Tuesday, July 11, 2006

May We Just Put The Double-Taxation Whine about the Estate Tax to Rest?

One of the infuriatingly stupid arguments made by advocates for repeal of the Spoiled Brat Tax is that it amounts to double taxation, because the creator of the estate may have paid income tax while building a windfall for his or her heirs. As stated by one of Ladue's favorite lapdogs, Jim Talent: "Moreover, taxes on estates represent a form of double and sometimes triple taxation because everything taxed when you die has already been taxed at least once.

There are two problems with this argument. One is factual and one is theoretical. Let me start with the factual.

"Real Wealth and "Salary Trash"" Wealth may be earned, but real wealth is inherited, and repeal of the Spoiled Brat Tax will exclude real wealth from any taxation. Here's an anecdote to make that point more clear. We were at a garden party at the home of one of the wealthiest families in Kansas City, and we were talking with a senior partner of one of Kansas City's silk-stocking law firms. I was surprised to hear him voice some discomfort at being surrounded by such wealth, and I assured him that his income was probably in the upper quartile of the party. He laughed at my lack of understanding, and explained that he was "salary trash", one of the lower class who relies on income - rather than wealth - to live.

The estate tax, in its most aggressive modern forms, has impacted only the top 2 percent of estates. While the spoiled brats and their lapdogs like to talk about the tax in terms of scrappy mom-and-pop stores and family farms, the undeniable truth is that the only people who pay estate taxes are the offspring of multi-millionaires - and most of them inherited the country-club memberships they seek to pass on without contributing to the country that has afforded them their wealth.

Truth is, inheritances are not created from money that anybody has paid income tax on for generations. Only a few insanely overpaid individuals, like Ken Lay, manage to salt away enough income to approach the estate tax.

It's Not Double Taxation if the Heirs are Only Paying Once: On a more theoretical level, when money changes hands in our society, that is normally a taxable event. People who want to see the Spoiled Brat Tax eliminated act like taxation is an extraordinary burden if it is heirs, rather than than strangers, who "suffer" from having to pay Uncle Sam when they inherit millions of dollars.

Perhaps this can be made more clear by a hypothetical. Assume that Scrooge McDuck has a hundred thousand dollars in his bank account. He faces the choice of adding it to the billions of dollars he is passing on to Donald Duck, his spendthrift nephew, or hiring me to act as a political consultant, to help him see through the hypocrisy of the Republican party.

He chooses to hire me. Now, by the logic of Jim Talent and the anti-Spoiled Brat Tax brigade, I should not have to pay income tax. If Scrooge McDuck paid income tax when he "earned" his wealth, I should not have to pay tax on that same money when he passes it on to me, right? Perhaps we should devise some sort of indelible stamp we could press on to our dollar bills when we earn them, so that they could never be subjected to Jim Talent's theoretical "double taxation".

To be fair, Jim Talent doesn't take it this far. He's not actually arguing that someone who works for the money shouldn't be subjected to taxation. That would be absurd. He's only arguing that people who don't earn the money - the people who "earn" their money through inheritance - should be able to dodge their obligation to support our country.

13 Comments:

Anonymous Anonymous said...

As the Guinness commercial says, "Brilliant!".

I can't think of anything better than the IRS taking its piece of the pie when a loved one dies.

When one donates what one earned to charity, there is no tax, but a tax deduction. Maybe we should tax charitable giving too, so the government can handle all the money that is currently given to help people. The government sure knows how to spend it more wisely than we do.

Brilliant!

7/11/2006 11:52 PM  
Blogger Dan said...

I'm not sure I'm really getting your point. Is it your position that the government should not get money at all? While we can certainly quibble about the amount of revenue needed to support Republican spending, it remains clear to me that we do need to tax someone, somewhere. On the list of taxes to repeal, a tax on dead millionaires ranks at or near the bottom, don't you think?

7/12/2006 6:18 AM  
Blogger les said...

Well said, Dan. Another false aspect of the "it's already been taxed" cry is that much--most, more likely--wealth that is not inherited is still not taxed outside of the estate tax. People like Bill Gates and Warren Buffet--neither of whom opposes the estate tax, by the way--are wealthy because of the appreciation in assets they earned; and that appreciated wealth is not taxed unless assets are sold. When the wealth is taxed in an estate, their heirs get a step up in basis which eliminates the tax on the value they receive, when they sell. I thought you were getting a better class of trolls lately--surely anon can do better than a thoroughly vacuous non-sequitor?

7/12/2006 10:54 AM  
Blogger emawkc said...

Les,
Gate's and Buffet are wealthy because of a couple of institutions you might have heard of -- namly Microsoft and Berkshire Hathaway. Which assets are you referring to? Real estate? Stock holdings?

