Death Tax 4ever?

Or at least a while longer:

"The Senate will move from its previously scheduled agenda for Tuesday, September 6, and instead consider a resolution expressing the sympathy of the Senate for the victims of Hurricane Katrina," he said yesterday.

At the top of the bumped agenda? GOP discussion of putting a stake through the heart of the inheritance tax.

More here. It will be interesting to see the ways big and small Hurricane Katrina mucks up politics as usual over the next few months.

And more on the death tax here.

Comments

[Jennifer]

Taxing unearned inheritances makes more sense than taxing earned income or even profits. And wasn't one of the tax's original purposes to prevent having too much power accumulate in the hands of a single family/dynasty?

[MP]

I find estate taxes to be morally repugnant, but still pretty low on the long list of morally repugnant things done by the Feds. The emphasis by Congress on this issue certainly gives weight to the "kickbacks for the rich" arguments against the GOP.

[crimethink]

Jennifer,

Presumably, any inheritance is earned, by the one who leaves it. Your line of reasoning would also mandate taxes on gifts, which are by definition unearned by the recipient.

[joe]

I find trotting out the buzzword "Death Tax" pretty fucking repugnant after what's been happening over the past week.

How many people who died of thirst at the Convention Center are paying that tax?

[jf]

crimethink:

You've never heard of the Gift Tax?

[thoreau]

I have nothing to really contribute to this, but I will enjoy the debate between Jennifer and everybody else. She's good at that sort of thing.

Get a gun yet, Jennifer? I went with a friend and rented a couple pistols over the weekend at the shooting range. We had fun. I'm going to rent some more before I make a buying decision, but it was definitely fun. I liked the Sig 9mm. Definite kick, but fairly accurate (well, for a newbie). I tried a Smith & Wesson .38 revolver. I wasn't as accurate with it, but my friend liked it more.

The lesson? No matter how much advice you get, everybody finds a different model preferable. It's better to have something that works well for you than whatever some highly opinionated "expert" declares to be the best around. And no matter what you have, if worse comes to worst you'll be better armed than unarmed.

[Phil]

ISTR seeing a study that, for every X% reduction in the estate tax, we can expect charitable giving to go down by x% or some portion thereof, since giving to charity keeps that much of the estate away from taxation. And millionaries and billionaires have a lot more money to give than the middle class does.

You know, these are the private charities that the same people pursuing the permanent elimination of the estate tax say are what will fill the gap when government services are reduced. But they also want to pursue a policy that ensures underfunding of those charities. Why, it's almost as if those things are connected. Almost.

[Jennifer]

Your line of reasoning would also mandate taxes on gifts, which are by definition unearned by the recipient.

There already is a tax on expensive enough gifts. And I have no problem with that--obviously it would be stupid to pay an additional tax on your standard birthday or Christmas gift, but why not a tax on a truly expensive gift, like a house or a trust fund?

[Mr. Nice Guy]

Okay, joe. Enlighten us. How many more days have to pass before "life goes on"?

...sheesh..

[Jennifer]

Thoreau--

No, I haven't even started my gun education program, because my company's biggest client dropped a HUGE workload on me Friday afternoon. So I spent my holiday weekend working my butt off, and am glad to be officially back at work so I can take a break.

Jeff and I did buy a bunch of water on Friday night, though. From my perspective (speaking as the one who merely paid for it) we didn't get nearly enough; from Jeff's perspective (speaking as the one who had to carry it up to our place), we got way the hell too much.

[jf]

I see no problem with Jennifer's stance. I'd even go further and say that if it were possible (which it ain't, so I don't need all the reasons why it wouldn't work), I'd much rather see wealth taxed rather than income.

[Phil]

>http://www.ombwatch.org/article/articleview/501/1/116?TopicID=1:

Based on this and other econometric data, most agree that repeal of the estate tax would have an adverse impact on charitable giving. The Treasury Department estimates that between $5 billion and $6 billion in charitable gifts would be lost each year if the estate tax is repealed. In a study for Independent Sector, Price Waterhouse concluded "abolishing the estate tax...would have reduced charitable bequests by about $3 billion out of an estimated $7 billion in 1996." Actually, charitable bequests turned out to be $10.2 billion in 1996, which would have increased the impact of the repeal. One respected estate tax attorney says over $10 billion per year in charitable giving would be lost. The estimates of impact are wide, but most conclude the impact would be substantial.

These are, of course, the same private charities that those pursuing the permanent repeal of the estate tax tell us are supposed to fill the gap when government services are reduced. (Something which the "starve the beast" policy is supposed to ensure.) Yet they also pursue a policy which will see that those same private charities are likely underfunded. Why, it's almost as if there's a connection, but for the life of me I can't figure out what it is.

[jf]

Phil:

I think we can all see that the days of starving leviathan have long passed. It's all about "compassionate conservatism" (puke) now. Low taxes, high spending, and damn the deficit.

[R C Dean]

Why tax wealth rather than income? Its all taking stuff from people, so I don't know that one is morally superior than the other.

The great thing about income is that its liquid, and can be taxed without too much economic disruption.

Wealth, on the other hand, is invested, and to tax it you have to force divestment and disruption. I suspect that is why the inheritance tax is considered a net loser for the economy and for the taxman. By the time the heirs get done tearing down a perfectly good business to pay the inheritance tax, they have removed a good generator of wealth, income, and taxes from the scene.

I'm sure there are fancy studies on this, but my gut tells me skimming income is less economically disruptive than confiscating wealth.

I would bet money that those advocating the taxing of wealth rather than income don't have much wealth, and wittingly or not are advocating a shift of the tax burden off of their shoulders and onto those of others.

