Estate Tax

Will someone (Mr. Deez) explain why repealing this tax is a good idea for the country in general? (assuming Republicans think it is.) I read this affects like 5,000 families total each year - but the rank and file Republican supports repleaing it more than they support a minimum wage that adjusts for inflation.

 

I think there are 3 main arguments frequently made in favor of repealing the estate tax:

(1) It discourages wealthy people from generating economic activity. Why bother, because half of the wealth they accumulate will go to the state, not their heirs.

(2) It encourages wealthy people to relocate to jurisdictions with no estate tax. This argument is used more often to justify repeal of a state's estate tax, because of how easy it is to move between states. I don't hear it much in connection with the Federal estate tax.

(3) It is unfair, especially to the owners of small businesses who don't have the liquidity to pay the tax and are forced to sell the business.

 

A person has already paid taxes on the wealth that has been generated whether income, property, etc. and the government steps in after someone passes away and demands money. Heirs have a few choices, mostly bad. They usually end up having to liquidate assets to pay, or sell property, or other portions of the estate that the previous owner has already paid taxes on in some form or another along the way. Why should government get another take out of it? It should be repealed and the sooner the better.

 

There are a lot of unfair things in the world, though. And this is about estates over $11 million?
It confuses me why people in the middle to upper middle class are so concerned about multi millionaires and their struggles. The multi millionaire clearly doesn't give a **** about you or your financial situation.

 

They don't?

 

Bad? Really? So I'm supposed to feel sorry for a guy who inherits $10,000,000, but has to forfeit $2,000,000 of it in taxes? Even if the entire $10,000,000 is tied up in a farm, the worst-case scenario is that he sells the farm, pays the tax, and walks away with $8,000,000 in cash. More likely, he has to sell off a part of the land or borrow some or all of the $2 million and keeps the farm. Either way, the lucky dude comes out way, way, way ahead.

The "bad choices" viewpoint hinges on a presupposition that heirs have a right to inherit property that was earned or accumulated by their parents or other relatives. Some modern conservatives try to link this viewpoint to foundational concepts of capitalism, but that link doesn't exist. Consider the following quote:

The death of a father, to such of his children as live in the same house with him, is seldom attended with any increase, and frequently with a considerable diminution of revenue, by the loss of his industry, of his office, or of some life-rent estate of which he may have been in possession. That tax would be cruel and oppressive which aggravated their loss by taking from them any part of his succession. It may, however, sometimes be otherwise with those children who, in the language of the Roman law, are said to be emancipated; in that of the Scotch law, to be forisfamiliated; that is, who have received their portion, have got families of their own, and are supported by funds separate and independent of those of their father. Whatever part of his succession might come to such children would be a real addition to their fortune, and might therefore, perhaps, without more inconveniency than what attends all duties of this kind, be liable to some tax.​

In other words, there is nothing unfair about imposing an inheritance tax on adult children when their parents die. Who said this? Some commie pinko? A modern day liberal? No -- Adam Smith, in the Wealth of Nations.

Another early supporter of an estate tax was Thomas Paine. He saw no reason to allow people to inherit property without paying for it. He wrote a pamphlet called "Agrarian Justice" proposing a ground-lease payment for inherited land, payable to the government. The proceeds would be used to pay a sizeable stipend (roughly 1-year average salary) to all citizens when they turn 21, and to fund universal pensions for those over 50. This way, all new adults start on a level playing field, and all older adults could retire in comfort. Here is a link to the Wikipeda page about the pamphlet.

Capitalism is founded on the fact that wealth accumulates to those who have valuable skills or knowledge, or who work hard, or who take risks and get lucky. Allowing unlimited property to pass through generations causes wealth to accumulate to the undeserving, and is therefore a drag on the economy.

There is a legitimate debate about when the tax should kick in, and what the rate should be. I personally think the exemptions of $5ish million per person / $10ish million per couple are about right, but that the graduation of rates is much too steep. The top rate of 40% shouldn't kick in until the multi-hundred-million range, with much smaller taxes owed by estates that are barely taxable and increasing slowly but steadily.

 

Why not tax Democrats only twice? Then everyone is satisfied.

 

thanks for this ******** reply. This is exactly why I specifically asked for Mr. Deez to provide the Republican perspective.

