What about the inheritance tax?
Don Quixote on Aug 19 2010 at 5:46 pm | Filed under: Uncategorized
Even the most libertarian portion of my brain recognizes that there must be some taxes for a modern society to function at all. Given there have to be some sort of taxes, I’ve always thought the inheritance tax was one of the more reasonable ones. The person from whom the money is taken no longer needs it. The person to whom the money would otherwise be given has, likely as not, done little or nothing to earn it. It’s a relatively easy tax to get out of paying; just spend your money or give it to the people you want to have it before you die. A whole industry has grown up providing ways to protect your money from inheritance taxes through the use of trusts and other devices. Often, close corporations can be formed to keep the money from being taxed. Yet, for reasons I don’t quite understand, the inheritance tax is an absolute hot-button item for very many people. The 60 plus organization alternative to AARP listed killing this tax as one of its top two priorities. But why?
A few weeks ago, Bookworm suggested that the problem was that the government took the money out of the productive economy by taking it out of the hands of those who would otherwise receive it. That gave me pause, because I hadn’t thought about it, but it’s only true in the most limited sense. In truth, the government passes it right back out into the productive economy, it stopping in government hands only long enough to do what taxes do — fund programs and reduce the deficit.
The one change I would make is to make all gifts untaxable, so that a person could dispose of his/her estate before death without having to pay taxes on the transfer. But, after death, I have trouble seeing a problem with taxing what remains. At least, I can’t see what other taxes would be preferrable. What am I missing? And, if you do oppose the inheritance tax, what tax would you raise to compensate for the reduction in revenue from the permanent elimination of this tax?
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Remember that not all assets are in the form of cash or other liquid asset. If someone owns a small manufacturing company, worth $20MM let’s say, his heirs are going to have to come up with a substantial sum of money–$8MM at a 40% rate–to pay the inheritance taxes. It is most unlikely that such a company would have anything like $8MM sitting around in any liquid form, so the heirs are going to have to either sell the business, or part of the business, or take out a big loan against it.
Off topic Mikey today. I ran across this comment. I haven’t heard of this Gallup poll, so I am withholding my celebration:
The public is now paying attention and ignoring the MSM. This is a big problem for the left. Sunday I saw a Gallup poll showing media credibility has dropped to 25% for print and 21% for broadcast. Lies and smears are no longer taken seriously.
25% for print, and 21% for broadcast!!! Say it ain’t so, Joe!
If this commenter can be taken at his word, this is absolutely chilling news for the far-lefties. We are now in the territory where mainstream Americans have finally clued in that the mainstream media is nothing more than a mouthpiece of propaganda for the Democrat Party.
25% means only the hard-core left trusts the media.
This doesn’t mean yet that the majority of Americans have actually turned hostile to the media the way I have. But it’s the big first step. Whatever in the world are the Democrats going to do? The usual playbook is falling flat on its face. Charges of racism no longer work. The coordinated message via the media, to deceive and lie and obfuscate, no longer works. The public has turned skeptical. Independents have turned skeptical. The next step is actual distrust, followed by the final step of out-and-out hostility to the media. They CANNOT any longer play their usual games with their usual confidence.
It could mean all the difference for the elections to come in 2010, 2012, 2014…
To the idea that an estate tax opponent must cite a tax to make up for the lost revenue, why is it not deemed sufficient to propose a spending cut to offset it instead. And as the estate tax accounts for a rather small % of revenue anyway (I saw 1.5% somewhere), why is it even an issue at a time when we are tolerating trillions in budget deficits.
To the assumption that the estate tax raises revenue net-net in the first place, there’s this paper: Does the Estate Tax Raise Revenue? which looks interesting.
Without having fully read that paper, I can guess that part of the argument points to all the planning and structures that high-net-worth individuals put in place in order to avoid the estate tax. This provides huge economically-distorting effects without any obvious net benefit (unless you count fully employment for accountants/lawyers). The fact is that, most likely, nobody actually pays the estate tax except for those who are financially unsophisticated. For the other wealthy individuals, the ones who are financially sophisticated and well-connected and know the inside tricks, the estate tax is probably little more than a government incentive to turn themselves/their families into mini-empires or ‘charitable trusts’ or whatever the favored structure of the day is.
The counterargument that estate tax proponents typically make at this point is: “See? Unless you’re unsophisticated, you’ll avoid the estate tax. Only idiots get hit by it. What’s the problem?” The problem is, a tax that falls disproportionately on folks who are not super-wealthy but just have a little bit of wealth, and on folks who are less well versed in financial scheming, in the name of ‘soaking the rich’ doesn’t sit right with me. This tax is not going to hit the trust-fund kids of a Hamptons-going bank exec who lives on the upper east side and has regular meetings with his accountant. It’s going to hit the kids of a 57-year-old heart-attack victim who owned a family farm or sporting goods store, which (as David Foster points out) then has to be liquidated just to pay the tax bill.