[Jennifer]

RC-

I'm not advocating the taxation of wealth so much as I am advocating the taxation of wealth set to be transferred from the dead to the living. And for all the stories I hear of how the inheritance tax destroys small businesses and small farmers, I haven't seen actual stats, just anecdotes. Anyone who stands to inherit enough to pay taxes on it, can afford to pay the taxes on it.

I just don't understand the "compassionate conservative" stance that Paris Hilton's maid should pay more taxes than her boss.

[andy]

To all the people advocating the repeal of the estate tax: How DO you keep a society from turning into a de facto plutocracy? Or is that not an unfavorable outcome for y'all?

[Stretch]

I have trouble with the estate tax. On the one hand you have people who work their asses off their whole life so they can leave a good amount of money to their children and I think it's terrible to take any of that away. On the other hand, I can't really argue that taxing Paris Hilton's inheritance is really that bad.

[Loofah]

The thing I think is really funny is that you fools are railing against a tax that (I will assume through the use of basic statistics) NONE of you will be subjct too. The revenue lost by getting rid of the estate tax will simply come from higher taxes on you brainwashed idiots.
The study of Economics often assumes that consumers act in a "rational" way (ie in their self-interest). Asking for higher taxes on oneself to prop up those who can most afford paying their fair share is hardly rational.
This is a perfect example of people being completely fooled by a PR effort by a few weathly familes (think Walton) to take money from the rest of us. Using that "death tax" phrase perpetuates the manipulation of your very basic thought processes.
The advocates for the repeal oftem site the farmers and small businesses hurt by it but fail to cite ONE SINGLE example of this happening.

[Jennifer]

What's really funny is that many people who oppose the estate tax insist that poverty AND wealth are both earned: the rich are rich because they're better than the average person, and the poor are poor because they're worse. And yet they oppose a tax on unearned wealth, which means those who actually EARN what they have must pay more to cover the shortfall.

[andy]

"The thing I think is really funny is that you fools are railing against a tax that (I will assume through the use of basic statistics) NONE of you will be subjct too."

I would wager that libertarians, on average, are higher on the wealth scale than the average Joe (or joe, for that matter 😉 ). Or more principled. Or both.

[Stretch]

To all the people advocating the repeal of the estate tax: How DO you keep a society from turning into a de facto plutocracy?

I've heard this argument several times and it just never made much sense to me. The same people who claim that this tax prevents such a thing also claim that the wealthy can easily afford the tax. It can't really be both.

Overall, I'd be much happier with the tax if the minimum was set significantly higher. I'm sorry, but you're not preventing plutocracy by taking half of 1.5 million, you're just pillaging those who worked hard and saved their money.

[JMoore]

Loofah

Please define "fair share."

(Full disclosure: I will have to pay a death tax on my parents' estate, and my heirs will have to pay one on mine as the law stands.)

[Jennifer]

I'm sorry, but you're not preventing plutocracy by taking half of 1.5 million, you're just pillaging those who worked hard and saved their money.

No, you're taking it from the heirs of those who worked hard and saved their money. If they inherited their parent's brains and work ethic then they'll be able to earn mmore on their own, especially with such a huge pile of seed money to start.

Seriously--why this opposition to the estate tax? Would you rather tax the living than the dead?

[Meyer]

I will be subject to the estate tax, and I'm for keeping it.

[crimethink]

Jennifer and jf,

Yeah, I forgot about that. I sure hope I don't get audited for my childhood birthdays... 🙁

Phil,

Do charities have a right to wealthy people's money? Do you seriously believe that the only reason people leave money to charity in their wills is to keep the govt from getting it?

andy,

Children who grow up wealthy are usually experts at spending money, not making it. In a generation or two, an inheritance will vanish all on its own. And if by some chance a wealthy child puts his or her inheritance to good use by investing it wisely, aren't we all better off anyway?

[JMoore]

I'm for abolishing the death tax, as well as the income tax. It costs me a fortune in accountancy fees to avoid both of them.

[Phil]

Do charities have a right to wealthy people's money? Do you seriously believe that the only reason people leave money to charity in their wills is to keep the govt from getting it?

No, and no.

Better strawmen, please.

[andy]

"I'm sorry, but you're not preventing plutocracy by taking half of 1.5 million, you're just pillaging those who worked hard and saved their money."

No, you're taking it from the heirs of those who worked hard and saved their money. If they inherited their parent's brains and work ethic then they'll be able to earn mmore on their own, especially with such a huge pile of seed money to start."

Sorry, Jennifer, but Stretch has a point. 1.5 million ain't sh*t, in the scheme of things. But what would be a good number to start taxing? Or would it be a progressive tax (10% on 1 mill-2 mill, 20% on 2 mill-5 mill, 30% on 5 mill-10 mill, etc.)?

[andy]

"And if by some chance a wealthy child puts his or her inheritance to good use by investing it wisely, aren't we all better off anyway?"

Ooooh... This one's debatable. I'm going to say: conceivably...

[Jennifer]

Andy--

Why not an estate Flat Tax similar to the one people propose for income?

[Stretch]

No, you're taking it from the heirs of those who worked hard and saved their money. If they inherited their parent's brains and work ethic then they'll be able to earn mmore on their own, especially with such a huge pile of seed money to start.

Seriously--why this opposition to the estate tax? Would you rather tax the living than the dead?

