Stan Collender notifies CNBC that the US doesn't tax death. Though, it might be better if we did; it's the one thing we indisputably could use less of.
It's pretty surprising to see CNBC use that phrasing. It obscures, rather than clarifies the tax incidence, and it's pretty clearly a political choice. We tax estates. Estates used to belong to dead people. But we're not taxing death; we're recognizing that when someone inherits, they're experiencing a material gain. There's no reason that that sort of income should be exempt from tax. So we tax the estate.
Now, in my opinion, we ought to tax the assets as income to the recipients. A $10 million estate divided among 20 grandchildren gets taxed more heavily than a $1 million estate going to one child, even though that child is thereby made much better off than the grandchildren.
But that leads to the prospect of kids having to sell grandmother's engagement ring in order to pay the tax, and so instead we have a more inefficient, less progressive tax* that allows people to shield a very generous level of benefits from the tax man. You could solve that problem by making people pay the tax when they sell the asset, but most people would, in practice, evade this, because the IRS is not going to come by asking you for the whereabouts of the ring. On the other hand, that would leave us about where we are, with a generous practical examption, better progressivity, and greater efficiency. In an imperfect world, I expect that's about the best we're going to do.
* Middling estates actually pay a higher effective rate than really large ones, because they can't structure around the tax
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Any number of wealthy liberals who support the death tax are total hypocrites. If they were ethical, they'd also support abolition of family trusts, and limits on life insurance proceeds - the two main ways that the stinking rich, like the hypocrite Kennedys, escape paying any death tax.
Of course, they don't do that because that would cut into their own money. Imagine! Future generations of stinking rich Kennedys, and Pelosis, and Kerrys (thanks to Heinz catsup) would actually have to work for a living, instead of gracing us with their wonderful presence in the political sphere.
By the way, did you ever wonder why you NEVER hear the rich liberals talk about subjecting ALL income to FICA taxes? All they ever talk about is raising the maximum income subject to FICA. Then trust fund babies would have to kick in.
I'm not saying that I support any increases in any taxes. I'm just pointing out that the Liberals that spout this stuff are usually total hypocrites who thing the tax burden should fall on anyone but themselves.
ahh, Ed, I'm one of those liberals. And I pay lots of taxes. And I don't think that, I think it's my patriotic duty to support government, my civil duty to make sure it's effective,
"By the way, did you ever wonder why you NEVER hear the rich liberals talk about subjecting ALL income to FICA taxes?"
The Medicare portion of the payroll taxes already applies to all income, uncapped. The problem with uncapping the Social Security portion as well is that -- unless you want to explicitly make it a welfare program -- it would lead to a similarly large increase in Social Security benefit payouts. Social Security benefits are currently limited to the wage base, so a retiree who made $100k on average per year during his career gets about the same benefit as a retiree who made $1 million per year. If you kept the current system and uncapped the Social Security tax, then the retiree who made $1 million per year would get Social Security benefit checks based on that income. Once word got out about the size of some of those checks, the system would probably be politically unsustainable.
I think he was referring to unearned income. It is not subject to the payroll tax or the self employment tax.
If they were ethical, they'd also support abolition of family trusts, and limits on life insurance proceeds?
Why would it be necessary to support these positions in order to be ethical? This makes no sense. Are you arguming that such tax-avoidance schemes are not available to conservatives, and only to liberals? Also, there are "limits" on life insurance proceeds, no? I thought life insurance proceeds paid into the estate of the deceased were indeed taxable...
I have to say I agree with Megan on this one: just tax inheritance proceeds as income to the living, as (most?) state governments do. It seems a more straightforward way to go about it, and, I'd reckon, less susceptible to being demagogued as a "death tax."
It's not wealthy conservatives wanting to tax estates to death. It's wealthy liberals. If they were willing to put their money where their mouth is, they'd be be calling for abolition of trusts, etc. They won't because they're total hypocrites who want to keep their money.
Life insurance is paid to the beneficiary of the policy. It's only paid to the estate if the policy is worded that way. If the owner of the policy is the beneficiary, the policy is not part of the estate. The beneficiary simply presents a death certificate to the insurance company and collects a check. This is used all the time in small partnerships to prevent the dissolution of the partnership - due to death taxes - if one partner dies , as well as paying off the relatives of the dead partner - to keep them from having an ownership in the partnership. Basically the partners take out life insurance on each of the other partners.
Life insurance proceeds are part of the estate. They are generally taxable as such.
The reason these people buy life insurance is to ensure the liquidity to pay taxes.
Some people use an ILIT, which takes the insurance out of the estate, but the estate is still taxed, and the proceeds from the insurance are frequently used to pay the estate tax. This prevents families from having to split up productive businesses or sell family homes. There is a very steep price to be paid, though, for using an ILIT - You give up access to all the living benefits of life insurance, which are substantial.
Further, there ARE limits to life insurance proceeds. They are called insurability rules.
