Strengthening Constitutional Self-Government

No Left Turns

Death Taxes and their Proponents

The Wall Street Journal has a tightly written and persuasive editorial today on the Death Tax. The big proponents of the Death Tax, according to this piece, are the life insurance lobby (which could lose billions of dollars as the need for policies written to avoid the effects of the tax are lost) and the super-rich who can afford to shelter their assets. Repealing the Death Tax remains popular with a large majority of voters and with a majority of both houses in Congress--although the WSJ warns of a possible Democrat-led filibuster attempt in the Senate in order to avoid the repeal.

In 2006 the Republicans in Congress and Republicans aspiring to be in Congress would do well to make lowering or, better yet, eliminating the Death Tax a centerpiece of their message to voters. It has popular appeal, not just because it has to do with lowering a tax--which is always popular but could be said to be so because of narrow self-interest--it has popular appeal because it has to do with a fundamental issue of justice and the American people understand that on some very basic level. Hand Democrats the rope with which they will hang themselves trying to make a case for the justice of a thing that is patently unjust. It is one of those things that will tell the voters all they need to know about that party.

Discussions - 10 Comments

How is the estate tax unjust? If one inherits their money why shouldn’t they be taxed on the income? When I work for an income it is taxed. Also, isn’t something like the first $5 million tax free?

Also, why is it referred to as a death tax?

The estate tax is unjust because that money was already taxed, when it was earned. An inheritance is not income, it is a legacy.

It is called a death tax because it is inherited at the death of the person who earned the money in the first place, who is seeking to leave it to his heirs; usually his children. How many times ought the same dollar be taxed in your opinion? When you earn it, it is taxed, when you save it, it is taxed, and when you die, it is taxed. Seems a bit much to me.

Yes, this is a very simplistic answer to your question, but you sound like a very simple answer might be required.

Kate - sorry for seeming so simple, but sometimes things do become more complicated than they need to be.

How many times should the same dollar be taxed?..... Well, when I earn it it is taxed, when I pay my utility bills it is taxed, when I puchase gasoline it is taxed, etc. At most transfers of the dollar, it seems to be taxed. I just don’t feel it is unjust to tax one who inherits the dollar. There are very high minimums to protect the small business and farm.

As for the "death tax" - One is not taxed because they die - One is taxed because they inherit a great deal of money.

Nick, so it is someones fault that they inherit money and thereby should be taxed? My grandfather recently died and left my grandmother a large sum of money...which they both worked for and paid taxes on it when they made it, and also every year at income tax time. When my grandmother passes on in the future, why should I have to pay a tax on what I inherit when it has already been taxed numerous times. Why punish people for saving money to leave to their children? All my grandfather wanted was to make sure that everyone was taken care of. Why should this be a governmental concern at all. What is the benefit of someone saving up money for their children if the government is going to take all of it anyways? The repeal of the death tax seems very common sense to me...

Lori, fault has nothing to do with it. Of course it is not one’s "fault" to inherit money. It is of course not one’s fault when they earn money, win money, or puchase something that they are taxed on.

I’m sorry to hear about your grandfather. And, please know my following comments about money are not meant to diminish that.

It has been a while since I took a tax class, but I do believe you can receive a tax-free gift from your grandmother of $10,000. This can be tax free to you, your spouse, etc. each member of your grandmother’s family that she would like to give a gift to. I also believe that an inheritance is tax free of less than either $1 million or $5 million - I’m not sure what the minimum is now.

I just don’t see it as a punishment. If a rich person inherits their wealth and I work for mine, I just think both incomes should be taxed. I do see your point about savings. My own grandmother has had to cash in some of her savings last year and had to pay income taxes on what I saw as such a low AGI, that I didn’t feel were fair.

I am no economist. I just play one in a high school classroom from time to time. So (I hope) I am providing some links to better minds than mine on the issue.

Try this:
Estate Taxes: An Historical Perspective, by Gary Robbins of The Heritage Foundation

Or play with this: How Much Estate Tax Will You Pay?

