Sunday, June 18, 2006

The Estate Tax is Good Tax Policy

One of the favorite targets of Republicans is the estate tax, or, as they prefer to spin it, the "death tax". Both Missouri senators support repealing the tax permanently, covering their attack on the middle class by wrapping themselves in the banner of small businesses and family farms.

In fact, the "estate tax" could more properly be called the "spoiled brat" tax than the "death tax". Right now, dead multi-millionaires are able to pass on $4,000,000 - FOUR MILLION DOLLARS!! - without paying any federal estate tax whatsoever. That's not counting setting up trusts or tax shelters or working with life insurance to pass on even more without paying any taxes. Any gazillionaire that doesn't manage to pass on a huge amount more than that while still avoiding paying Uncle Sam a share just isn't paying enough attention to the tax shelters their country-club neighbors are using.

But first, let's talk about the notion of tax. Then, we'll talk about the notion of inheritance. Then, finally, we'll talk about conspiracy.

About Taxation:
It's easy to complain about taxes. Nobody, myself included, likes to pay them, and yet they're everywhere. I pay taxes when I buy gasoline, when I pay my phone bill, when I get my paycheck, and on and on. Pretty much whenever you transfer funds from one person to another, there is a tax burden.

The fairness of the status quo depends upon the perspective taken. I could argue that sales tax is unfair, because the poor people spend a higher percentage of their money on goods and services than rich people, who tend to sock it away in a mutual fund and make more money. On the other hand, I could argue that the graduated income tax is unfair, because the uber-wealthy pay almost half of the federal income tax.

Ultimately, though, the government needs money, and somebody has to pay for it. (Even Republicans, who have developed an unquenchable thirst for deficit spending, realize that our children will have to pay for these years of fiscal idiocy. That'w why, on this Father's Day, all children of Republican fathers should kick their fathers in the groin.) The wealthy wind up paying a good deal more than the poor, because most of the tax comes from the income tax, and income disparity in this country is rapidly approaching feudal proportions. (Simple-minded folk think that the flat tax is a good idea, so that if we all paid 17%, that would be fair. But they don't understand that 17% of $10,000 means absolutely nothing to Bill Gates, but it means a huge impact on my lifestyle. Pity the simple-minded - they mean well, but know little of life.)

So, since we need to pay, the goal is to make it hurt as little as possible. We spread sales and fuels taxes out, so they don't hurt as much as they would if we paid a lump sum every year. We lessen the immediate impact of the income tax by using withholding, and people rejoice when they get a refund of their own money back!

No tax hurts as little as the estate tax. From the perspective of the recipient, an inheritance is a windfall, unearned and personally undeserved. When we get up into the $4,000,000 range, we're talking about a huge cash jolt that has nothing to do with hard work, ingenuity, entrepreneurial risk, or helping people. It is money that cannot be planned upon to come in at a certain time, so it winds up being an unscheduled, uncertain, unplannable $4,000,000 hot cash infusion. Four hundred million tax-free pennies from heaven.

This is a pain free tax. All it really does is reduce the size of the windfall received by the children of the uber-wealthy. Reduced pleasure, in the context of taxation, does not equate to increased pain. Making me pay more gas tax so some kid who has never worked a day in his or her life can have MORE than $4 million tax-free just doesn't seem fair to me. Does that sound fair to you?

About Inheritance: The wealthy have many ways of helping their children. Getting them into schools, unpaid internships subsidized by parents, hiring tutors, setting them up in business, hiring them into the family business, giving them the tremendous advantages of a web of daddy and mommy's friends to make certain they have cushy jobs through their careers, and so on and so on. These are just a tiny few of the many, many forms of affirmative action that have developed to protect the offspring of the wealthy from the harshness of the world the rest of us live in.

These are fine and wonderful things - and I have certainly sought to help my children get their starts in life, too. No problem with that whatsoever. Sam and Ali are both tremendously "advantaged" kids, and I sincerely wish that I could leave them an estate over $4,000,000.

But it galls me to hear the children of advantage seek to pass their pain-free tax burdens on to others. They whine like feeble victims at the thought that unearned multi-million dollar inheritances might be taxed.

Worse yet, they wrap themselves in the misleading guise of the small businesses and family farms of America. In fact, only a tiny percentage of family farms pay any estate tax whatsoever, and, even in those cases, a little life insurance and planning can help the millionaire kids inherit their farms and businesses without undue financial burdens.