Ha! Take that, ‘rich people’! say the trust-fund kids of the bank exec….
DQ, in five words:
It’s not the government’s money!
What i have at the time of death has already been taxed. it belongs to my family.
Danny said what I would say. IT HAS ALREADY BEEN TAXED!
Why shouldn’t I, when I die, choose to leave my after-tax gains to my family rather than gift it to some else? Why should I have to gift it to someone else? It’s already mine, and it’s after-tax! My family is my most-beloved. If I am utterly self-centered, I will have spent it all on myself. Rather, I have been conserving and preserving it, to pass on to my beloved children.
And you, Don Quixote, say, no, you have no right to do so, to pass on your after-tax worth to your children. You should spend it all on yourself, or, as Obama says, redistribute it to others who are somehow more deserving. You have no right to determine WHO you yourself choose to pass it on to.
“The person from whom the money is taken no longer needs it. The person to whom the money would otherwise be given has, likely as not, done little or nothing to earn it.”
How is it the government’s business (or ours) that an heir didn’t earn the money? Is there some sort of Busybody Principle at work here that allows the parasite class (government) to tsk tsk at the prospect of “unearned” money going to somebody besides itself? How does the frickin’ master of “hand over your money or I’ll imprison you” complain about ”unearned money,” let alone assert ownership of it?
“In truth, the government passes it right back out into the productive economy, it stopping in government hands only long enough to do what taxes do — fund programs and reduce the deficit.”
I’m not sure that the detour the money takes, hither and yon through various departments, satrapies, and bureaus “to fund programs,” does anything useful. How much good does that money do paying the grocery bills of affirmative action counselors or ”education experts” compared with staying at David Foster’s hypothetical $20 million company to pay people who actually produce something?
As for “reduce the deficit,” there’s a bridge in Marin County I’d be happy to sell you.
Yes, this is a hot-button item!
I was going to say a couple of things; but they have already been stated quite well.
Sonic Charmer said:
“The problem is, a tax that falls disproportionately on folks who are not super-wealthy but just have a little bit of wealth, and on folks who are less well versed in financial scheming, in the name of ‘soaking the rich’ doesn’t sit right with me. . . . It’s going to hit the kids of a 57-year-old heart-attack victim who owned a family farm . . . ”
This is true, I know a couple of friends from high-school who were faced with just that situation. My friends did not go into farming because their mother had to sell the farm in order to pay the tax. It was a real shame as both of my friends were very active in 4H when younger and FFA in high school. While their sister was planning on going to college anyway, my two friends had to change plans from a future in running the family farm to going to community college instead. Something that they weren’t thrilled about. In fact, they had done a lot to “earn” that inheritance (i.e. the family farm) – several springs, summers, and harvests spent working long, hard hours. So, that wasn’t money that would have just “fallen into the undeserved laps.” The only good thing that came out of it all was that college for all three was paid for with money from the sale and they were able to stay in their house (the one they all grew up in) until they finished high school.
And, especially true as Danny and Mike said:
“It’s not the government’s money!” and “It’s already been taxed!”
Charles Martel also said:
“I’m not sure that the detour the money takes, hither and yon through various departments, satrapies, and bureaus “to fund programs,” does anything useful.”
Worded much better than I would have. I especially like the “hither and yon” part; that sounds about right our tax dollars go – hither and yon, never stopping near me to do any good.
P.S. DQ, It is hard to ignore that little quip of yours, “The person from whom the money is taken no longer needs it” Really? I do hope that you were just trying to be funny, even if it was inappropriately. Just because I don’t spend money on myself doesn’t mean that I don’t need it (for family).
I’m puzzled by the “has already been taxed” argument. Most taxes could be opposed on this basis. Sales taxes, property taxes, gasoline taxes, tobacco and alcohol taxes, special assessment districts and a host of others are paid for with money that has already been taxed. Social Security may even be worse, charged against pre-tax gross income. Why is this argument uniquely put forth when we are talking about inheritance taxes?
The small factory should definitely be run by a corporation, which, since it never dies, would easily avoid an inheritance or estate tax.
Not a single person so far has taken me up on my challenge to name a better tax. As for the criticism that the tax does not lower the deficit, until we have a balanced budget all taxes either lower the deficit or allow for an increase in spending to keep the deficit the same. Proposing a reduction in spending would be an acceptable alternative to proposing an alternative to the tax, but only after the budget is balanced (since the proposed reduction in spending should be made anyway, whether there is a reduction in taxes or not). Anyway, no one has done that, either.
The one argument made so far that did make sense to me is that the cottage industry that has sprung up around tax avoidance is a complete waste of resources, but the same might be said, for example, of the industry surrounding income tax avoidance.
Charles, when I said “The person from whom the money is taken no longer needs it” I simply meant that person is dead. Of course, his/her family may still need it.