This might be the least libertarian post I've ever read in Assymetrical Info. What about businesses that fold and get gobbled up by the Berkshire Hathaways of the world b/c said business cannot pay the tax man? (Maybe that's why Buffett likes the estate tax.) Why is the state entitled to a second helping of this money in the first place? Given that just a few days ago you were talking like Tyler Durden waiting for the collapse of the US financial system, I'm really, really confused.
What about businesses that fold and get gobbled up by the Berkshire Hathaways of the world b/c said business cannot pay the tax man?
For some reason I never see any hard statistics on all these thousands of businesses that allegedly fold from estate taxes. Maybe that's because it doesn't happen?
Fair enough, though you said thousands, not I. And Berkshire Hathaway has profited by buying businesses, such as Dairy Queen, when the founder was close to death. The founder benefits by having time to set up a nice tax shelter and avoid the estate tax, so if you love collecting taxes from the wealthy, the effect of the estate tax is contrary to your stated goals.
There is this, though: "A 2000 study by the US Forest Service's Southern Research Station found that about 1.3 million acres per year of forested land had to be sold to pay the estate tax, and of the land sold, 29 percent was developed or converted to other uses. And 2.6 million acres of trees are chopped down each year to pay the estate tax. (The study makes clear that people sold the assets to pay the estate tax, rather than simply to pocket some cash.)" (http://www.csmonitor.com/2005/0502/p25s01-cogn.html)
1.3 million acres per year out of how many?
My question really comes down to, how many families are really in danger of losing family farms or other businesses because of this tax? Out of how many farms and businesses inherited? From my experience the answer is "not that many, since I don't know any".
I know far more (infinitely more, technically) people selling businesses and filing bankruptcy because of the housing crash than I do from the estate tax.
Wiredog - for some reason I can't reply to your comment b/c my browser won't display the "reply" button below your message.
First, I'm not claiming that landowners who aren't logging or developing their land are somehow being driven out of the business of not logging or developing their land to pay estate taxes. I'm lamenting the development of forested land because I like forests.
Second, infinitely more, technically? The bursting of the housing bubble is terrible and the effects far-reaching, but I'm pretty sure those effects are finite.
regarding those family farms -
the American Farm Bureau has not been able to come up with any family farms that were sold to pay estate taxes.
3.5 mil is one whole lotta money - how many family farms are worth that much?
conagra may have some and cargill may have some - but not the Jones family or the Smith family.
Getting acquired by Berkshire Hathaway is a pretty good deal for a closely-held company, since Buffett tends to keep those companies intact and treat the sellers equitably. The problem is more for the companies that don't have the option of being bought by Berkshire.
As for why Buffett likes the estate tax, this seems to be another case where his words and actions don't line up exactly (I've noted this phenomenon before elsewhere, "Does Warren Buffett's Secretary Have a Higher Effective Tax Rate than Him?"). By donating the bulk of his fortune (as shares of BRK) to the Gates Foundation, Buffett is actively avoiding both the estate tax and the capital gains tax.
If the estate tax were set at a small enough rate (e.g., 10%), there ought to be a way for heirs of closely-held businesses to sell a portion of their ownership stake in the business to pay the tax without liquidating the business, for example, through a leveraged employee stock ownership plan (LESOP).
Incidentally, an estate tax set at, say, 10% with a $50k deduction would probably raise a lot more revenue than one with a much higher rate and a much higher deduction.
Buffett does treat sellers well and generally keeps the management structure in place until the seller dies or relinquishes control. That is admirable. What isn't admirable is that he seems to see himself as a more equal pig who can decide what's best for the teeming masses who don't hold his level of wealth and influence. I think we agree on that point, but you're more diplomatic than I. As such, you insist on data and examples like the Gates donation instead of just throwing Animal Farm slurs around.
Despite wildly fluctuating tax rates, tax receipts have stayed pretty much constant for decades. I'd be interested to see if a steep reduction in the estate tax rate would correlate with higher tax receipts.
Think of it this way: why would I want to let Paris Hilton get unearned millions without paying any tax, while her dry cleaner pays 35%?
Hadn't you previously proposed addressing this by eliminating the step up in basis upon inheritance? Additionally, isn't your point about Paris Hilton irrelevant since she has the type of estate that avoids all these taxes anyway?
Arrogant, much? Who are you to say what her father can do with his own money?
Pretty much the same person that says what the dry cleaner can't do with theirs?
Exactly. An arrogant, self-righteous do-gooder.
It's not very consistent that the Gift Tax hits anything about $13000, but trusts can navigate around it, for the Paris Hiltons of the world.
I want to give fifteen million to some stranger on the block, I get taxed hard. But I want to funnel fifteen million to my spoiled kids, sure.
Reconciling trust funds with the Gift Tax would be a good start.
Yeah, the inconsistency of the tax code is pretty maddening.
Fancy trusts reduce estate/gift taxes to some extent, but they do not avoid the tax, believe me. There are lots of smart lawyers working for the IRS. They make sure that Uncle Sam is not written out of the will. If you expect to make a lot of money, divide your business up among your heirs before you get rich, like Sam Walton did.