 

Why not tax at 100% then if you think taxing twice is ok just because you die? What is it about death that should cause a tax event other than probate costs or something similar to that?

 

Let's assume it is an unfair fax. Also unfair ---the minimum wage has effectively gone down 6 straight years, since there is no cost of living adjustment. I’m not talking about handouts – I’m talking about the working poor struggling to get a foothold. Go to college to better yourself? The cost of higher education has gone up almost 500% since the mid 80s.. fair?
And Republicans in congress – not to mention every day Republicans – are concerned about the taxes Mitt Romney’s family will have to pay when he dies. Make sense to you?

 

An extremist on the other side would say "What is it about death that should enable someone to obtain property that they didn't personally earn?" Both positions miss the point.

When a person dies, something has to happen to his wealth. You believe that a person should be able to control his property from the grave and give it to whomever he wants. I see the merit in this position, and don't reject it out of hand. But I don't accept it as an absolute truth, either. I think government can and should set up rules for what happens to property when someone dies.
In doing so, government must strike the appropriate balance between incentives and fairness. IMHO, zero tax on small inheritances, a moderate tax on mid-sized inheritances, and a steep tax on huge inheritances services these joint goals by giving people an incentive to accumulate wealth, while ensuring that wealth does not continue to accumulate over the generations, creating an obscenely wealthy class of people who never did anything special themselves.

I too am interested to hear Deez's take on this issue, btw. My initial post on this thread was an attempt to summarize the mainline anti-estate-tax arguments somewhat neutrally, but I trust he will do so more accurately than I ever could.

 

I'm never surprised at people who think that the government should get a part of something they never earned, but they are quick to point out that the heir didn't earn it either and should be willing to give up a piece of it because of that. It sounds just like the Obama drivel of "you didn't build that". I didn't build the family ranch, but I do maintain it. It has become more valuable, that's how the market operates. If they want to tax me on it, then tax me on the cost at the original purchase, not on the perceived value of it now. The government didn't build any fence or water dam, lay any water pipe, drill any water well. They don't come out and work cattle, and I've never had any rep from the government show up to haul hay out of the field on a hot afternoon with a rain storm brewing and I don't have a choice to leave it. The government has not done anything to "earn" a tax from it, and I don't think it is fair for them to expect one.

 

Did the family ranch ever get a tax break, incentive, or take a deduction of any kind? So you did build it, but not alone. You had the help of the governement.

Are you in favor of eliminating capital gains tax of any kind, or just family ranches?

 

If it is fair for the top, why not for everyone? Most that are for it are only for it because it has no effect on them. As long as someone else is paying it, every tax is fine!!

 

You can pretty much say that about any type of tax. The government didn't show up and do the job for just about anybody that is paying a lot of income taxes. But the reality is that the government needs money to sustain itself. Many of us would argue that it needs to do with less, especially the federal government. But, the money it does take in is going to come from businesses and people that they didn't show up and do the job for. They would be down to just collecting some minor user fees otherwise.

 

The minimum wage and the estate tax are all about the government telling other people what to do with their money. The argument that they already have any say so any added involvement is justified seems like a weak argument. The question is what is appropriate and how much should our government be allowed to take from us especially when they are spending more than they take and use that deficit and justification for taking more. It is all backwards in my opinion, the assumption that more and more of our lives need to be controlled by government.

 

The government is not some big brother entity simply collecting and never putting back. You can certainly argue that they could be more effective/efficient, or that they should have different priorities and policies in how they spend the money but they spend every nickel that comes in, so they aren't hoarding our taxes.


You say they government didn't feed your cattle but I'd be willing to bet BIG money that some form of government put in the road that you use everyday to get that cattle from your ranch to the slaughter house, so the government did do something to help you make that money and increase the value of your ranch. Did you personally have a more direct relationship with the increase in value...SURE you did!!! But to claim that the government played no part in your success is wishful thinking.

The government will always require money to come from the citizens to operate. It is not a matter of IF, but where (and in this case WHEN) the money comes from.

I believe that given all the choices of where and when to collect taxes from an individual, an estate tax is one of the best places and times to tax. The person being taxed no longer needs the money, they are dead. The person recieving the money didn't earn it or else they would already have been paid it in the form of wages or profits.