Seriously, why shouldn't people be free to leave whatever they want to their children? You talk of it like it's a bad thing. As I've already said, I have mixed feelings on the estate tax, but 1.5 million is far too low to start taking half of it, imo. In such a case, that "pile" of seed money gets halved immediately, then probably quartered or more. And you're not taxing the dead. You're taxing the living heirs. Maybe you feel they don't deserve the money, but I'll leave that call up to their relatives.

[JMoore]

Some people seem to think that rich people keep all their millions in a sock under the mattress. Whether they spend it on luxuries (which are provided by the middle class who profit from providing them) or invest it (which makes the middle class possible), the money will be circulated. A tax is just a way for government to direct that circulation. It's a question of who you want to be making the decisions.

[crimethink]

Phil,

How is either of those a straw man?

If you argue that charities would suffer if the estate tax was repealed, you imply that rich people -- with more money to divy up in their wills -- will leave less to charity.

If you support the estate tax because charities would otherwise lose money, you tacitly argue that the right of a dying person to decide what to do with his or her money is less important than the charity's claim on that money.

[Shannon Love]

The problem with the estate tax is that by taxing assets instead of income, it often forces the breakup of economically efficient enterprises just to satisfy the tax man.

Most people seem to image that the wealthy inherent big piles cash. They don't. Most inherent a business or properties. High estate taxes can force the heirs to sell the business or break it up just to pay the tax. Businesses that would otherwise be economically successful are destroyed and we are all worse off as a result.

These attempts to engineer society via the tax code always fail. The superrich can always find or create loopholes while the major burden of the tax falls on the upper middle class. There is no evidence at all that estate taxes impede the multi-generational accumulation of wealth.

On a more philosophical level, the estate tax springs from an idea that what an individual earns or creates in their lifetime is not theirs to dispose of as they see fit. It reflects a philosophy that you only own something to the extent that the state allows you to and that a person cannot dispose of their earnings and properties except in a manner the state finds befitting.

All other considerations aside, that is a disturbing way of looking at people's life work.

[M1EK]

No, what's really funny is that a Reason writer is calling it the "death tax", and nobody friggin' cares. Can we change the name of the magazine to (R)eason, please?

[Jennifer]

Shannon and RC-

Can you give examples of businesses being destroyed to pay the estate taxes? That's the main bugaboo used by those who would repeal it, yet they never cite examples. So what thriving businesses were destroyed?

[rafuzo]

I'm with Crimethink. Have you seen the airhead wealth-destroyer on "Celebrity Cattle Drive" that was spawned by the CEO of Yahoo? That guy will be broke long before he dies, at the rate she burns it. Maybe that's the plan, leave the kids nothing so the gov't doesn't get it.

Frankly I think it's asinine that on this blog we're having discussions about taxation as a punitive measure for the rich.

[Timothy]

Jennifer: My objection to the estate tax is that the savings being taxed were already taxed when earned as income. By-and-large, anyway. There are a limited number of tax-deferred savings plans, and you have to pay income tax on the contents once you withdraw and spend (IE when you tap that 401(k) or IRA, the Roth IRA, however, is funded with post-tax income).

If you pass on stocks, the inheritors will have to pay income tax on the earnings when they sell, same thing with bonds. You'll have to pay taxes that aren't the estate tax if you sell the house, and on lump-sum insurance payments, etc etc. The estate tax is in addition to all of that, just one more way to gouge.

Besides, if you're ultra-wealthy you don't end up paying the estate tax anyway because you pass stuff on in the form of trusts set up to pass on assets, but that takes a lot of cash to do. Millions in liquidity, which most folks simply don't have.

[Jennifer]

Frankly I think it's asinine that on this blog we're having discussions about taxation as a punitive measure for the rich.

Who said anything about "punitive?" Tax money has to come from somewhere, and I'm just saying that taxing the dead is better than taxing the living. I also think that unearned income--be it inheritance, interest or trust-fund dividends--should be taxed BEFORE earned income or earned profits.

[quasibill]

First - all taxes are evil - they are all robbery. So arguing over the estate tax vs. income tax is like arguing whether you want to be robbed by a man vs. a woman. Minarchists, however, will argue that some robbery is justifiable if the proceeds are spent for the victim's benefit.

So, in that vein, I'd argue that the estate tax is less market distorting than income tax (and therefore I would rather be robbed by a woman for the possibility of getting some cheap action). There is no taxpayer reacting in real time to the tax, just an estate. Sure, like any tax, it will destroy wealth and investment, but it's not an ongoing decision making process. Taxing income changes many, many decisions on a daily basis for most taxpayers. Taxing an estate will make a change in decision making (for those who pay attention to such decisions) in one transaction.

Further, the moral component of the estate tax is somewhat less repugnant than income taxes. The owner of the property is dead, and therefore has at least less rights than a living person. Call me macabre, but stealing wealth from the dead is less morally repugnant (though still wrong) than robbing living people.

[Jennifer]

Timothy--

Well, I oppose the earned-income tax anyway, so the double taxation is just adding insult to injury.

[Timothy]

Also, I think the sales tax is the only tax defensible on moral grounds. Just, you know, for the record.

[rafuzo]

So what thriving businesses were destroyed?

I can cite one example of my own experience: a friend of my father's established a local drycleaning chain here in Boston many years ago. He kicked off at the ripe old age of 46 from a massive heart attack and due to the value of the business and how it was the single major asset in his portfolio, his family got shocked with a tax bill so hefty they had to sell the company to pay it off. Now the company is owned by some random conglomerate who got 45 cents on the dollar for the business and his widow has been working like a dog to put her four kids through college because the proceeds from the sale got taxed at some absurd rate, as well as being hit with attorney's fees for the estate handling and all.