Mike, pass your money on to your beloved children before you die. That’s why I suggested an end to all taxes on gifts. Our put it in a trust or some sort of family corporation where it will pass automatically to your children when you die, without being taxed. Sorry, this is not my area of the law, but there are plenty of advisors available to set these things up.
Charles Martel, I suppose you are right that the government shouldn’t be in the business of deciding who has earned money and who hasn’t. Still, I’d rather take from a person who inherits money than one who works hour by hour to earn it. I’m not saying that inheritance/estate taxes are necessarily good things. I just don’t see why they are considered so much worse than other taxes. In many ways, I think they are better.
One more thought. I would be in favor of a generous amount exempt from the tax to take care of the person who wishes to pass on a small estate but does not have the assets to spend on good tax avoidance advice. Otherwise, such a tax is indeed unfair.
Sr. Quixote, you proceed from a firm assumption that the revenue from this tax does good things; it is this assumption with which I would respectfully but vigorously disagree.
With regard to deficit reduction, our fiscal history demonstrates that additional revenue is not typically used for deficit reduction at all. One study found that out of 16 years in which taxes were raised, spending increased even more in 15 of those 16 years, resulting in an even larger deficit. Give Nancy Pelosi an extra $1.00, and she’ll spend an extra $1.25. So I’d rather give her $40,000 and run a $10,000 deficit than give her $4,000,000,000,000 and run a $1,000,000,000,000 deficit. Besides, there are certain core functions of government which simply must be performed, or else the hayseeds show up on the capitol steps with pitchforks and torches; the rest is mischief money, for funding ACORN, bailing out insolvent union pension funds, buying large auto companies, etc.. Taking federal revenue down to the level needed for those core functions would be a wonderful, wonderful thing to do.
DQ, you said, “The small factory should definitely be run by a corporation, which, since it never dies, would easily avoid an inheritance or estate tax”.
I am not familiar with the fine points of the law on this, so please explain this to me. The family corporation’s liabilities are a mixture of debt and equity. The equity figures into the deceased owner’s inheritance tax liability, doesn’t it? If the family inherits the equity, it is taxable, right? If the family doesn’t have the cash on hand to pay the inheritance tax, it must either pay for it with additional debt or sell the family’s equity in the company. That’s why family companies have to be put into trusts.
I think of the effects of the inheritance tax on Americans as a sort of equivalent to the way the Great Society’s welfare system has broken down the black family. Except that in the former, the government intrusion is taking away money, in order to fund the latter destructive intrusion (among other things). Both intrusions are equally destructive for a good society and for the citizens involved. In a usual big-government slight-of-hand move, both intrusions actually most benefit third-party special interests (bureaucrats and lawyers) who are able to lobby in Washington, while both hurt diffused constituencies unable to effectively lobby for themselves.
In most cases the inheritance tax takes money from Americans who have made responsible choices over the course of their lives. Many people think of it as a tax on the rich, and that the rich can well afford it, the children haven’t earned the money, etc. As if this moral argument justifies the theft. But what seems even more egregious to me is the assumption that the “common good,” as defined by government politicians and bureaucrats who do not know, trumps each and every individual case. As the good comments here have discussed, there are many, many cases, I would guess the majority, where the inheritance tax hurts survivors who are not “rich.” That fact should give one pause, even if one doesn’t agree with the moral argument, or the pragmatic argument that taxing success, foresight, responsibility, and families providing for themselves is a bad incentive in a society.
Why shouldn’t rich old people give away their money to their loved ones? Seems obvious to me that I would want to provide for myself responsibility (including any medical problems that would crop up in old age) without having to go with a hand out to my children. Ever read King Lear?
The government in this case takes foul advantage of responsible Americans who, in a just society, would be encouraged and incentivized. It takes away yet more freedom, of both individual achievers and survivors, with no moral right. And it takes advantage of the fact that people don’t know when they’re going to die.
But, obviously, lawyers and accountants love it. And politicians get the money to hand out as favors to their buddies. Do you see why people are angry yet?
“In truth, the government passes it right back out into the productive economy, it stopping in government hands only long enough to do what taxes do — fund programs and reduce the deficit” This is a variant of the “broken windows fallacy.” If money is wasted on something by the government–say, breaking windows and then repairing them, or digging holes and filling them up again–the money does “pass right back out into the productive economy” but it has still been wasted. Human resources and materials, for money is a token, have been spent on useless things. Unfortunately, many if not most government programs are now in this category rather than in a genuine “investment” category.
In truth, the government passes it right back out into the productive economy, it stopping in government hands only long enough to do what taxes do — fund programs and reduce the deficit.
That’s an amazing truth you have there DQ. A positive lack of truth there it is.
Danny, you may well be right that there are better solutions. As I said, this is not my area of the law. My point, though, is that there are solutions out there and anyone who has $20 million in assets in anything should get an expert and figure out how to take advantage of them.