The transfer of wealth from one generation to the next (the latter group having likely added very little to the value of the estate) is one of the best times for a government to tax and fund itself.

I'm a father, I too want to ensure my children are not destitute when I die. i want to continue to take care of and ensure the futures of my children, but they don't need $10 million + to be secure. That kind of figure is a "sit on my *** for the rest of my life" number. That is not what capitalism and a free market are designed to compensate and foster.

 

I also think the estate tax should be levied not on the giver but on the recipients. If a person has accumulated a $200Million estate, let them give it all away but to many different parties/groups. I think a tax on everything above $5million recieved should be levied on the recipient and the graduated rates should increase rapidly for higher amounts. I believe this would promote, in this example, the benefactor distributing the $200 million amongst 40 different groups/people to the tune of $5M per. Rather than 2 individuals getting $100M apiece.

I believe this would be a better outcome for everyone except the 2 people that get less. Better for the other 38 people, better for economy and better for the country.

 

Why is the government's job to keep people from "sitting on their *** for the rest of their lives". Why continually give more and more power and wealth over to the only organization that can use violence legally and also controls what is legal. I would much rather prefer a society of rich lazy asses over one characterized by tyranny.

 

The problem you have is the estate tax is never set in stone. It changes with every Congress so how can one effectively estate plan when it might change in 2 years? Get rid of it so it doesn't become a political football. Does anyone believe the Kennedys have ever paid a dime in estate tax? It's all sheltered.

 

I keep hearing this, but my grandma's estate was about 900k and we got all sorts of governmental taxes and restrictions and regulations and fees thrown at us.

Nope, just a presupposition that people have a right to pass on what they've earned to others as they see fit.

Feeling sorry has nothing to do with it. X is either fair or not. If it's fair, fine, then let's keep it. If it's unfair, I don't qualify it by the income level of the person being cheated.

Those rare occasions when once short paragraph speaks volumes....

 

chango, we may have to agree to disagree on this issue. I do support eliminating the estate tax as it's written right now. (I also wouldn't mind seeing the minimum wage indexed for inflation and support taxing capital gains income at ordinary rates, so I'm not exactly a fan of rich guys.) Why do I support eliminating it?

1. It's applied in a very arbitrary manner. Yes, it hits rich people, but it mainly hits stupid rich people - those who failed to plan for it or rich people who were unfortunate enough to die suddenly. If you have a sharp estate planner or are pretty sharp yourself, it's pretty easy to beat the estate tax by using irrevocable trusts, business entities of various types, gifts to family members, etc.

Here's an example of someone beating it. My grandfather had enough money to get hit with the estate tax, but about 25 years before he died, he started using gifts to his kids, a family trust, and a family partnership (which he still had quasi if not legal control over) to beat the tax. If he hadn't done all that, his estate would have gotten clobbered and tied up in California probate court for a long time. Instead, when he died, most of his wealth had already been given away (and accrued interest and capital gains for its beneficiaries) and, his wife had enough to live on comfortably for the rest of her life. What he had left in his name was within the estate tax credit and simple enough to slide through probate court with minimal hassle and attorneys fees even in California, which is a tough probate state. The point is that he didn't avoid the tax because he wasn't rich enough. He avoided it because he was smart enough to plan and lucky enough to live long enough to make the planning work. If he hadn't been that sharp or if he had been unfortunate enough to die 20 years earlier, would that be cause to slam his estate with taxes? I don't think so, but it would have happened.

2. Unlike the capital gains tax that the Right often claims to be double taxation, the estate tax actually is, and regardless of how much money you make, I do think that if the same government entity taxes the same income multiple times, it's an injustice. In fact, I think a legitimate argument could be made that denies one of property without due process of law (meaning unconstitutional).

3. Not only is it double taxation, the estate tax is pretty oppressive, though no where near as much as it used to be. Prior to 2001, the estate tax levied a 55 percent tax, and the credit was only $675K. That's brutal. The credit is much higher now (about $5.3M), but the rate is still 40 percent. Considering that it's a second tax on top of income taxes, that's still pretty rough.