And then consider this as an addendum to Julie’s article: Benefits Of The Estate Tax -- For The Super-Rich

I do not like the estate tax because of what I have seen it do to families that I know. It is NOT about money and that kind of wealth, which I see you despise. It is about the problem of passing solid assets; property in a more classic sense. Farmers, whose assets are all in land and equipment, leave the family farm to their children. They may even have someone in the family who would be willing to farm the land ( a shrinking pool), but there is never any cash in the estate to pay the tax. Surely they ought to plan ahead and buy LOTS of life insurance to pay the tax. Do you know any farmers who could do that? They NEVER have that kind of money month to month (those stinking rich bastards.) Since the land has value, it is taxable, and where does that money come from to pay the death tax? The land must be sold and around here, a once rural area, that usually means to developers. Farmland gone is never reclaimed.

Small businesses have the same problem; there is not enough money in the business to pay the estate taxes. The value of the estate is in solid form; the building and the land the building sits on and inventory. So a man has spent his life building a business and it must be sold by his heirs to acquire cash to pay the tax.

So this is not about the really rich, who might have the more liquid assets to enable their heirs to pay the tax and do see that third article. It is about small businessmen and farmers whose assets are not in cash, but in property. They just get slammed by this. There are not enough "super-wealthy" people around to make it worth keeping the estate tax. It is the asset rich, cash-poor, middle class that takes the hit and provides the tax revenue our federal and some state governments, so desperately desire.

And what does "fair" have to do with it? How do you come up with an objective "fair"? Fairness is always a matter of perspective. You didn’t "feel" that your grandmother’s taxes were "fair" but another guy might think they were very "fair" because her estate looked plenty big to him. Couldn’t we talk about "right" instead of "fair"? I prefer Lori’s question: Why should this be a governmental concern at all. As if in answer, from Julie’s article and Frank Keating before he had a special interest: "I believe death taxes are un-American. They are rooted in the failed collectivist schemes of the past and have no place in a society that values entrepreneurship, work, saving, and families." Me too.

I’ll wade into the estate tax controversy. I do not know a lot about the estate tax, but having taken a Wills and Estates Class and a Federal Income tax class, I may be in a position to offer some legal and factual opinions about the estate tax.

First, whenever Republicans claim they must do away with the estate tax to protect "small businesses" they are being incredibly dishonest. It is fine to think the tax is unjust, etc. but it is not fine to lie about its effect on small businesses. If Republicans are only concerned about harming small businesses with the estate tax then they could raise the exemption to $5 million dollars or whatever and still keep the tax. I think a business with assets of $5 million is no longer small. The point is, the small business line only works to a point, and past that point the Republicans offer no argument why they should not tax people.

The argument about only taxing once is also untrue in some instances, given the current structure of the income tax. Here is an easy example. Person A buys stock with his taxed money. The stock is worth $1,000. Over the course of 50 years the stock appreciates to $100,000. Person A will not be taxed on this appreciation, which is theoretically considered income, until he sells the stock (a relization event). A dies with $99,000 of untaxed income. In his will, A devises the stock to B. Because of section 1014, B will not be taxed if he sells the stock soon after he gets it. B will NEVER be taxed on the $99,000 of appreciation. If we have an estate tax then section 1014 makes sense. IF we do not, then it does not, as evidence by the fact that the year the estate tax is not present (2010), section 1014 is no longer in force, and section 1022 is. Section 1022 estate tax (sort of)! Basically 1022 gives taxpayers a $1.3 million exemption (a lot lower than the $3 million offered by the current estate tax) and then it will tax the recipient for the appreciation of the asset during the donor’s life (at the 15% capital gains rate), and I am unsure of this, at gift tax rates (which I am uncertain how high they are, but they are probably pretty high). It should be noted, that the people most effected by the estate tax, tend to hold their wealth in stocks (think Bill Gates), etc. which are not taxed until sale. So they are not being taxed twice on their income, because they have yet to be taxed.