Zabrina, no, I still don’t see why people are angry, and no one has yet even tried to explained why any other specific tax is better or fairer than an inheritance or estate tax. You ask “Why shouldn’t rich old people give away their money to their loved ones?” and I agree with that, which is why I’d eliminate gift taxes. But I’ve seen far too many cases in my life where family and friends act like pirates eyeing a treasure chest, impatiently waiting for the patriarch to die so they can divide the spoils. I have one client who to this day is convinced that his uncle’s caretaker killed his uncle because he knew he was well taken care of in the will and got tired of waiting for the old fellow to die. I got kicked out of a boarding house in college because the children of the old lady who ran the house got impatient, took her out of her lifelong home & put her in an old folks home, knowing that would kill her. I’m sorry, but I’ve seen too many examples like this to share a rosy view of inheritance.
When I was 15 my Dad told me to never count on an inheritance from him because he planned on spending it all before he died. I’m pretty sure he hasn’t spent it all (he’s a very fiscally prudent fellow) and he’s going strong at 82, but I’ve always lived my life as if he meant what he said. Too many people work less hard than they should to make their own way in the world because they expect to receive an inheritance.
I’ll stand by my statement that if I have to take money from someone I’d rather take it from someone who is receiving it as an inheritance than from someone who is receiving it for earning it hour by hour in a field, a factory or, heck, at the counter at McDonald’s. From that standpoint, income taxes and Social Security taxes are 10 times worse than inheritance/estate taxes. So, again, I ask, what taxes would you prefer to inheritance/estate taxes?
DQ, there seems to be a fundamental contradiction in your position as you’re asserting that significant $$$ should be raised by estate tax yet at same time, people should shield their assets from said tax by lifetime gifts and by use of trusts, etc. Obviously, if the second is effective then the first isn’t going to raise much money.
Also: I wonder how this is handled in Germany?…because that country has a considerable number of successful and sometimes fairly large family-owned businesses that have been around for a long time.
Hi David Foster. I’m not really “asserting that significant $$$ should be raised by estate tax” although I know it looks that way. I’m just trying to understand why the venom against this particular tax, far more heat than other taxes seem to generate. I’m hoping the Bookwormroom readers will compare this to other taxes and explain why this one is worse than the others.
I can understand why senior citizens focus on this tax, since it is potentially the largest tax still to be paid from their assets. But from an objective, non-self-interested standpoint, I just don’t understand why this tax is so much worse than any other tax.
Your point is well taken, though, that if folks with significant money have ways to protect themselves and folks with less money are largely protected by a sizeable up front exemption, not a lot of money will be raised by this tax. But it’s still worth exploring, I think, why this particular tax is such a hot-button item. Thanks for contributing.
One tax on citizens to fund the Federal government, period: a flat consumption tax. Abolish all other taxes, including the corporate tax (which still ends up another, hidden, passed-on tax on individuals). If you want fairness and equal rights under law, that is the answer. There is no moral justification for seizing people’s money based on the government’s judgment of whether they DESERVE it or not, based on the government’s evaluation of their “class” which in practice for individuals may or may not be true. One flat consumption tax would be transparent: everybody could see and forecast exactly how big a chunk of money the government takes from them, and they could clearly evaluate if they were getting their money’s worth as citizens. That’s why politicians (and the lawyers they swim with) don’t want it, because they and some of us already know we’re not getting our money’s worth, and they don’t want the rest of us millions to figure it out.
I personally prefer the Fair Tax, since it provides a rebate of the tax to citizens below the poverty line, to cover the purchases of life’s necessities. It is also revenue-neutral: will supply the same amount of taxes to the Feds as they get now. The only problem I see with a generic flat tax is that it is still too easy for any sitting Congress to meddle with it and find exemptions and exceptions for special interests and social engineering (i.e. favoring their friends).
Your examples of people acting badly because of inheritance laws had nothing to do with inheritance taxes, unless you want to use the tax to confiscate all wealth inherited and thereby remove the incentive of some people to take advantage of rich older people?
It’s clear you are okay with using taxes for social engineering. But who decides who’s in charge of what’s being engineered?
“…but I’ve seen far too many cases in my life where family and friends act like pirates eyeing a treasure chest, impatiently waiting for the patriarch to die so they can divide the spoils.”
That may be, DQ. There are good families and there are bad families. However, it isn’t the government’s business to interfere either way to engineer equitable family relations. Let’s face it, it is not the money that made people self-serving and greedy, it is peoples’ moral decisions that made it so. Finally, the core argument remains, it is not the government’s money.
Taxation, I agree, is a necessary evil. I happen to believe that this country is only going to survive if the tax burden is shared equally by all of society’s segments – a flat tax for all income groups. Anything else is an open door for one group of people to plunder the labor of others.
“My point, though, is that there are solutions out there and anyone who has $20 million in assets in anything should get an expert and figure out how to take advantage of them.”