The business, as far as I know, is doing ok, in someone else's hands. So I guess that death tax thing really is a bugaboo after all.

[Phil]

If you argue that charities would suffer if the estate tax was repealed, you imply that rich people -- with more money to divy up in their wills -- will leave less to charity.

Did you bother to RTFA? Apparently you did not, because the answer appears to be, "Yes, the estates with the lowest tax liability are also the ones that leave the least to charity." It stands to reason -- you remember reason, right? -- that if we reduce the tax liability on all estate to zero, that giving to charity will ____________ . Fill in the blank with the correct answer.

If you support the estate tax because charities would otherwise lose money, you tacitly argue that the right of a dying person to decide what to do with his or her money is less important than the charity's claim on that money.

I'm arguing no such thing. Nor have I said that I support the estate tax -- my personal stance on the estate tax is irrelevant here. I'm noting that it appears to be noncoincidental that the same group of people are arguing:

1) Private charities should do nearly all the things that government does now in terms of social services; and

2) We should pursue policies that will reduce both the amount of money going to government and the amount going to private charities.

The facts in the OMB link are what they are. You make of them what you want, but don't pretend they don't exist. If you have a recommendation for making up the likely charitable giving shortfall pursuant to the complete abolition of the estate tax, let's hear it. I'm not pretending to have a solution, but I am noting that the problem is there.

Shannon: The problem with the estate tax is that by taxing assets instead of income, it often forces the breakup of economically efficient enterprises just to satisfy the tax man.

Please define "often" and give plentiful examples. Thank you.

[Jennifer]

Rafuzo--

I'm amazed your dad's friend didn't list his wife as a co-owner of the business, to avoid such inheritance problems.

[Timothy]

quasibill: Well, maybe and maybe not, the main argument from economists on the income tax is that it distorts consumer preference less than an equal-yield sales tax. Essentially the income tax shifts in the budget constraint, rather than moving the end-points around. However, that's in a world where there's an income tax rate, and you pay it: this is not, however, the world in which we live. I think once you factor in the myriad distortions inherent in the tax code, it's probably about a wash between Sales and Income taxes in terms of distortion, with maybe Sales a little bit ahead.

That said, does the wealth being deeded to the living by another living person make a difference? Supposing there is a will, which I would assume there is in most high-worth estates, that represents a contingency statement written by a living person who is in command of his/her wealth and faculties. Thusly, regardless of probate and all that, I would argue that the wealth is owned by the heirs the instant that a person dies, and the estate tax does, in fact, steal from the living.

[thoreau]

I don't understand the notion of taxing somebody for the value of an inherited business. If a tax is to be levied, doesn't it make more sense to levy the tax on the profits every year, to avoid adding to the disruption caused by the previous owner's death?

Whatever one might think of estate taxes on liquid assets (e.g. a pile of cash), an estate tax on a business makes far less sense than just taxing the profits regardless of who the owner is or how the ownership is transferred.

[crimethink]

Phil,

Yes, I did RTFA, but you're trying to disown the conclusion -- that people only give to charity what would otherwise be taken away in taxes. You accused me of setting up a straw man when I merely presented the article's (dubious, in my view) conclusion.

As for your second point, yes, it is noncoincidental that the same people are against taxation and against govt involvement in charity work, but probably not for the reason you imply.

[Mac Daddy Hoon]

Can you give examples of businesses being destroyed to pay the estate taxes?

It would be nearly impossible for any one person to know or be able to cite specific examples of small businesses being forced into liquidation to pay estate taxes. Any examples would be anecdotal anyway. Of course this doesn't mean the situation isn't real.

I Googled "Estate Taxes" and this is the first scholarly looking article that showed up. I didn't RTFA so I can't comment on sources, quality of analysis etc. but the executive summary is not favorable. I also know the CATO Institute has done a lot of work and analysis on estate taxes.

If anyone can cite some sources that support estate taxes, please cite. I would like to study the opposing viewpoint.

[joe]

Mr. Nice Guy,

Callin the Inheretance Tax the Death Tax mocks the dead 365 days a year. There just happen to be a lot of newly dead at this particular moment, so that mockery is especially offensive.

[Jennifer]

Even if repealing the estate tax is a wonderful idea, is this the best time to do it--when there's a deficit, a war, AND the need to rebuild a chunk of the South the size of Great Britain and figure out what to do with about a million broke, unemployed and homeless refugees?

[Phil]

. . . but you're trying to disown the conclusion -- that people only give to charity what would otherwise be taken away in taxes. You accused me of setting up a straw man when I merely presented the article's (dubious, in my view) conclusion.

If you have numbers that contradict that conclusion, or have a different interpretation that makes equal sense in light of the factual numbers, by all means, knock yourself out and give it. Otherwise, you're just trying to gainsay, and doing a frankly piss-poor job of it.

As for your second point, yes, it is noncoincidental that the same people are against taxation and against govt involvement in charity work, but probably not for the reason you imply.

[Insert generic criticism of reading ability here.]

Pay attention. I'm going to construct a path here for you to make it easy:

Step the First: IF the conclusions of the link I provided are true . . .

Step the Second: . . . THEN the permanent abolition of the estate tax will result in a significant drop in PRIVATE giving to charity.

Step the Third: THEREFORE pursuing the permanent abolition of the estate tax will both . . .

Step the Fourth: . . . reduce the amount of government income and its ability to pursue social programs . . .

Step the Fifth: . . . AS WELL AS reduce private giving that's supposed to fill the gap that Step the Fourth will result in.

That the same people pursue a policy that will result in both the Fourth and Fifth steps is the problem.