Dan, I think one of the biggest problems with the presentation is the whole bilk-the-rich tone of the argrment. Americans haven't fallen for the class warfare argument, as well we shouldn't.

Perhaps we should focus on some kind of inheritance tax rather than a death tax.

7/12/2006 11:14 AM  
Blogger les said...

Thanks for making my point, emaw. Gates wealth is predominantly microsoft stock, much resulting from stock issued at formation--not income then, and not taxed as it appreciates--and more from options, taxed (if at all) at low valuations and not taxed as it appreciates. Berkshire Hathaway is a similar example. If you are trying to refute a point, try to come up with non-supporting examples. As to the bilk-the-rich bs, you might recall that the forces behind eliminating the estate tax are the rich, trying to convince voters that it hits the mom-and-pops. If by "bilking" you mean taxing the gains made by people as a result of business and ownership in a society, yeah, actually, that seems pretty ok to me.

7/12/2006 4:48 PM  
Blogger Nightmare said...

OH YEAH!! Well, YOUR MOTHER!

Showed you didn't I!

7/13/2006 6:43 PM  
Anonymous TRAVELINGAL said...

Screw the estate tax. Wise up and give it away before you die.
http://www.irs.gov/businesses/small/article/0,,id=98968,00.html

Give it to your kids, your partner, anybody..well you probably already do..but did you know that if you give more than $11,000 a year, you better report it and pay your taxes. Shhhh.. Don't let the IRS know you are going to buy that car for little Jenny when she graduates...no no no...well you can cheat like hundreds of thousands of Americans do. And, be sure to give away ALL your money at least 3 years before you die and then go into a nursing home on the taxpayer dole. There...that will avoid those darn estate taxes.

7/14/2006 6:01 PM  
Blogger emawkc said...

Les,

I wasn't sure whether the "untaxed" assets you were referring to meant stocks. Of course you are aware that the stocks are untaxed until they are sold, at which point they are taxed.

So they pay taxes on thos gains when the gains are realized. It sounds like you are advocating taxing the assets before and gain has been realized. A pre-emptive tax?

7/19/2006 1:09 PM  
Blogger antimedia said...

Dan, your argument sounds good, but I'm struggling with some details. You claim that truly wealthy people have no income to tax. Therefore, when they pass it on to their heirs, it should be taxed.

I guess I don't understand how you can be truly wealthy, spending money all the time and never earning any, and stay wealthy.

As for Gates and Buffet - where do they get the money to build their house, buy their cars, get food for their freezers? Do they wave their unsold stock in front of the realtor and say, give me this house, I'm rich?

Help me, Dan. I'm confused.

7/20/2006 12:10 AM  
Blogger Dan said...

Anti-M:

Of course they have some income - but actual salaries from actual work is a tiny component. Sale of appreciated stock is subjected to favorable tax treatment, as are dividends, etc. Also, it is possible to be paid spending money as a an employee of the family business without taking on real responsibilities.

I hope I didn't claim that the wealthy have no income to tax. They do have investment income, and, sometimes, ordinary income.

7/20/2006 6:23 AM  
Blogger antimedia said...

OK, Dan, you answered, "Of course they have some income - but actual salaries from actual work is a tiny component. Sale of appreciated stock is subjected to favorable tax treatment, as are dividends, etc. Also, it is possible to be paid spending money as a an employee of the family business without taking on real responsibilities."

Favorable tax treatment is not the same as not being taxed.

Being paid for doing nothing is irrelevant. I can point to some very non-wealthy people who are being paid to do nothing.

So, what we're down to is this. Wealthy people have assets that appreciate, making them more wealthy. They only pay taxes on those assets when they liquidate them. So, during their lifetimes, their taxable events are; income from salaries, income from dividends and income from the sale of assets (stocks, bonds, cds, real estate, etc.)

Right?

If the tax treatment on any of those is favorable (and I have no idea if it is or even how favorable is defined by you), then that can be remedied by changing the tax treatment so it's less favorable, right?

That leaves us with the unsold assets and cash being passed on to the heirs when the owner dies, right?

The cash has to have been taxed before, right? It has to have come either from income or from the sale of assets, right?

So now we're left with the unsold assets. But, if the heir wants access to that wealth, they must sell some assets, right? And when they sell those assets, they will be subject to (by your definition) favorable tax treatment.

So, I'm still having trouble understanding how the death tax (or inheritance tax, if you prefer) is not double taxation.

On a side note, I'd be much more inclined to listen to your arguments if they weren't couched in such class hatred rhetoric - "Spoiled Brat Tax", "windfall", "lapdogs", "spoiled brats", "not contrbuting to the country". It's hard to sift through the rhetoric to find the real argument.

7/20/2006 8:09 PM  
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