Well, I for one think Mr. Hilton ought to be able to do anything he wants with his money, including giving every penny of it to his vapid offspring. But said vapid offspring ought not to be able to collect a $100 million worth of income without paying taxes on this income any more so than the $13/hour office cleaner who wins the lottery.
Because you think the optimal tax on capital is zero? (If we can't use the "dynastic" model with the Hiltons, where are we supposed to use it?)
Megan,
You have a point.
It's not fair that Paris Hilton's dry cleaner gets taxed at 35% but not Paris Hilton on her inheritance.
It's also not fair that people who own assets that the police assert were used in crimes (by others) can have those assets seized, while you get to keep your assets.
Maybe we should find the most unjust things that occur in society and make sure that this injustice is multiplied so that everbody experiences it equally.
Apparently you think that would be fair.
I was impressed when you claimed, in a recent bloggingheads diavlog, that you just don't care about wealthy people having assets far in excess of what they seem to have earned.
This post makes me doubt that.
Glass half empty, much?
All she said is that she thinks the taxation should be equitable, by citing the example of a middle-income business owner against that of an extremely wealthy celebrity family, and noting the unjust discrepancy between the two cases.
Where on earth do you read animosity against the rich in that?
Because the explanation started with:
"Why would I want to let Paris Hilton get unearned millions..."
That's why.
Unfortunately, you quoted selectively. There's a "while" in there that starts the second clause and completes the thought.
Well, I don't think the second clause helped to save her from the implication (that was the bulk of my criticism).
The first clause seemed, to me, to reveal the leftist sensibility that the world would be better if rich people, especially silly and widely ridiculed ones like Paris Hilton, were made to suffer more and to surrender their wealth so that the we (through our political surrogates) can spend it for them.
How else should one interpret the idea that she's "let[ting]" Paris Hilton get her inheritance? As if the inheritance is rightly Megan's (or ours) to control, rather than those who earned it.
Megan's position, as she explained in the main post, is that if the inheritance is to be taxed, then it should be treated as essentially income to the recipients. Paris Hilton gets income by inheritance without having to do anything other than be born to a Hilton, and by virtue of how large that wealth is, she can structure her assets to avoid paying any tax on those earnings. Meanwhile her dry cleaner's offspring will see their much lesser inherited income dinged by 35%.
So Megan chose a poor combination of words in her follow-up. So what? If you want to oppose the inheritance tax on principle, go wild -- I'm not thrilled with how it works, either. But I don't see why her underlying point was so unfair. If the tax is going to exist and persist, and all present indications suggest that it will do so, then it should be levied equally, and not strike down the upper middle class while the exceedingly wealthy avoid it entirely.
"* Middling estates actually pay a higher effective rate than really large ones, because they can't structure around the tax"
Isn't that the case with all taxes? At least in a tax system as absurdly complex as the US Federal Tax Code...
Megan nails it again! I haven't seen the argument articulated quite so logically and succinctly before. Nice post.
To folks who say that supporting the estate tax isn't libertarian, I say hog-wash. Sure, most libertarians would like less government, so we're naturally inclined to oppose taxes of any kind. However, when the argument is about how to raise a given amount of money, rather than about what the government should spend, I'd argue that it's very libertarian to support an estate tax.
Given that our society levies taxes on income to fund most of the government's expenditures, why is it un-libertarian to support taxing income that's inherited in the same manner that other income is taxed?
The tired argument about the money already being taxed is silly on its face. All money has already been taxed! The income tax is a tax on transfers of money, not a tax on the money itself. The distribution of an estate is a transfer just the same as a lottery winning is. Of course both should be taxed.
Jim
Better-than-average spin.
The income tax is a tax on income, just like the sales tax is a tax on sales and the wheel tax is a tax on your car.
It's all theft, but that's probably an advanced topic.
It's fine to say that we have to collect some taxes so we might as well do it in the most efficient way possible. I agree -- let's do that. But it's not clear to me why you'd think that implies we should tax wages and bequests at the same rate; that's deeply at odds with the entire optimal-tax literature.
To me, the "desired social outcomes" argument is probably the most robust of the lot. But I still don't buy it.
For every study that shows one optimal structure, there are probably a dozen more, paid for by a dozen different interest groups, that show 12 other optimal structures.
I'm not saying there aren't multiple possible results -- but that doesn't mean anything goes. Sure, weight different people differently, maybe put extra emphasis on the poor, whatever you want -- I'm not denying that won't change some results. But some stuff is still robust to however you want to set your "desired social outcome" objective function (assuming you don't do anything crazy like drop the Pareto principle). For instance, the math is always going to tell you that all else equal, you want to tax inelastic stuff more than elastic stuff. And it turns out that the "don't tax capital" result is really, really robust; the result is being driven by Pareto, not by the particular form of the objective function.
