is still the most efficient method for producing this
material in the Internet age. There are many other ways in which such work could be
supported--for example, through a system of individual tax credits. Unfortunately, this article
fails to even recognize the nature of the problem. 

"Senators Threaten to Force Music Licensing on the Web" 
James V. Grimaldi 
Washington Post, July 12, 2000, page E3 

This article reports on hearings of the Senate Judiciary Committee on the transfer of
copyrighted music over the Internet. At one point, the article reports that Senator Diane
Feinstein berated a witness for "innovating a technology 'which entirely defeats the purpose of
copyright protection.'" 

Usually politicians view it as their responsibility to adapt laws to changing technology. It is rare
for a political figure to vehemently argue a Luddite position for turning back technology, as
Senator Feinstein has apparently done in this instance. This fact deserved more attention than it
was given in the article. 

More about the Internet. 

[Top] 

OUTSTANDING STORIES OF THE WEEK

"Despite Benefits, Democrats' Estate Tax Plan Gets Little Notice" 
David Cay Johnston 
New York Times, July 13, 2000, page C1 

This article discusses a Democratic proposal for scaling back the estate tax, which would
exempt up to $10 million of assets of a family held farm or business. Under this proposal, less
than one in a thousand estates would be subject to any tax whatsoever. While the Democratic
proposal would provide complete relief for the vast majority of the people currently subject to
the tax, the article points out that the two main groups lobbying for repeal of the tax, the
National Federation of Independent Business and the American Farm Bureau, have not even
informed their members of the Democratic alternative to complete repeal. 

"As Devastating Epidemics Increase, Nations Take on Drug Companies" 
Donald G. McNeil Jr. 
New York Times, July 9, 2000, Section 1 page 8 

This article examines the battles that developing nations have waged against the pharmaceutical
industry and the U.S. government over the enforcement of patent protection on life-saving
drugs in developing nations. While most drugs are relatively cheap to produce, if corporations
can benefit from the monopoly provided by patent protection, they can charge prices that make
many drugs unaffordable to people in developing nations. 

"For ALS Patients, a Drug With a Clouded Future" 
Robert O'Harrow Jr. 
Washington Post, July 10, 2000, page A1 

This article examines the history of the development and the marketing of the drug Myotrophin
as a treatment for ALS, a fatal neurological disease. The article reports on how Cephalon Inc.,
the company that manufactures the drug, pushed the product through the Food and Drug
Administration's approval process even though there were questions about its safety and
effectiveness. 

[Top] 


Dean Baker is an economist and the co-director of the Center for Economics and Policy
Research (CEPR). His latest book (co-authored with Mark Weisbrot) is Social Security: The
Phony Crisis (University of Chicago Press). ERR is a joint project of FAIR and CEPR. 

ERR is edited by Jim Naureckas. 

Back to CEPR's Economics Reporting Review website.