MDH: It would be nearly impossible for any one person to know or be able to cite specific examples of small businesses being forced into liquidation to pay estate taxes.

Er . . . if they don't have any evidence, then perhaps they shouldn't make the claim? I know, that's crazy talk, but still.

[joe]

"My objection to the estate tax is that the savings being taxed were already taxed when earned as income."

Your employer gets taxed on its profits. Then you get taxed on your income. Then you pay a sales tax at the Casual Male. Then the Casual Male pays taxes on its income. Then the Casual male's employees...

The government takes taxes when there is a financial transaction. When Uncle Morty passes away and you inherit his wealth, that's a transaction - a different transaction than all of those sales of Morty's Motor Oil that made him his money in the first place.

Double taxation is a bogus argument in this case, because the lucky heir didn't pay a dime on the money Uncle Morty earned.

[KEE-rist!]

Callin the Inheretance Tax the Death Tax mocks the dead 365 days a year.

Please stop being tiresome, joe.

[ChrisO]

What a sad deterioration of libertarianism to see us buying into the "what is the most moral way to conduct a government smash-and-grab" argument. The feds should live off of customs duties and fees from National Parks, trademark/patent registrations etcs.

Politically, of course, the death tax is DOA right now, and I'm sure even the sponsors don't want to bring it up right now and pass up a chance to look "compassionate" with other people's money. Blecch.

[ChrisO]

I meant to say that the "death tax repeal is DOA." Yes, I can proofread--I just choose not to... 🙂

[Col DuBois]

joe,

And calling you an intelligent being mocks intelligent beings 365 days a year, but...

[JDM]

"If a tax is to be levied, doesn't it make more sense to levy the tax on the profits every year, to avoid adding to the disruption caused by the previous owner's death?"

This is exactly why it is called a death tax. If the owner happens to die that year, there is suddenly a huge tax placed on the enterprise. Often the tax is high enough to disrupt the business. Ultimately, it's just an arbitrary way for the government to grab more money.

[quasibill]

"Thusly, regardless of probate and all that, I would argue that the wealth is owned by the heirs the instant that a person dies, and the estate tax does, in fact, steal from the living."

Not to be too harsh here, but that is sophism at its finest. If the person actually gave it to the heirs before dying, they would already have it, and there would be no need for a will or probate. It was only given AFTER death, which is, to some extent, impossible for the person to do on his own. So, no, you are not robbing the heirs, you are stealing from the dead person. Remember, the dead person always has the ability to give while she's alive - that's consistent with natural rights.

To some extent, the possessions of a dead person have returned to a state of nature. Noone actually possesses them at that point, and it requires a living person's labor to re-appropriate them.

Again, I still prefer allowing people to control the distribution of their assetts upon death. And I acknowledge that such a tax, like any tax, is wealth and investment destructive. But if I have to choose between the frying pan or the fire, I'll pick the estate tax.

[shiki]

Is it fitting that
the two certain things in life
happen together?

[Mac Daddy Hoon]

Even if repealing the estate tax is a wonderful idea, is this the best time to do it--when there's a deficit, a war, AND the need to rebuild a chunk of the South the size of Great Britain and figure out what to do with about a million broke, unemployed and homeless refugees?

One stat I did see from TFA I cited was the Estate and Gift taxes only represent about 1.4% of total government revenue. The largest percentage by far is individual income taxes. So the potential loss of government revenue really isn't a strong reason to oppose repealing the estate tax, since it isn't a signficant source of revenue anyway.

[Taxman]

Rafuzo - Sorry to hear about your friends situation. However I am a bit puzzled. The Internal Revenue Code allows an unlimited marital deduction for transfers between spouses to pass free of gift and estate tax.

Consequently I would think your friend should have easily avoided the tax since generally, in lieu of any will, the assets transfer to the spouse and would be therefore be exempt. Unless there was a will to the contrary..?

[JMoore]

I'm afraid I just don't understand how calling it the death tax mocks the dead.

Not that it would matter if it does: the advantage in being dead is that you don't care anymore.

[mediageek]

The lesson? No matter how much advice you get, everybody finds a different model preferable.

Well said, Thoreau. Like cars, stereos, computers or any other consumer good, picking a firearm is a very personal decision.

I now return you to your regularly scheduled thread.

[joe]

"If the owner happens to die that year, there is suddenly a huge tax placed on the enterprise."

Won't somebody please think of the enterprises?

[Flyover Country]

"Well said, Thoreau. Like cars, stereos, computers or any other consumer good, picking a firearm is a very personal decision."

I love this site. Where else would you read that sentence?

[Mr. Nice Guy]

"Ultimately, it's just an arbitrary way for the government to grab more money."

Bingo.

[Isaac Bartram]

thoreau

I didn't get a chance the other day to respond to this post of yours:

Somewhere down the line I'll probably buy a shotgun. Aside from its home defense uses, I like the taste of duck.

If you are serious I stongly recommend Ducks Unlimited.

http://www.ducks.org/

They are a most excellent conservation group specializing in restoring wetlands (so there members will have lots of ducks to hunt).

With a membership you get an excellent magazine with every thing from info on their latest projects to gun and gear reviews to recipes.

Feel free to continue the regularly scheduled thread.

[mediageek]

Oh, back on topic, the inheritance tax is inherently wrong because it's a taxation on wealth that was already taxed once (or more than once, depending on how it was acquired.)

It's just another example of the feds picking some arbitrary event (death, property ownership, whatever) and slapping a tax on it in order to double-triple-or-quadruple dip.