"Why would I want to let Paris Hilton get unearned millions without paying any tax, while her dry cleaner pays 35%"
1. Somebody earned it and paid taxes on it - why should we have an opinion on who they chose to give it to?
2. It doesn't raise very much money compared to the economic distortion caused by those trying to avoid the tax. Exhibit number 1 - The run-down strip shopping center that's just begging for re-development. (Bet you have one near you). More often than not - the family is waiting for the owner to die before selling to someone willing to make improvements in order to benefit from step-up in basis.
3. Businessmen/entrepreneurs are often most productive in their late middle and later ages. At that point in life, they are often explicitly continuing to be productive for their kids' benefit (they have more than enough for themselves). I want to encourage productive people to continue to be productive.
4. It's unfair - people who have time to plan can avoid much of the tax. Those that die unexpectedly - often leave behind big estate tax burdens that others avoided.
5. It's unfair - some assets are really hard to structure so as to avoid estate tax. Why should a farmer's family pay more tax on the same size estate than a real estate developer's family?
6. If you scratch the surface - you find the many progressive support death taxes (come one the trigger event is death - I don't get the objection to that name) in order to avoid the in-egalitarian result of large estates being preserved over many generations. There's no evidence that estate taxes prevent this and usually by the third of fourth generation you can count on the heirs frittering away their inheritance.
Why should a farmer's family pay more tax on the same size estate
My understanding is that most family farms, over 90%, aren't large enough financially to pay any estate tax. I know several farmers in Utah who inherited family farms (or ranches) and were below the cutoff.
I did specify the same size estate. But if it helps you, substitute just about any small business that can't be broken up into pieces without devaluing it.
I am continually amazed that people object to a tax that falls only on the richest 0.27 percent of Americans, and that is paid by people who have done nothing, save lucky birth, to earn it.
This (non) argument drives me crazy. It's the embodiment of the left-wing lament that "so many (stupid is usually unstated) poor people vote against their economic interest! Why can't they smarten up and vote Democratic?" Let me try to break it down for you in little words:
Many people think that the government taking money from the people that earned it is WRONG. It is a moral badness, sometimes necessary but it should be minimized. I don't need to be physically abused to know that abuse is bad -- even if the person being abused is rich.
People don't generally see it as the lucky beneficiary paying the tax, they see it as the government taking a last cut of the hard work of the dead person who would like to pass it on to their family.
Turn this around -- if more than 50% of the population agree that the death/inheritance/whatever tax is morally wrong EVEN THOUGH it doesn't affect them maybe they're right.
Some of us believe in defending the minority against the tyranny of the majority.
1. I object to all taxes, as do many others, so objection to any particular tax shouldn't be all that amazing. From my perspective all taxes are inherently unjust, so it should follow that you can arrive at an argument that any particular tax is unjust in it's own particular way.
2. The fact that recipients haven't earned their inheritance doesn't hold in general -- an estate may be just as easily "deserved" as any other form of income. Say a pretty young thing marries a rich old thing with the agreement that the young thing will inherit the old thing's assets upon death; the pretty young thing deserves that wealth as much as I deserve my paycheck.
3. People may object not to taking money away from the recipients but to anyone trying to take away their power to see to the final disposition of their estate -- or anyone else's. Final wishes are quite literally sacred to a lot of people.
Joshua, spouses are always exempt from the estate tax. We're talking about children here, and being the child of a rich dude is rarely a CHOICE.
You might be talking about children; I'm talking about desert. I don't think "we" are actually talking about anything.
If it would clarify the issue let me amend my previous hypothetical to read "acts as a companion, cohabitant and sex partner in a formal arrangement that does not constitute legal marriage with" instead of "marries".
Your point is that sometimes the recipients of an inheritance DO earn it, and that it's unfair that they current get taxed.
...Your best hypothetical is a woman who could have all her money shielded under the spouse exemption, but doesn't (for no apparent reason). I'm not sure anything so convoluted has ever existed, and if it has, it merits very little sympathy.
Ergo, if that's the best example of a "deserved" inheritance (and why should you proffer anything but the best?), I seriously doubt any "deserved" inheritances have ever existed.
Which is my point.
(replying to ray1 @2:59 here as comments only nest finitely)
*sigh* Maybe one of them's already married. Whatever, I don't think the quality of the example matters, the point is that existence proofs don't persuade you. I'm cool with that -- and it goes back to what I said about how "we" aren't talking about anything, except possibly whether we're talking about anything.
So how does one "justly" pay for the things that we collectively need done? Such as border protection, preventing the UN from conquering the USA, etc?
Voluntarily! Or you bite the bullet and try to minimize injustice within your newly defined side-constraint-set instead of trying to eliminate it.
Both proponents and opponents, largely, have no understanding of this tax (which indicates something in and of itself). It probably should be an inheritance tax or, even better, we should just absorb this into capital gains taxation as I suggest here.
http://www.janegalt.net/blog/archives/005285.html
This is *not* money that escapes taxation, it is taxed like any savings I've accumulated, but I'm not dead. It is possible to sidestep capital gains tax in the process, but only to the extent the asset was included in a taxable estate. So only the exemption amount misses taxation.