That’s like saying any nation like the US is able to properly handle all kinds of military problems simply because the US is militarily mighty.
You have ignored the Human Factor, DQ. Maintaining a government bureaucracy and lawyer class, by siphoning funds from a 20 million inheritance, isn’t a “solution”. Just because you have money, doesn’t mean it will do anything good. Just because America has a military, doesn’t mean people know what to do with it.
>>And, if you do oppose the inheritance tax, what tax would you raise to compensate for the reduction in revenue from the permanent elimination of this tax?>>
None. I propose that the government be reduced in size. The only legitimate function of the federal government is defense and interstate commerce. Lets reduce it back to the size required for those functions.
You don’t understand why people get incensed about the inheritance tax, and then you comment about the greedy heirs who hover like vultures till the person dies – well…the government is the biggest greediest vulture of them all and there’s absolutely no way to cut it out of your will. There simply is no “won’t”. You _will_.
The reason people get so incensed is that the estate has been earned over a lifetime, and it _belongs_ to the person who earned it. The government has earned _nothing_. Taxing that estate is simple theft. It is _not_ the governments’s money unless they decide to let the citizen keep it – it’s the citizen’s money, and the citizen pays a tax to support the government in performing certain functions. What right does the government have to that property? Past services rendered? As you point out, the person is dead – s/he requires no further services, so what right has the government to demand payment?
>>That’s why family companies have to be put into trusts.>>
Danny – even if it’s a Sub-chapter S family corporation ? Have you any info that would compare the two options? We’re considering possibilities…
“I’ll stand by my statement that if I have to take money from someone I’d rather take it from someone who is receiving it as an inheritance than from someone who is receiving it for earning it hour by hour in a field”
Now you are playing identity politics. You think if they take the Jews too, that they won’t be after you eventually?
The law has to cover everybody. You start making special dispensations for the “elite” and politically favored, and things will get into civil war territory eventually. That includes people who earned money and people who got money due to blood ties.
Just like free speech, you can’t ban the idiots without also banning the genius speakers.
” I’m hoping the Bookwormroom readers will compare this to other taxes and explain why this one is worse than the others.”
Why should people who don’t lobby against specific taxes alone, be able to tell you why special interests lobby against one tax? You’d have to investigate the special interests. Follow the money.
“what tax would you raise to compensate for the reduction in revenue from the permanent elimination of this tax”
I don’t think a lot of people here are for “compensating” for the government’s need for money and luxuries. We’re here to starve the government. Not play paddy cake with it when it cries for a new serf class to exploit, when the old serf class got free.
Elimination of one tax, is elimination of one tax. It does not necessitate, for good government, that it be “replaced”.
Suek, I suspect our Benevolent Masters in DC like the inheritance tax precisely because it tells the peons that they can slave for generations, but that they still owe a “cut” to the Man upstairs. That means serfs are serfs and will stay serfs, not masters of their own destiny.
It also means the tax bureaucrats and public “servants” are getting wealth untaxed. because their money is the taxes of the people. This is a great way to co opt ambitious people. Instead of working to get rich, knowing the government will own you. Instead, why not be lazy and get free vacations while having the government tax slaves to pay YOU?
Okay, we have two suggestions — a flat tax on income and a flat tax on consumption. I like these and would love to hear others (and to hear the relative merits of those two compared). However, they would involve the elimination of far more than just inheritance and estate taxes.
Danny notes that the core argument remains that it is not the government’s money, it’s the person’s money. But that is true of all taxes, isn’t it? What makes inheritance/estate taxes any different in that regard?
(OK, my suggested alternative coming up in a bit here, but in the meantime…)
DQ, I think part of why we’re transmitting on different frequencies here is that many of are hearing your question in the context of “this inheritance tax, as it is being reinstated, with all of the context that goes with it” rather than, “inheritance taxes in general and in principle.”
That context is that when the ball drops on New Year’s Eve in Times Square, the inheritance tax goes from 0% to 55%. Even if you like inheritance taxes in principle, 0 to 55 in 10 seconds is no way to run an economy. (Well, at least they’re not making the new tax rates retroactive to before the legislation was passed, as the Dems reached back into H-Dubya’s term when the Arkansan arrived in ’93.)
More context: they already tax half the things under the sun, and are constantly considering the other half, according to what they think they can get away with; in such a context, the proper response is to fight, fight, fight everything they propose, because with each victory they achieve, they just move on to their next objective and we have lost ground.
More context: as the deceased is… well, deceased, as has been observed here… inheritance taxes may be thought of as income taxes on the heirs. So why is this income tax 55%, instead of topping out at 39.6% like the rest?
And, if you do oppose the inheritance tax, what tax would you raise to compensate for the reduction in revenue from the permanent elimination of this tax?
I think suek comments have led me to the definitive answer. Reduce the size of government or tax the hell out of them.