[Isaac Bartram]

stongly: insert missing r

[Ironchef]

Instead of the Death Tax set to kick in when a monetary amount is reached (what? 750k?), let's only kick it in (hard) on the richest 1 percent in the country.

Since the standard defense of this tax is to "keep the uber-rich from accumulating more and more", why not target the uber-rich? Is it fair? - was it ever? Are there loopholes? - there always will be? Can we get away with it? - we've discriminated against the rich before, why stop now?

[Timothy]

Joe:

I'm well aware of how taxes work, thanks. And, as I stated earlier, I think the only tax that's defensible is the sales tax. That would mean that income, coroporate taxes, and everything but the sales tax would be immoral. It's not like I'm all for cap gains, or corporate taxes and just happen to hate the estate tax for no reason.

There's no good reason to tax corporate profits, as the increased cost really just gets passed down to the consumer. Taxing income is stealing part of my work effort because I have the audacity to support myself. The property tax hits me (either directly or in the form of higher rent) for having the gumption to live someplace. Capital gains will hit if I'm a big enough jerk to invest well, the estate tax will nail me if I'm so inconsiderate as to do well for myself. I see the sales tax as sort of a useage fee on fiat money, and given that taxes have to come from someplace (even if it would be ideal that the government subsist on usage fees, that's not going to happen and I've made my peace with it), you're only hit at the level of what you choose to spend. Plus it's pretty hard to evade, and you wouldn't need the IRS really.

Now, I can see the logic behind a slightly progressive income tax with no deductions, and while I still think that taxing income (even ala the Jane Galt Tax Plan), it would still be better than our current system, and would be less distortionary.

[jf]

We could always go back to nuthin' but tariffs. Just like the founders intended.

[Timothy]

I'll excuse the Founders for not having the Hecksher-Olin theorem, or even any real trade theory other than Mercantilism to work with, but it doesn't make protectionism any less wrong.

[joe]

Ironchef,

The Inheritance Tax doesn't kick in until you're well into the millions.

It currently effects far less than 1% of the population.

[Mac Daddy Hoon]

The Inheritance Tax doesn't kick in until you're well into the millions.

It currently effects far less than 1% of the population.

I hear this frequently but I can't reconcile this to my own situation. If my parents were to die tomorrow, their estate would undoubtedly be required to pay an estate tax. Their prinicpal assets are two homes and monetary investments. So this means that my parents are in the top 1% of the population? It sure doesn't seem that way to me. I am not suggesting that my parents haven't been financially successful; they clearly have been. But top 1%?! I don't recall reading about my parents on the Society pages.

I think what has really happened is that the upper middle class has grown more wealthy. So taxes such as the Estate Tax and the Alternative Minimum Tax, that were designed to impact only the truly rich, have reached down into the upper middle class because the lower limits of the taxes haven't been adjusted upwards with the growth in the demographic sector.

[Jennifer]

Actually, Mac Daddy, I think the problem isn't that the middle classes are growing wealthier, but that the tax limits haven't been adjusted for inflation. I remember whan "a millionaire" was somebody who would never, ever have to work again if he didn't feel like it; now "millionaires" are often middle-class themselves. Likewise, my household brings in "a six figure income," which used to mean the topmost limits of the middle class; nowadays, we're comfortable and making good progress toward our financial goals, but certainly nothing to brag about. Six figures, a million dollars--not so impressive when a single-family home in a humdrum neighborhood can cost over half a million right there.

[...]

Who is anybody here to decide what "unearned" income is? If I wiped my dying grandmother's ass clean and ate dinner with her every night for 10 years before she died and she had $2 mill in the bank and she left me that, who the hell is Jennifer or joe to presume that they - or anyone in government, ahem joe - is in a position to decide how much my ass-wiping and dining were worth to my grandmother, or what percentage of that pay I should be docked? Mind your own damn bank account, turds.

[Ironchef]

Joe, according to wikipedia it's 1.5 million. Higher than I thought, but certainly low enough to make it affect more than the richest 1%. And I don't believe for a minute that you would agree to apply this ONLY to that 1%.

Like MacDaddy, my folks too will be affected if the hot housing market continues, and they certainly aren't rich, nor did they get where they are by "working off the backs of the poor" (or whatever class-struggle mantra the pro-tax people preach). They were lucky enough to purchase a house in NVa about 30 years ago, which is now reaching 7 figures in value.

[Jennifer]

Your grandmother was dying for ten years?

[Bob]

>Even if repealing the estate tax is a wonderful idea,
>is this the best time to do it--when there's a deficit

You assume a fact not in evidence: that the estate tax is a net revenue generator for the government. Analysis I've seen indicates that it's not. In other words, the cost of enforcing the estate tax is about equal to the tax generated, resulting in a wash. Since I am in principle opposed to taxes whose sole effect seems to be a full employment program for bureaucrats and lawyers, we should eliminate the estate tax altogether.

[...]

my grandmother is 102, comin' up on 103!

[thoreau]

... makes a good point: Sometimes inheritances are very hard-earned.

To some that point may be irrelevant, to others highly relevant, and to others it may be an entirely unnecessary point (not quite the same as irrelevant), but it's worth keeping in mind.