PS- as a banker I saw plenty of businesses forced to sell because of estate taxes. Usually people sell, rather than just fold, but its rarely a great outcome....jeez.
Maybe it is time to elevate Diana Moon Glampers to handicapper general. It's the only equitable thing to do.
Megan -
I truly don't understand why the "material gain" deserves to be taxed.
As an analogy: If I have a 12 year old child who has an interest in going to college one day, and I open up an account in their name and put $1,000 per month into the account with the intention of the child assuming account ownership at 18, should then the account receive taxation on the full sum of deposits?
That is also a material wealth transfer. Does it not also deserve to be receive substantial taxation, again, because it's being transferred to someone new?
Why is this acceptable?
If the estate had chosen to make "reasonable" distributions of those assets to their family members during the life of the owner, then they would not receive such taxation. The owner could put them in various vessels to shelter them from taxation whilst still transferring the ownership.
But if the owner of the assets transfers them directly to a designee, they deserve taxation.
I just don't get this logic honestly. Could you explain why you think this is an acceptable form of taxation?
Joe
Sure there is; it's their money!
They've already paid taxes on it. To subject the estate is to tax it twice. From the time that dollar is spent by the beneficiary, it's been taxed at least four times: sales tax, estate tax, income tax, and corporate income tax.
What makes you even vaguely libertarian?
The estate tax isn't intended (entirely) to raise money, it's also intended (whether it works is another matter) to prevent the rise of a large inherited aristocracy of the sort that was once common in Europe.
"There's no reason that that sort of income should be exempt from tax."
It is so frustrating to see this sort of thing. Of course it's not exempt from tax: it's already been taxed! The people that inherit money are not inheriting the decedent's pre-tax earnings.
If I win the lottery tomorrow, I have to pay income taxes on it. If I then die, my children should have to pay more tax on the remainder... why, exactly?
Call it what you want, it's double-taxation.
Additionally, it's theft. But that's probably for another conversation.
I think it's unfair that the same person should have to pay taxes on the same money after he dies. You die, you should be able to keep the money, tax-free. Keep it right there in your coffin, tax-free.
...However, if you want to pass it to your offspring, they should definitely pay taxes on it-- they never earned it, and they've yet to pay taxes on it.
Wiredog -
Maybe I'm missing something, but how exactly would it prevent such an aristocracy from forming? It's not taking 60,70-80% of the estate. The amount it is taking could be re-couped through investing the estate over a short period of time (under a decade).
If you want to prevent an aristocracy, there are far more efficient ways of doing so....at least in my mind. But then, where does the split between "wealthy family benefitting the world through charitable giving, VC, etc." and "Coldhearted aristocrat" start?
Joe
The theory, as I understand it (been awhile since the college history class on the Progressives) was that the tax keeps the estate from growing over the generations to the point where you have a de facto aristocracy where all the money is concentrated. That seems, historically, to have worked.
But I think the tax rate has been substantially reduced, and more exemptions added, since the tax was put in place, which reduces its effectiveness for that purpose. But even at 30% it still slows the growth.
That seems, historically, to have worked.
Funny how we didn't have an problem with aristocrats before we actually added a regular inheritance tax with the Revenue Act of 1916.
wiredog:
My understanding is that most family farms, over 90%, aren't large enough financially to pay any estate tax
benschon:
I am continually amazed that people object to a tax that falls only on the richest 0.27 percent of Americans
For what it's worth, I tend to fall into the "this money has already been taxed, so why should we tax it again" camp.
That said, I've never understood this concept of taxes not mattering because a small percentage of the population will pay them. It's either fair or it's not, right? 0.27% of Americans is still more than 800,000 people. Is it OK to be unfair to 800,000 Americans simply because 299,200,000 Americans aren't affected?
Doesn't make sense to me...
The problem with the "it's my money I should be able to give it to whomever I want" argument, is that the entire income-tax system would collapse if that's the approach we took. Of course you, as a free agent should be able to do what you want with your money. The question is about whether the person you give it to has to declare it as income.
Let's say I'm a rich guy who needs my lawn mowed. I already paid taxes on all my money. If I give you some money to mow my lawn, why should you have to pay taxes on the money I gave you? I already paid taxes on it myself. Since you're my friend, shouldn't I be able to just declare the transfer a gift "between friends" and thus allow you to legally avoid paying taxes on it? It is my money after all, right?
As Megan said before, things would be much cleaner if the estate tax was dropped and gifts and inheritances were taxed as income, but that's not how the mechanics work. Still, the clumsy implementation doesn't negate the the original logic behind the system.
To be consistent, anyone arguing for an elimination of the estate tax must also support the elimination of the gift and inheritance tax exemptions. Then their logic would hold up fine.
Jim
It's only a problem if you conflate gifts and income, which you seem to be doing.
But I'm conflating things that are already one-in-the-same under our system.
A gift or inheritance is a windfall, as are lottery winnings and found money. In our system, we generally tax windfalls as income.