Final thoughts on the estate tax:1. I disfavor the estate tax because it does not allow moderately wealthy families to pass down illiquid assets. I think if a middle class family finds some wacky painting worth $10 million in the garbage, they should be allowed to keep it, or if they have an heirloom worth a lot, they should be allowed to keep it, rather than being forced to sell it to raise funds to pay the tax. 2. I think the estate tax on the very wealthy is appropriate. It prevents concentration of wealth which is fine for a republic/democracy. America does not need the idle rich in my opinion. 3. The estate tax is also good because it forces the very wealthy to give away large portions of wealth to charitable causes. I suppose Ashland University has numerous examples of that, anytime you see a building named after someone the estate tax has persuaded them to give away the money (where it is not taxed at all) rather than have it taxed. What incentive would there be for wealthy people to give $30 million to a college without the estate tax? Very little. My recommendation would be to raise the exemption amount (it reverts back to $1 million in 2011, which is too small) to a reasonable amount, and then tie the exemption amount to inflation so the real exemption will not decrease over time.

One last thing I forgot to mention:

The current structure of income tax and estate tax favors the middle class a great deal. Because of 1014 and the estate tax exemption, it is possible for people to inherit $3 million worth of stock completely tax free (no income tax ever or estate tax). IF we do away with the estate tax it seems mostly likely 1014 and 1022 will be changed, and people will have to pay income taxes on the basis of all that appreciation.

I’ll give an easy example. Person A buys stock for $1,000 and it appreciates to $100,000. Person A dies and gives the stock to Person B. Obviously B needs to sell the stock to make any money, so he does. Under the current regime he pays no taxes on the stock because it is NOT $3 million (so no estate tax) and because 1014 erases the appreciation from income tax. Under a no estate tax system, no 1014/1022 system, B would be taxed on $99,000 at 15%. One can see that not having an estate tax would harm middle class people.

1022 as it stands now (but it will probably be changed if no estate tax forever) basically acts like an estate tax, but instead of exempting $3 million it only exempts $1.3. 1022 only applies the year there is no estate tax (2010) so you can see that a system without an estate tax is actually worse than one with it.

I think the problem is that the government needs money, Liberal and Conservative have to agree to that. There is simply no easy way around it. Governments get money through taxation.

I believe the defintion of small business is one with less than 100 employees. It has nothing to do with the value of the assets.

Andrew Carnegie and John D. Rockefeller were not forced by any fear of the estate tax to give away huge chunks of money for great causes. Philanthropy exists exclusive of government pressure.

Family fortunes rose and fell in America before the establishment of an estate tax. Read the history of America and see which of the wealthiest familes in 1800 were still wealthy in 1900. People gain and squander wealth, independent of governmental control.

Governments get money through taxation. Yessirree. Then tell me, whose money is it? Currently the federal government acts like it belongs to the entity that prints and mints the stuff. Does the government create the wealth? No, it just consumes what the amazing American people produce. So, how to make America a more productive place? Leave more of the money where it can become capital and produce something.

OK, governments are good things. We would not like the alternative. But why can’t government take taxes in a simple way that does not involve itself with the personal lives of it’s citizens? I still like Lori’s question as to why government feels it must interest itself with the disposition of wealth within familes. If the IRS, for another example, does not like income tax you have paid, it can be extremely intrusive. How does that work in a nation where each man was supposed to be sovereign?

An angry tangent, but the principle is the same; a government that concerns itself with your money, that you earned or even inherited from someone else who earned it, is dabbling with despotism.

10,000% return on a stock purchases are very atypical. The majority of the money being taxed has already been taxed. Most people did not invest 100k and now have 10 million in stock and never sold any of it along the way.

There are many small businesses with assets at or above 5 million. If you owned a couple of full service car washes, you'd be a small business owner with assets around 5 million. If you owned a machine shop that tooled parts for the oil and gas industry, you could easily have 5 million in assets and still be a small business.

What makes people think it is their place to tell others what they have to do with their money? "estate tax is also good because it forces the very wealthy to give away large portions of wealth". Its a matter of freedom. Trying to manipulate people's actions through gov't legislation is a horrible idea. Don't get me wrong I am all for charitable contributions, but we don't need to gov't saying, " You give it to me, or you give it away."

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