[Ron]

As an attorney who has been involved in estate planning for years, I have seen and heard virtually all of the arguments that have been made here. Phil's point that charitable giving would probably substantially decrease after repeal is, I believe correct. It really shouldn't take a study to prove that someone who is given the choice of having a portion of their estate paid to Uncle Sam or to their favorite charity (most likely not Uncle Sam) will opt for charity, and I have seen my clients make that decision for years. On the other hand, Thoreau's point that death is not an economically efficient time to collect the tax is also valid, and can place a tremendous burden on families trying to carry on after the death of a parent or parents. Joe, you are correct that only a tiny percentage of estates pay any tax, but the percentage of estates that are effected by the tax is vastly greater than that. Why? Because it is necessary to do estate planning to maximize tax-free lifetime gifts and to fully utilize each person's unified credit (which currently shelters up to $1.5 million in assets). Not only are professional fees expensive, but the required planning to minimize tax is often at odds with a person's desires regarding the disposition of their estate. From a purely utilitarian viewpoint, one of the biggest problems with the estate tax is that it doesn't raise enough revenue to justify the economic and social costs of complying with it.

Now to the issue everyone here is missing: the elephant in the corner is the income tax basis step-up at death--when a person dies, the "cost" of their assets is adjusted to the assets' fair market values. That is almost always an upward adjustment, because people don't tend to hang on the losing investments, and business assets are usually fully depreciated by the time the owner dies. So, assmume that stock your parent bought for $5/share is worth $50/share when they die. If your parent's estate is not subject to the estate tax, the $45/share appreciation in the stock IS NEVER TAXED. The 2001 tax act partially addresses this potential revenue loss by providing that, upon full repeal (currently scheduled for 2010), the amount of the basis adjustment at death will be LIMITED (to $3-4 million or so). Why does this matter? Well, for one thing, we don't gain much economic efficiency from estate tax repeal, since lots of people will simply have to pay professionals and alter their dispositive plans to take advantage of the limited income tax basis step-ups. Secondly, even if people think it is unfair to tax people's estates upon their deaths, I doubt that there are many who think their heirs should be able to permanently avoid paying income tax on investment appreciation just because the owner died and left the assets to someone else. Notions of equity don't sway me in favor of estate tax repeal, unless you are going to eliminate the income tax basis step-up also.

In conclusion, if repeal is passed as originally proposed in 2001, we haven't accomplished much from a policy standpoint. Compliance costs will still be high, the revenue loss will be substantial, there will be an adverse impact on charitable giving, and the only people who will see much benefit at all over current law are in about one-tenth of Joe's 1 1/2 percent, who won't have to do tax planning for death anymore and can now concentrate on sheltering the gains from their investments that no longer have an unlimited basis step-up.

This is why I believe there is a larger agenda behind estate tax repeal. I believe the real goal is to eliminate the taxation of investment appreciation entirely. Getting rid of the estate tax is a necessary first step. Eliminating the income tax on investments comes next, followed by implementation of a broad based consumption tax of some kind (VAT?). The result would be a very broad based, highly regressive tax system, which raises significantly less revenue than at present--Grover Norquist's dream, and he may realize it, if the pesky deficit doesn't get in the way.

[Jennifer]

Ron--

By "regressive," do you mean fix the tax code so that the rich pay nothing and the poor and middle classes are the only ones to actually pay tax?

[Ron]

Jennifer: Uh, at the risk of sounding like a flaming liberal, yes.

[Ron]

Jennifer: I should qualify "nothing", as an amount that wouldn't make a wealthy person lose any sleep at night.

[Jennifer]

Ron--

I'm not surprised by this at all. I vaguely remember something last year about a plan to make unearned income--dividends and such--tax-free.

No tax for the rich, no tax for the churches, lots of tax for the working poor--that system worked well for pre-Revolutionary France, anyway. At least until the aristocrats were guillotined.

[Curious]

Why don't folks give their stuff away before they die, before the tax man and the health sector get their paws on it?

You have to trust your kids, but if you were nice to them....

[Ron]

Jennifer: Well, that's a different debate. I'm just unveiling what the policy really is. You should chat with Grover sometime, he can explain why this is a good thing.

[MP]

Ron,

The cost basis of an inheirited asset is the asset's value at time of inheiritance? It seems to me that that in the scenario you describe, the cost basis of the inheirited security should remain $5, no matter who the asset is transferred to. This is news to me, but I know didly about estate planning.

[MP]

I'm not surprised by this at all. I vaguely remember something last year about a plan to make unearned income--dividends and such--tax-free.

Double taxation is grossly unfair. Taxing both corporate profits and dividends is clearly double taxation.

However, focusing on this particular unfairness in the tax code while leaving all of the other distortions deservedly gets the GOP called out for "tax cuts for the rich".

[Ron]

Well, you have me beat on Supreme Court interpretation, so I guess we're even. The basis step-up issue is the one none of the estate tax repeal proponents want you to know about. The reason the Gallo's, Waltons, and Mars families want an estate tax rate pegged at 15% as a compromise right now is so that they can tie it to the capital gain rate and kill them both off at once when the tax on investments is repealed later.

Curious: You can't give the assets away during life beyond the amount covered by your unified credit. Actually, right now you can only give away $1 million, while you can pass $1.5 million at death. Don't ask.

[Jennifer]

I'd actually be willing to make a deal with the government--let me live tax-free, and you can have ALL of my money when I die. Once I'm dead I won't need it, but I could use more now.

[The Mad Scientist]

Suppose for a moment that I DO have $2 million hidden in a very large sock inside my mattress instead of invested in a business or the market. How is any IRS goon going to know about the value of my estate? If I bequeath my mattress to a relative and they don't do anything that would raise a red flag with the IRS like running out and paying cash for a new house, won't it be really easy for my heirs to avoid paying taxes on their inheritance? It seems like the most liquid assets would be so far under the taxman's radar that the only assets they could ever tax would be just those productive ones like businesses or investments.