If you are going to have an estate tax, I see no justification for any rate other than 100% on 100% of estates. Dead is dead. Just have 100% of the proceeds from the tax distributed tax free to each citizen on an equal basis. Call it a dividend on America.
If you want to break up huge accumulations of wealth, the kind where one family is the landlord for everyone in several counties over multiple generations, you have to set the estate tax as a very high percentage of the wealth that is transferred. This sort of thing has been done in other countries. It's not clear that we need to do it here, because we don't have that kind of history of landholding. Our great fortunes come from business, and the wealth of the Hiltons did nothing to prevent the rise of the Gates family. It's a different matter when land is the primary source of wealth and someone has the land locked up.
If you really want to protect the mom-and-pop business or the family in which the parents die at 55 (before the college fund is spent and the weddings paid for) you need to set the estate tax to kick in at a somewhat higher level than it did before the Bush reforms. The level was $600,000 for years, and that made more and more middle-class estates subject to taxation over time. Then it was $1 million for a while. In 2009, it is $3.5 million. Then it goes away entirely in 2010, and then reverts to $1 million in 2011 unless Congress acts.
This is obviously silly. $600,000 would strike anyone as too low and $1 million is iffy in a world that encourages people to save for major life events, but it's not clear to me that $3.5 million is a problem. Freezing that for the next 50 years would be, but it strikes me as in the right ballpark to start discussions now.
Here's an implementation question for those who advocate eliminating the estate tax and using the capital gains tax instead. One advantage of the estate tax is that the person who receives the asset after tax gets a new basis for the asset on the day he receives it. If he sells it and has a capital gain, he calculates it based on the value on that day. This is the case even if someone in his family bought it for $10 in 1899. If there were no estate tax and you had to figure the capital gains on something that had been in the family for a long time, how would you do it? Suppose the owner in the generation before yours had a terrible filing system and didn't keep all the papers.
Modern tax systems are tough on people who don't keep good records. It would be tough on heirs of folks who kept bad records. Fairness would probably dictate a smallish exemption amount even from capital gains and some alternative methods of calculating basis (historical appraisals/adjusting for inflation?).
My question for you - You don't seem to be advocating death taxes (can't help myself) for the purpose of breaking up large accumulations of wealth therefore would you favor repealing estate taxes if it were shown that the enforcement, compliance,and the cost of economic distortions were close to or exceeded the revenue raised by the estate tax minus the expected increase in capital gains taxes?
If revenue minus trouble for the estate tax is less than revenue minus trouble for the capital gains tax, then yes, capital gains is the way to go. I do predict various implementation problems, though.
Sean E. discusses the Canadian system, which is one I hadn't considered. Sean, what are the tax rates like under that system? Is there an exemption amount before they kick in? And does it matter if the property is inherited by a spouse? A child?
(I just like to look at all the possibilities.)
Fair enough. We already have the trouble of the capital gains tax. Presumably it would be increased somewhat by eliminating the step up in basis - but I would imagine not significantly. I'm struck by the fact that the estate tax is almost never justified by it's proponents based on it's value as a revenue raiser.
I'll concede that establishing a cost basis may sometimes be problematic but it's not as if the estate tax is free of problems. It seems to me it is awfully hard to justify having the estate tax as whole other tax enforcement problem unless you are trying to further some social goal. It just doesn't raise that much revenue.
The estate tax is a fun thing to argue about because it has so many things to offend the sensibilities of liberals and conservatives.
At the end of the day, it don't matter. The estate tax does jack shit to bridge the income gap, because any rich person worth his salt can hire a lawyer who knows half a dozen ways to make sure the real money isn't in the estate when he dies. It doesn't break the mom and pop business because mom and pop businesses generally don't have enough money to even trigger the estate tax. The only person who is going to get screwed by the estate tax is rich and financially illiterate.
Party pooper!
As someone living in a European country with no estate tax I don't understand the necessity of such a tax for preventing accumulations of wealth. Perhaps I can come up with a better idea while counting the weeks we still have to go until tax day.
"Now, in my opinion, we ought to tax the assets as income to the recipients. A $10 million estate divided among 20 grandchildren gets taxed more heavily than a $1 million estate going to one child, even though that child is thereby made much better off than the grandchildren."
You lost me here. Ten million split across 20 individuals is $500,000 per person. If we tax that as income to the recipients, shouldn't that be taxed LESS heavily than $1,000,000 per person?
I'd think you'd want to incentivize the distribution of assets in an estate. The primary social argument in favor of the estate tax is that it stands as an obstacle to the concentration of wealth across generations. If an estate tax MUST exist, it best accomplishes that goal (while simultaneously keeping federal confiscation at a relative minimum) by taxing inheritance on the heir's end, not on the deceased's.
In other words, a decedent who splits his estate across 10 relatives has his estate taxed less than if he left the whole estate to a single person. Set, say, a $1 million exemption per heir, and the estate tax could be avoided entirely, regardless of the size of the estate, if it's sufficiently divvied up. This serves to discourage concentration of wealth, but it also means that large estates won't automatically get punished simply for being large.