But, really, I don't care. Why should I have some governmentally-approved pseudo-right to have my family set me up in business? Why should I get to take over the family plumbing business just because my father inherited it from his father? Why is little Jimmy's vision of working a family farm in Georgia any more important to us than little Tyrone's vision of working that same farm, even though he is descended from the slaves that worked on that farm? Why should we care to have our tax policy reward this sick sense of entitlement?

I'm not against the concept of inheritance. I'll be happy to accept one. But I don't think that the joy of inheritance suffers unduly when the amount over $4,000,000 is subjected to a tax burden. My heart does not bleed for the rich kids who get only $4,000,000.

The Conspiracy: Believe it or not, the reason we are talking about the "death tax" instead of the "spoiled rich kid tax" is because a cabal of incredibly wealthy families have decided that we are stupid enough to save their billions. 18 families worth a total of $185.5 billion have financed and coordinated a 10-year effort to repeal the estate tax, a move that would collectively net them a windfall of $71.6 billion. Those families include cess-pools of sick selfishness like the families behind Wal=Mart and Gallo Wines.

Absent from the group of 18, however, is Bill Gates.
“The estate tax should be regarded as just paying back to the country for all the wonderful things it’s made possible for the people who have that wealth,” said Bill Gates Sr. in an audio statement played at the press conference. “I don’t think there’s any great societal goal being served by inherited wealth. And certainly there’s no sensible argument that I can think of for insisting on being able to pass the last penny of $100 million on to your three kids.”
The group of 18 families have spent a few million dollars to convince you to increase your own taxes to save them $71.6 billion. Has it worked?

(Thanks to Waveflux for inspiring me to get down to writing this. If you want to read a more positive article, go read The Estate Tax: Efficient, Fair and Misunderstood.)


Anonymous travelingal said...

Dan, prior to the time the estate tax laws were changed, the maximum deduction for taxes on an estate (at the federal level) was $675,000, and in fact, that is the rate used by some states even today (including Kansas).

So, instead of talking super rich, let's talk about people who worked hard all their life and accumulated a modest estate. Bear in mind, that estate includes everything that is owned at the time of death including your life insurance policies, your 401 K, all of your personal property including things like your furniture, your cars, your home, etc. Let's say you had taken out life insurance policies on your kids. Well, even though the kids are still alive, your estate also includes the cash value of your kids policies. After a lifetime of working, it's not too hard to fathom ordinary people accumulating an estate of 675,000, especially if they had been good money managers and paid off their homes, etc.

A couple more things. The rate of taxation on anything above the exemption was nearly 50 percent and the final kicker, it must be paid by the end of the 10th month after death and paid by the recipient to be. When I say recipient to be, I mean even if you have not received one dime from the estate yet because it isn't settled yet, you must still come up with the tax by the end of the 10th month after death. How do you do that? Well, things in the estate can be sold to raise the money. If you're lucky, the estate is mostly readily available cash, but if you're not so lucky, the estate may be a house or personal property so you better plan on having the real estate agent over real soon or maybe an auction will do. I had the good fortune of having this happen to me and I had to write a personal check even though I had not received any money yet from the estate. I eventually got proceeds from the estate - 2 years later, but unfortunately the IRS wasn't willing to wait that long. I can tell you from experience, that 10 months after a close loved one dies, you are still so stricken with grief, that you aren't even thinking right, much less have the wherewithall to have put a house on the market and sold it in that amount of time in order to be able to pay the friggin death tax. And, of course, there's the little item of multiple heirs. Hopefully, they're all willing and agreeable when it comes to selling what needs to be sold, etc.

Soooo, let's quit talking about only the super rich being hit by the tax ok? Instead, start adding up what you'll have 20-30 years from now and what your kids will have to pay in estate taxes if the new law is repealed. That 150,000 home today...hmmm...wonder what it will be worth 20 years from now???

6/19/2006 4:02 AM  
Blogger Dan said...

Travelingal - They're not talking about rolling the tax back to $675,000, thought they should. They're talking about ELIMINATING it! The troubles you complain of, such as the timing issue, are issues that can be addressed by means other than giving the dead multi-milliionaires a tax break that will shift a trillion dollars in tax burden to people without silver spoons. Like changing the due date.