*Representatives from both houses should be taxed [details/charts/graphs not provided here] incrementally by a % [to be determined] for serving beyond two terms.
*Chairman/women who serve on house committees beyond their two term limit should be additionally taxed incrementally at a higher rate. First level tax for serving beyond term limits and again for chairing beyond term limits.
*Tax rates rise for house members each year in or out of office. This includes, all perks they enjoy at our expense, i.e., health insurance packages, travel, dining.
DQ I tend to sympathize with your views on this one. The pejorative phrase “death tax” is really a misnomer, as no one is taxed upon their death. The tax is levied on the beneficiaries of the estate, who, it seems to me, are getting a windfall earned through the sweat of the brow of someone other than themselves. Arguments against taxation generally, IMO, prove too much, as the issue you raise is why the inheritance tax is singled out as against other taxes for particular derision. Accept the proposition that all taxes are bad and at best necessary evils — why is this particular tax worse than the others? If you have to have some taxation, as most seem to agree we do, it is the lesser of evils, it seems to me, to tax windfalls more than income earned by the sweat of one’s own brow.
That said I do think I understand the instinctive visceral reaction contra the inheritance tax, in that what seems a windfall to you and me seems to many others a birthright. I certainly understand why it would seem outrageous for the govt to step in and squelch the wishes of the departed in terms of how to distribute the product of a lifetime of hard work. But if you gotta tax something, all other things being equal I’d rather tax (what I deem to be) windfalls first and earned income second.
” If you have to have some taxation, as most seem to agree we do, it is the lesser of evils, it seems to me, to tax windfalls more than income earned by the sweat of one’s own brow.”
It’s a way to decrease wealth in generations, that the government came up with. There’s no particular reason why estate taxes should be that high, except that it is a good way, like broken marriages, to keep the middle class from being the wealthy class.
The wealthy class, already takes advantage of certain loopholes in their wealth distribution plan. Or perhaps their plan was always, like Soros, to exploit everybody and then spend the proceeds, before they die, ushering in a Utopia.
I seem to remember that if you simply keep the money in the inheritance in a trust or mutual fund, and simply use the capital gain or interest, you don’t get the estate tax. But what this means is that it inculcates an entire generation of Rich and Useless fops who essentially have a guaranteed income as “trust fund” babies.
Perhaps Democrats are smart enough to figure this out, as they seem very good on keeping wealth “in the family” so to say. Thus they don’t feel bad by taxing the “stupid” half for trying to get all the inheritance at once.
DQ
Here is why I think we so dislike the Inheritance Tax.
The people who are hit the hardest by this tax are those who are “middle wealthy”. They have worked hard all their life, built up a business paid their taxes, and lived the American Dream. They are now fincancially comforable and essentially independant. They do not have the resources to shield the product of their efforts as the very wealthy with several hundred million dollars in assetts.
The Inheritance Tax takes the product of a lifetime and forces people to divest from it just to give the Tax Man as share of something he had no hand in creating (and, indeed, could be seen as an advisary in its creation). The Tax Man takes a large bite too. I believe the value cited earlier was 40%. If there is more than two benficiaries to your estate, why does the Tax Man get the biggest bite?
The Inheritance Tax is a one time hit that takes productive assets from the estate and gives them to the government. Those assests are either activly running a productive business of some sort, or are in the form of stocks and bonds that fund other productive concerns. Government money does not fund productive concerns.
The strong emotions involved with the inheritance tax I believe are related to the unfair stacking of the deck in favor of the government to take one last, large bite out of the fruits of its citizens labor at a time when they can not do anything to manage the problem while dealing with the loss of a loved one. This is where the idea of “taxes were already paid on the money”.
When the money came in it was taxed as income. What was left over was used to live and build the wealth of the individual (stocks/bonds/savings or capital back into their own business). Income generated from these efforts are also taxed. Again, what is left over is used to live on and build wealth. We humans develop an emotional attachement to the things we have created and we feel threatened by a third party arbitrarily taking the fruits of our efforts. This is true whether it is thru theft by a criminal or by the legal takings of our government.
I hope this sheds some light on the emotional impact the Inheritance Tax has on people.
P.S. Book: We enjoy Don, but hurry back.
>>The tax is levied on the beneficiaries of the estate>>
Not so. It is levied upon the estate before distribution. Income status of the beneficiaries is irrelevant, therefore.
” why is this particular tax worse than the others?”
You are lacking the context. Why is one nation getting a nuke worse than another nation getting a nuke? Why is the US using two nukes better than Iran trying to get nukes for peaceful energy? Because.
We’re dealing with reality here, people. Not some fictional world where we can make things up as we go along. And in reality, there are forces, like government, that just don’t change based upon personal whim.
The Revolutionary War was not about a tax on some tea. There was no particular issue about this thing being more than the other thing on a equivalency scale.