4. Any tax that is levied against non-cash assets can lead to some arguably unjust results and can harm a family pretty badly. Dad may have had enough to pay a pretty stout tax bill, but he may not have been sophisticated enough to set up shrewd estate plan, and his kids may not have the cash to pay the bill. Accordingly, if someone has built a successful business and wants to leave it to his children to run, his kids could have to lose the only economic mechanism they've ever known to pay a double tax bill. That can be pretty damaging to a family.

Politically, I think the estate tax is an easy target for the GOP. True, it doesn't directly harm poor and middle class people, but it creates enough unjust scenarios that getting rid of it isn't too hard of a sell and telling someone who just lost a love with that he owes a giant tax bill is a bit of a kick-in-the-balls. It's easy to make the public sympathize with those people. If I was a Democrat, rather than standing by a tax that's hard to justify, I'd propose reforming the estate tax as an alternative to the full repeal that the GOP wants. I'm not saying I endorse all of these, but here are some reform options Democrats could advocate if they wanted to polarize the GOP's position and make it tougher for them to pitch full repeal.

1. Instead of taxing the estate, tax the beneficiaries. After all, an estate is a piece of paper, and the guy who earned the money is dead. The real taxpayer is the estate's beneficiary anyway. Eliminate the estate sham, and tax the inheritance as income to the beneficiary, which would allow him to claim the normal deductions he'd get on his tax return, and yes, that would typically lower the tax. That's a lot fairer than what's done now.

2. When a closely held business or a family home is part of the estate and the beneficiaries are the spouse, children, or grandchildren of the decedent, defer the taxes until the beneficiaries sell their interest in the business. That takes away the "I had to sell Dad's family farm that he worked his whole life to build to pay off the government" horror story.

3. Allow the taxes on all non-cash assets to be paid over a period of years. If you've inherited property that does have to be sold, you shouldn't have to sell it immediately and under bad terms just because you owe a tax bill. For example, suppose your father died and left you real estate during a real estate bust. Should you have to take it in the shorts on the sale of the property to pay the taxes? I don't think so. It would be better to let the person hold onto the property and pay the taxes when they can get a respectable sales price. Obviously, you could write in some limitations on this to keep people from dragging the process out, but giving them a reasonable amount of time is fair.

 

Thanks for the response. Lots of good info. I understand where families who are impacted by this tax are coming from.

I suppose I'm still stuck on: stagnant wages, college costs have exploded, the middle class struggles to keep their head above water -- and the Republican congress thinks, "We need to do something about this damn estate tax". I'd hate to have to sell that to the American people in a general election. AND people who will never even sniff this kind of wealth line up to defend what is 'fair' for Tagg Romney when dad goes to Mormon heaven.

 

Well said Mr. Deez. We have taken multiple steps in the estate planning, including dividing assets, buying expensive life insurance policies and every time we believe that we have taken care of business the government moves the goal posts and we have to work our way around it again, at no expense of course ;-)

 

Deez,

You point to many practical problems with the estate tax as it is currently structured, and I agree with most of what you say. I particularly agree with your suggestions 1 (inheritance tax instead of estate tax) and 3 (allow payment over time).

I also have no problem with what your grandfather did, passing assets down slowly over time. That doesn't work, though, for estates in the 9-figure and 10-figure range because of the relatively low cap on annual exclusions. The only way the super-rich can significantly lower their estate taxes is by giving large fractions of their property away to charities, which is what many of them do.

At the end of the day, I share the concerns expressed by our founding fathers about the perils of excessive wealth accumulation. They sought to create a system where wealth accrues to people who are talented and/or industrious, as opposed to people who are well-born. Modern America has gotten too far away from that, and I believe that is a big part of the reason for our current economic woes.

There are many ways to dampen wealth accumulation, and an estate or inheritance tax is just one of them. It may well not be the best one. But I strongly believe we have to move beyond the idea that people have a right to pass their wealth on to their children, no matter what. The estate/inheritance tax should not be seen primarily as a revenue generator, but instead as a means to prevent unearned accumulation of wealth.

 

I am assuming that this point is supposed to be a Democrat's view? If so, this same sentence could be applied to social programs that "help" those unfortunate people that apparently cannot work for their own money. We could substitute some parts of the sentence to read as this, "What is it about being below the poverty level that should enable someone to obtain government assistance that they didn't personally earn?"

Not saying this is your point of view, just wanted to play a little devil's advocate on why this isn't a good argument for not repealing the estate tax. I don't agree that both miss the point. I have a question about what you said here...