"If there were no estate tax and you had to figure the capital gains on something that had been in the family for a long time, how would you do it? Suppose the owner in the generation before yours had a terrible filing system and didn't keep all the papers."
In Canada, we have no estate tax as such, but there is a deemed disposition of assets on death (in most circumstances) to avoid indefinite deferrals of capital gains.
"The income tax is a tax on transfers of money, not a tax on the money itself. The distribution of an estate is a transfer just the same as a lottery winning is. Of course both should be taxed."
If the logic behind this is that everytime money changes hands, it's income, then why not just tax all gifts, inheritences, etc. as income for the recipient?
Here's a possibly naive question from a non-American. Does the presence of an estate tax tend to bias retirees towards annuities over more flexible withdraw-as-needed retirement plans? I don't know if there is a US equivalent to Canadian RRIFs, but it does seem like this tax would make Americans much less willing to have signficant amounts of retirement/pension assets personally invested.
If the logic behind this is that everytime money changes hands, it's income, then why not just tax all gifts, inheritences, etc. as income for the recipient?
That's generally how it works for most gifts from the living that are over a relatively small minimum - like $13k or so. The issue is that gifts that you receive through the disposition of an estate have been granted a special exception and don't count as income in the same way that other gifts do. The logic is that the gift tax on those gifts is collected through the estate tax before the gifts are disbursed.
IMO, the people clamoring to eliminate the "death tax" want to have it both ways. They'd like to have no estate taxes, yet still keep the special exception for gifts disbursed from an estate.
Jim
Thanks magellan.
So it's not an "Estate Tax" so much as an "Estate Exemption"? Is it only bad PR that keeps us from talking about the "Death Benefit"?
Coming from a tax system based explicitly on "earned" income, the whole concept of an estate tax is a little off-putting but I can see how it might be consistent with the broader definition of income used in the US.
Sean,
First, I've never thought of it as a "death benefit," but when you consider the generous estate tax exemption amounts, you may be onto something with that spin.
Next, not to take this too far off topic, but your comment on "earned" income is intriguing. I thought Canada had very punishing taxes on unearned income like capital gains and dividends. Is that incorrect?
Thanks, Jim
For all those libertarians who say taxation = theft, I challenge you not to drive to work tomorrow on taxpayer-funded roads. Hypocrites all of you!!!
So, if you steal my car, I lose all rights to it?
What makes you think you had rights to it in the first place, man? You can't, like, own property.
Just as soon as the thieves give back the land they stole to build the roads. :-)
Yeah, that really doesn't follow. I think I at least have a claim on the assets purchased with money taken against my will in proportion to the extent to which my money contributed to them if I can't get back the money itself.
To be fair, if you can show that you paid more than me after we devolve into a Bryan Caplan-style Privatized Road Corporation I think I'd be obligated to square up with you, or at least cop to giving you shares in proportion to your previous involuntary contribution when setting up the PRC.
As an alternative challenge, try not consuming anything produced by the market, say, try eating tomorrow without buying any food or food-precursors from the market. Of course, the government had a hand in about everything produced by the market, and the market had a hand in about everything produced by the government so it's not likely we're going to find any pure examples to make absurd hypocrisy dares with.
Id think Mr. Collendar might want to reconsider his criticism, since it is pretty much an example of what he criticizes -- but I doubt that he will.
"Middling estates actually pay a higher effective rate than really large ones..."
That's an understatement. IRS Statistics of Income show that for returns filed in 2007, 363 estates with gross assets of $17.8 billion (average size $49 million) owed no tax, $0, zip.
This is why the "extremely wealthy", whom Collendar is posing as if he wants to tax, actually support the estate tax -- from the Kennedys to Warren Buffett. They don't pay it!
The mega legal tax scam they use to fund their families for generations is to put their wealth in a "charitable trust" or foundation, which escapes estate tax and change's income earned on the wealth to being tax-free. Then the family members continue to administer the "charity" -- for which they can be paid full market rate for managing that much wealth. So Warren's kids, who've already been named to work for his charity, may draw more income from his wealth than he has -- a very common development among "the kids" in such situations. Then you add the "opera tickets" and other considerations that they are plied with by persons lobbying to get distributions from that tax free income they control.
This is how Kennedys and Rockefellers get to play in politics and high society for multiple generations without every having constructive jobs - in spite of being the "extremely wealthy" that Mr Collendar would have you think get hit by the estate tax.
"I don't need Bush's tax cut. I have never worked a [bleeping] day in my life."
-- Patrick Kennedy, campaigning with Howard Dean, 2003.
You'd think that the "tax the rich" left would be very upset by all this. But nope, go figure.
The estate tax is a *bad tax* on all counts: it is opaque, hits persons in similar situations disparately, has very high transaction and planning costs that can lead to wildly varying results, and in practice lands on the very richest at a lower rate than on anyone else who is subject to it.