(By the way, I haven't actually checked, but I'd be surprised if I have more than $0.72 in change and maybe some old popcorn kernels wedged under my mattress, so please don't come by to steal my bed.)

[Ron]

MP: Well, estate tax repeal alone doesn't help the rich all that much because they still ultimately have to pay tax on investment appreciation. I just suspect that they have a plan for dealing with that, too. In the abstract, I don't know that I'm that far apart philosophically from folks of Grover's ilk. The problem for me is the deficit and out of control spending. Grover will never achieve his nirvana because the economy will have collapsed before then. Of course, some of his rich buddies and Saudi friends will probably make out OK in any event.

[Ron]

Mad Scientist: I have defended folks like you in IRS criminal investigations and defense work. E-mail me if you want my business card.

[zero]

I keep hearing people talk about how corporate profits are double taxed. Could some one clarify it for me? The way I am looking at it currently is that the income for the company is taxed as if the company was an individual. Then when the company distributes that income to other individuals as divideneds it is taxed as income to them. How is this double taxing?

[MP]

zero,

The profits that a Corporation makes are taxed. The after tax profits are then distributed to shareholders, who receive the distribution in the form of a dividend. This dividend is again taxed. Thus, double taxation. Clear 'nuff?

[Ron]

zero: Because the value of the stock is reduced by the tax the corporation pays, and the shareholder then pays tax on dividends which represent the earnings that the corporation paid tax on.

[The Mad Scientist]

I WISH I needed your services, Ron! Unfortunately, the only people I know with that sort of money are all related to my ex-wife. I'm in no danger of inheriting anything more valuable than my mom's debts. 🙂

[joe]

"Joe, according to wikipedia it's 1.5 million. Higher than I thought, but certainly low enough to make it affect more than the richest 1%. And I don't believe for a minute that you would agree to apply this ONLY to that 1%."

Far fewer than 1% of households have $1.5 millin in assets. Admittedly, that number should go up, so that people who "only" inherit a business with a value of $2 million aren't taxed. But, like the poor bastard on the tractor when the capital gains tax came up during Clinton's term, the few in that situation are being used as leverage by the Republicans to try to sqeeze through a giveaway to the Wal Mart heirs of the world.

"Mind your own damn bank account, turds." translates into "so let the suckers who get their money in $400 increments every week pay the taxes."

[joe]

Corporation gets income, and gets taxed.

Corporation pays dividends to shareholders, they get taxed.

Shareholders buy Sweaty Bald Guy's workout tape. Sweaty Bald Guy gets taxed.

What's the problem? Taxation (except for property taxes) happens at the point of transaction. When Uncle Irving's lawyer hands you a deed and a check that used to be Uncle Irving's, that's a transaction.

[zero]

So what you guys are saying is that it is like if I as a individual earn some money from doing work, that money is taxed. If then I give some of it as an allowance to my kids and that money is taxed also?

[thoreau]

joe, the problem with your analysis is that nobody here has admitted to buying Sweaty Bald Guy's workout tape.

[joe]

Somebody's clearly not ready to master his own body weight.

[Mac Daddy Hoon]

Far fewer than 1% of households have $1.5 millin in assets.

Do you have a source for this claim? You have made the claim twice without evidence.

Corporation gets income, and gets taxed.

Corporation pays dividends to shareholders, they get taxed.

Shareholders buy Sweaty Bald Guy's workout tape. Sweaty Bald Guy gets taxed.

In fact, the shareholders would be taxed at the Sweaty Bald Guy transaction, not SBG himself. Nevertheless, the spirit of the post is true, but it is hardly justification for perpetuating an inefficient and arguably immoral system. (There are clearly differing opinions on the morality point.)

[MP]

Taxation (except for property taxes) happens at the point of transaction.

I was going to let your first utterance of this slide, but I can't let it go unchallenged twice. Various tax systems are based on concepts far more complex than simply a tax on financial transactions. Although this is still a gross oversimplification, income taxes derive their legitimacy from their effort to extract a portion of GDP. Sales taxes attempt the same thing, from a different angle. These taxes differ from wealth taxes in their effort to extract value from productivity, not simply static value. Property taxes are a form of wealth taxes. Property taxes are used by localities because they more closely correspond to the collective assets being governed by the locality.

Viewing taxes as the Government stepping in the middle of all financial transactions excludes any economic rationality from the imposed system.

[zero]

joe:
My father is a farmer so I have some interest in farms. So I did a quick check and from the information I found it looks like about 8% of US farmers would be subject to the estate tax. Farmers and their heirs tend to land rich cash poor.

Average price per acre of land $1360
Source: http://muextension.missouri.edu/explore/agguides/agecon/g00404.htm

Number of farms at least 1000 acres: 176080
Source: http://search.usda.gov/search?q=cache:YlcSHxjIGvs:http://www.nass.usda.gov/census/census97/zipcode/States/united_states/us.wk3+us+farms+1000+acres+or+more&site=usda&output=xml_no_dtd&client=usda&access=p&num=10&proxystylesheet=usda

Percent of US frams 1000 acres and larger ~8%
Source: http://dare.agsci.colostate.edu/csuagecon/extension/docs/agmarketing/amr04-04.pdf

[Cliff]

The Kennedy family has shown me that no matter how much the old man made, the offspring will find ways to squander and waste it, so the money will be gone either through a tax or partying.

[DB]

Far fewer than 1% of households have $1.5 millin in assets.

Isn't it the percentage of *estates* that matters? I mean, I'm worth less than $1.5 million, but I ain't dead yet. My understanding is that 2-3% of estates get hit with the tax.