Imagine this person is living and only has a large sum of money to pass on, would they be paying taxes on money that was just sitting in the bank? When that same person dies, why should this money be classed differently when passed on to family members? I am not opposed to taxing it as income to the new owners of this money. Also, if land is passed down, they are already paying taxes on the property, why pay more based on the value of the whole property? Wouldn't they continue to pay property taxes annually on it anyway?

 

Here's a system I think would be ideal. The first $x any one person inherits (through gifts, wills, or otherwise) during his or her lifetime is tax free. Those who are lucky enough to inherit more than that amount (cumulatively), would owe tax. However, the tax would be modest at low levels, and escalate slowly.

In my first draft, the tax table might look like this (indexed to inflation):

up to $1 million no tax
amount over $1 million, up to $2 million 5%
amount over $2 million, up to $10 million 10%
amount over $10 million, up to $50 million 15%
amount over $50 million, up to $200 million 25%
amount over $200 million, up to $1 billion 35%
amount over $1 billion 50%​

Under this system, if you die with $100 million, you would have lots of options for how to distribute it. For example:

• • divide it equally between 100 people, each of them gets $1 million and none of them owes a penny in tax unless they previously inherited money from someone else.
  • divide it between 50 people, each gets $2 million and owes $50,000 in taxes
  • divide it between 10 people, each gets $10 million and owes $850,000 in taxes
  • divide it between 2 people, each gets $50 million and owes $6.85 million in taxes.
  • give it all to 1 person, who gets $100 million and owes $18.85 million in taxes

This would incentivize the super-rich to divide their estates up upon their death, which would be good for the economy.

 

But your average American just isn't going to care. They will hear the horror stories about family businesses getting destroyed by the tax (which probably doesn't happen often but it can happen, and it wouldn't be impossible to find an example), and that's enough to make them overlook who's mostly benefiting from scraping the estate tax. In addition, it's not a big revenue source. The government took in $3,020.8 billion in revenue. Only $19.3 billion was from from estate and gift taxes (about .06 percent of revenue). That's chump change - certainly not enough for anybody to care about.

Are there bigger priorities? Hell yes. You mention stagnant wages, college costs, etc., but who's offering a serious fix for those? Don't say Hillary Clinton or the Democratic Party. She's in the sack with Wall Street and corporate interests as much, if not more, than the GOP is. Why do you think a lot of Democrats would privately like to see Liz Warren get into the race? Corporate interests have the game rigged to make sure that they win no matter which party is in charge. Do you think the Goldman Sachs executives in New York are going to go vote GOP in 2016? They probably won't, unless Warren is the nominee.

When was the last time Democrats did something significant for labor unions? Taft-Hartley gutted them back in 1947, and labor has mostly been going downhill ever since. (As you know, I oppose right-to-work/freeload, which is the core of Taft-Hartley.) Democrats could have easily fixed that in the '60s, late '70s, early '90s, and from 2009 - 2011. What have they done about it? Not a damn thing. They've never even made a serious effort.

And yes, college costs are outrageous, but how are you going to bring them down? Eventually that's going to impact faculty and college administrators, 90 percent of whom are liberal Democrats. Is someone like HRC going to openly antagonize them? No chance in hell. Would a Liz Warren? Maybe, but probably not. She's one of them.

And I may piss you off with this, but there's a conflict of interest between Democrats and the middle class on the issue of immigration (legal and otherwise). There is absolutely no question that it hurts the middle class, especially the lower middle class, but Dems are all for it. Why? Because the identity politics angle helps them.

I know you care about the middle class, but being totally honest, nobody in politics is really on your side. You have one party that supports a wide open economic system that lets the wealthy keep getting wealthier and another party that supports a more managed economic system entangled with government but still one that lets the wealth keep getting wealthier. You don't win either way.

 

Be careful. Life insurance gets you out of probate court (a pretty minor benefit in Texas which has independent administration), but it doesn't necessarily get you out of the estate tax. If the decedent has any control over the policy or derives any economic benefit from it (which gets complicated) within a few years of death (I think three years), the proceeds can still get hit with the estate tax. I assume you've talked to your estate planner about this, but if not, I'd double check.

 

NJ's system would be a major improvement.