And from a fundamental economic viewpoint, at a time when the nation is grossly undersaving -- in light of the current investment needed to fund carrying the baby boomers in their retirement surge -- it is a tax on capital and savings that is used to convert the same to current govt consumption.
"As long as an inheritance tax remains a true inheritance tax, it always involves a conversion of capital into income, hence an act of economic waste which is damaging to all."
— Joseph Schumpeter
"Next, not to take this too far off topic, but your comment on "earned" income is intriguing. I thought Canada had very punishing taxes on unearned income like capital gains and dividends. Is that incorrect?"
Dividends and capital gains (any form of investment income)are considered "earned" under Canadian tax law.
Windfalls such as lottery or gambling winnings are exempt from taxation, as are gifts, inheritances, etc. If I ever hit it big in Vegas or on Wheel of Fortune, I could recover my US tax withholdings on return to Canada. Sadly, this has not been a significant benefit to me to date.
I don't have a solid basis for comparison, but I wouldn't say taxes on capital gains and dividends are particulalry punishing in Canada. There is a $750K lifetime capital gains exemption, after which they are taxed as income at 50% of their value. So preferential treatment over other forms of income, but it may well be that they are taxed even less elsewhere. There is also a dividend tax credit that is meant to offset any corporate taxes already paid on the earnings (since dividends are not tax deductible for the corporation). In theory the total tax paid on a dividend, personal plus corporate, should be roughly equal to the personal taxes paid if the same amount of income had been earned personally (in practice, this is obviously hit or miss depending on the specific circumstances).
Thanks for the info. I was thinking it was a 50% rate, not a 50% deduction. What you describe doesn't sound bad at all.
Isn't there a maximum gift per person per year (I think it's $20,000, right?) If one of you were to "give" me $50,000 (e-mail me offline for my address), I'd have to pay tax on it, right?
Also, re: resetting cost bases: for estates over the limit, the tax can be seen as covering the capital gain up until death (thereby resetting the cost basis to the cost on the death date), but estates under the limit don't pay tax. Aren't the cost bases on inherited securities in those estates still reset? If so, then I'd suggest that the association of estate taxes to capital gains taxes is a false one. Although I may have the rules wrong here. Anyone care to correct me?
"Isn't there a maximum gift per person per year (I think it's $20,000, right?)"
$13,000 per recipient annually (indexed for inflation).
PLUS another $1 million of lifetime gifts annually, per gift-maker.
This is subtracted from the estate tax exempt amount, currently $3.5 million, but it is still a good deal taxwise, as...
(1) It removes future appreciation of the transferred property's value out of the taxable estate
(2) Estate tax is calculated tax inclusive, while gift tax is tax exclusive, so the same nominal tax rate results in a lower effective rate.
What this means in English is that with a 50% tax rate, transferring $1 million of assets through an estate costs $500,000 of tax, but by gift costs only $333,333.33 of tax (50% tax on a gift of $666,666.67)
If one of you were to "give" me $50,000 (e-mail me offline for my address), I'd have to pay tax on it, right?
Nope. Gifts are tax-free to the recipient.
Aren't the cost bases on inherited securities in those estates still reset? If so, then I'd suggest that the association of estate taxes to capital gains taxes is a false one. Although I may have the rules wrong here. Anyone care to correct me?
At death inherited assets receive "stepped up basis" to current market value. Well, could be stepped down basis today. That's the value from which future taxable gain or loss is computed.
In the past there have been attempts to replace the existing "estate tax & stepped up basis" with "no estate tax & carryover basis" so heirs would owe capital gains tax just as the deceased would have.
It was disasterous. When assets get divided at death and blown separate ways by the four winds *nobody* had the records to calculate carryover basis. Stop for a moment and think of all the real world complications...
Thus, it's either no tax or an estate tax (or an inheritance tax imposed on heirs who receive assets, as some states have).
The estate tax raises a miniscule amount of funds for a mostly punitive purpose against a specific class of targeted individuals.
Common Mcardle, you know exactly what the estate tax is for: to punish the worthless heirs of the wealthy. To deprive them of money they do not deserve in the name of social equality.
It is not an income tax, it is a tax on the savings and capital of the dead man. And the state is indeed taking the money because he died, as they did not care to take it when it was in the form of income when he was alive .
When the wealth is tranferred from the dead man to his heirs', it seems a lot like income to me. Any time you get large sums of money from someone else it's taxed -- why should inheritence be any different?
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Besides, as Carnegie said "It were better for mankind that the millions of the rich were thrown into the sea than so spent as to encourage the slothful, the drunken, the unworthy." There's nothing wrong with being fabulously rich, but allowing a monied caste of individuals to persist simply based on their birthright sets us up for the very type of aristocracy this country so despised upon its founding.
By eliminating the estate tax you inflate the deficit that our children must repay. I calculated that my son's share will be between $99,000 and $180,000 and that was when he was born. since then, it's only gotten worse. The calculations are posted on my blog.