I agree with you that it's not hard to imagine people without ostentatious wealth accumulating an estate of $675,000. They'd be kind of foolish to get stuck holding onto kids' life insurance policies, etc., and most of the other list of items you mention can be handled through inter vivos gifts - I didn't even mention that the uber-wealthy can give each of their children $11,000 tax-free every year - that's another form of affirmative action for the spoiled.

Assuming that my children happen to pay an estate tax because I have handed over more than $675,000 (but, remember, we're really talking about $4,000,000), I hope they have the dignity not to whine about paying tax on the excess.

6/19/2006 6:17 AM  
Blogger les said...

Nice anecdote, travelingal, even though nearly completely inaccurate. First, even at the years-old 675,000 figure, the 50% rate started at $2.5 million of taxable assets--
that was a $3.175MM total estate. Currently, there is no 50% bracket.

The estate tax is payable by the estate; the only reason a beneficiary would pay is reluctance to liquidate an estate asset. The simplest estate plan allows a husband and wife to pass double the exemption amount, with no tax due when the first spouse dies--we're up to $4 million now, and $1.35MM in the old days. The death benefit proceeds of insurance policies are not part of the estate, and are not taxable to the recipient--that's why they're used to provide money to pay estate taxes in many cases. Even non-term life insurance cash value is not taxable if in an insurance trust--a simple and low-cost alternative, especially for someone whose estate is large enough to matter. Kids' policies? Don't own them--again not hard. And how many kids' policies have substantial cash value?

The IRS routinely does installment plans, if you bother to ask. In addition, tax on farm and business assets is eligible for automatic payment extension, as is the tax on certain other non-liquid assets. State taxes are a credit against the federal tax, not an "add on".

The reality, as Dan says, is that the whole shmear--the lies about all the small farms/businesses ruined, the "death tax" meme coined by PR firms, the lobbying--are the efforts of the super rich, to allow the Paris Hilton's among us to keep the family fortune without interruption.

Finally, the estate tax is quintessentially American; in no small part, it was intended to open up opportunity for all, by preventing a small number of dynastic families from accumulating such wealth that they essentially controlled the economy--a possibility amply demonstrated in previous societies, and in the U.S. before the estate tax. Also, as Bill Gates points out, it returns wealth toth esociety whose success and rules permitted the accumulation of wealth in the first place.

6/19/2006 1:35 PM  
Anonymous travelingal said...

"The death benefit proceeds of life insurance policies are not part of the estate and are not taxable to the recipient".

You are dead wrong Les. They are part of the estate and are subject to estate taxes. Perhaps you will believe the IRS, if not me!,,id=98968,00.html#estate

I don't have time to refute several of your other inaccuracies, but I will return.

6/19/2006 3:03 PM  
Anonymous travelingal said...

But here's another article for doubters about life insurance proceeds as part of the estate and also take a look at the percentages.

6/19/2006 3:08 PM  
Blogger les said...

You're right, travelingal; I should have put all insurance policies in the trust category. It's pretty simple to get rid of "incidents of ownership," and thereby taking insurance out of the estate; but I should keep my mental shortcuts straight--going too fast off the top of my head. The fact remains that, if an estate actually is subject to taxation, use of non-taxable insurance as the method of payment is simple and common. I wait with bated breath for correction of my other inaccuracies.

6/19/2006 5:43 PM  
Blogger emawkc said...

Yes, taxes are inevitable. But that doesn't make them fair. Taking money from someone is taking money from someone.

6/20/2006 2:48 PM  
Blogger Xavier Onassis said...

All of these points of view were very well reasoned, thought out and intelligently presented.

At least I assume they were, because they all had a lot of words in them.

I didn't really read any of them because:

1. Tax law is complicated and thinking about it makes my brain itch.

2. I don't have an "estate" unless you define the word as too many bills, no savings, no assets other than my Darth Tater action figure and a hard disk full of porn.

3. I don't live in Kansas (YESSS! There IS a God!)

4. No one will ever leave me anything from their estate because I'm an asshole.

5. I withdrew all of my 401k money early and spent it on booze and hookers while I was still young enough to enjoy it.

Having said all that, I agree with everything Dan said and disagree with everything Travelingal said. No particular reason...that's just my policy.

I don't know Les.

Emaw is, well, he's emaw.

Like "Snakes On A Plane", that pretty much tells you all you need to know.

6/20/2006 8:52 PM  
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3/17/2007 6:13 PM  

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