This is about camels, feathers, and backs.
>>There’s no particular reason why estate taxes should be that high>>
Well…except for the fact that the dead don’t vote – except in Chicago…and even there they only vote as they’re told…!
<B>They do not have the resources to shield the product of their efforts as the very wealthy with several hundred million dollars in assetts. </b>
But they are the ones most often targeted by the government for liquidation of funds, when government needs some quick cash for prostitutes or what not.
DQ and Johnston should get in touch with the reality of government corruption. They deal with such cases, without knowing the root causes; inevitably it creates problems.
Government corruption is not a “mistake”. It is a feature of the tyrants. It is not an “accident”. People still haven’t woken up to that little fact.
You have a bit of a fallacy in your premise: “The one change I would make is to make all gifts untaxable…”
If you do this, every dying man and woman will gift their entire inheritance to their heirs on their deathbed, thereby turning your “inheritance tax” into an “accident tax” (on people who die too suddenly to gift their stuff away). To make revenue from an inheritance tax, you *must* combine it with a gift tax (and adjust their rates together). As long as we have them, they will stay together out of sheer (revenue) necessity. By endorsing an inheritance tax, you are endorsing an entire framework of general transfer taxes. It’s pretty easy to consider transfer taxes to be a market-signal-distorting pox on the economy.
Cheers
— perry
Spartacus made some good points. And I was especially amused by the irony of Yankee Bruce and I almost simultaneously posting at the same time concerning the middle class issue with estate taxes.
You know, Johnston. If the government hadn’t stolen the wealth of families. They could have raised themselves from abject poverty and gotten themselves secure with some funding. Making money is hard when you have nothing. It gets a little easier if you have help from the family. And it gets a lot easier if disasters strike, but don’t destroy you because your family can cushion the fall.
You ever think what would happen to all your clients that ran into ERISA, if their ancestors hadn’t been taxed for all their wealth, and had instead passed it along so the wealth built generation upon generation, Johnston? They could afford better insurance, you know. Or to pay it out of pocket.
Some people deal with problems as they happen. But I deal with problems that can be prevented from coming into existence.There’s a difference.
Hi Suek:
Sub-Chapter S corporation operate on a “flow through”, which means that earnings at the end of the year flow through to the individual before they are taxed as income. That’s on the Profit/Loss side. On the Balance Sheet side, In my case, the assets of my Subchapter S are in a trust.
Yankee Bruce makes an excellent point in that the inheritance tax is usually paid by the middle wealthy. The wealthy-wealthy keep their funds in trusts that are out of reach of the tax-man altogether. Evidence for the prosecution on this point: the Kerry’s paid only a small fraction of their income in income tax when Jean F. Kerry was running for President (I did the math) because most of it was protected in international trust funds. Ditto for the Kennedy family, whose wealth is tied up in Fiji-based trust funds. That, of course, hardly stops them from voting and legislating to raise taxes on the rest of us lumpen proletariat while claiming to feel our pain.
“That, of course, hardly stops them from voting and legislating to raise taxes on the rest of us lumpen proletariat while claiming to feel our pain.”
The peasants got to be kept in their place. If everybody was as rich as the Big Names, it would be horrible to maintain standards. Everyone here should already know this about our precious rulers in DC.
So OK, here’s my two cents, with explanatory notes at the end. A bit long, but alternatives were called for! Been chewing on this for a bit, and think I’ve managed to include something to offend just about everyone. =)
Amendment 28: Federal Revenue and Expenditure
Section 1. The sixteenth article of amendment to the Constitution of the United States is hereby repealed, effective five years from the date of ratification of this article.
Section 2. The Congress shall have the power to tax each state according to the net present value of the expenditures and the increase in financial obligations to which that state legally commits itself during each calendar year. The same rate of taxation shall be applied to all states uniformly. The Congress shall have no other source of taxation.
Section 3. All revenue of the federal government shall go directly to the Treasury of the United States. The Secretary of the Treasury shall periodically account and make a report of all revenue collected, after which no less than one-twentieth of such revenue shall be used for the purpose of retiring permanently financial debt obligations of the United States. After this, new debt obligations may be issued, but not in an amount to exceed the value of additional debt obligations which have come due. All remaining funds shall then be placed at the disposal of the Congress. The Congress shall have no other source of expenditure, and shall have no authority to promise or commit funds for expenses beyond the current budget year except by transferring to a separate account the entire amount necessary for that expense.
Section 4. No payment or loan shall be made by the United States to any person or entity except in payment for specific and meaningful goods purchased or work performed, or the satisfaction of previously existing debt obligations.
Section 5. Failure to pay required taxes to a state is hereby prohibited. The Secretary of the Treasury shall have the authority to require an annual report of each taxpayer consisting of the taxpayer’s name; current address of residence; state of residence, if other than that of the current address; and an identifying number or code acceptable to the taxpayer’s state of residence. The Secretary shall use such information to assist states in accounting for all taxpayers.
Notes:
A) About 100 million tax returns would be replaced with 50.
B) The idea is a phase-out over about five years, to minimize the chaos. States would need to increase their taxes radically to compensate.
C) Federal taxes in any given state in any given year would be wholly dependent on the amount to which the legislature committed itself in that year, on an accrual basis. So if state employees are promised this year a 50% increase in their pensions starting 15 years in the future, the net present cost of that commitment would be taxable this year; conversely, if future obligations were decreased, this year’s taxes would decrease accordingly. So past sins (CA, IL, NJ, NY) would not kill any given state, and pressure would remain on the responsible ones to keep it up.
D) States would naturally be free to raise their revenue in whatever manner they chose, be that income, sales, property or inheritance taxes. “One size fits all” would be replaced by a marketplace of 50 different taxation plans.
E) Essentially, the only control lever available to Congress would be to adjust The Multiplier each year, which would likley begin somewhere in the range of 4.000. In other words, I haven’t looked at it real recently, but federal spending is about 4x the amount of state spending, so for a smooth transition, Congress would need to set The Multiplier somewhere in that range initially. As states assumed control of numerous functions currently handled (unwisely) at the federal level, the multiplier would decrease.
F) As an example, suppose a state spends about $20B annually. As federal taxes were phased out, that state would need to remit about 4.000 x $20B = $80B to DC. This is money they were already paying in taxes anyway, so it’s not a tax hike, but just a change in form. But every additional $1B the legislature decides to spend internally will in fact result in an additional $5B in revenue needed. This alone will put some fairly extreme pressure on state legislators to trim any spending not strictly needed. Additionally, since small spending changes would be magnified in different tax rates between the states, all 50 states would be thrown into fierce competition with each other to achieve maximum efficiency.
G) This amendment also serves as a balanced budget amendment, plus about 5%.
H) Yes, Section 4 would mean that Social Security, Medicare, and Medicaid would need to be phased over to the states.
Yes, this may seem a bit on the extreme side, but we are coming into extreme times. With our national aircraft pitching down 40 degrees, running out of altitude, and approaching redline speed, the clowns in charge are retracting the flaps, pushing in the throttle, and applying forward pressure on the yoke. This is utter madness, and we will be destroyed if we don’t do a number of things that are fairly radical. We’ve been politely asking Congress to please be more careful with the credit cards for decades… how’s that approach working out? We need to cut up the credit cards entirely, and just give them a fixed amount of cash, which is a bit less than we collect. When the cash runs out, they’re done for the year.
Washington, DC has become a house of ill repute. The trillions and trillions of dollars lying casually about have an odd tendency to induce what economists like to call “rent-seeking activity.” It attracts all the wrong sorts of people, as can plainly be seen. Giving them one simple vote on taxation and taking away the corrupting power of the federal tax code will not be a panacea, but will be take a lot of the fun out of it for the social engineers and the corruptocrats.
Most current members of Congress, naturally, would rather sign away their souls (had they not done so already) than pass this. But with 38 states on board — and yes, this is the really tough part — you don’t ask them, you tell them: pass this, or we’ll just call a constitutional convention, and if we have to do that, we’ll add a few items to our agenda. That’s how they got the 17th through.
It may seem extreme, but if we don’t make some permanent and structural changes — this, and / or something else — events may well overtake us which will make this solution seem quite moderate.
This may be off topic (I doubt it) but the linked book review prompts me to say that whether we are speaking of inheritance taxes or misuse of taxes, they are inextricably linked to how the money is spent, abused, wasted, corrupted, manipulated to feed the belly of the beast. Never Enough is an analysis of the history, politics, and economics of liberalism.
You’ll find nothing better. William Voegeli’s perceptions are keen, and his wry humor exposes the liberal bent for espousing contradictory positions simultaneously.Voegeli’s thesis is that liberalism has no limiting principle. As Samuel Gompers once famously said, “We do want more, and when it becomes more, we shall still want more.”
http://www.americanthinker.com/2010/08/never_enough.html
Let’s compare an inheritance tax on a wholly-owned business to a nominally equivalent corporate tax. The corporate tax is due annually and compounds. It’s predictable (barring fiddling with rates and regulations); you can figure it into an investment calculation without too much trouble and see if the investment still makes sense after (say) 20% of gross profit gets taken away each year.
Inheritance tax is a form of tax lottery – a (presumably) unpredictable event triggers it. This means you have to juggle probabilities to account for it. For economic planning, this means that inheritance taxes carry a risk premium on top of their nominal rate.
Inheritance taxes arbitrarily charge higher rates to accident-prone, sickly, and just plain short-lived people over healthy and long-lived ones. I might well argue that an inheritance tax is unfair precisely because it gives a free ride to people whose parents happen to live longer, vs. those whose parents happen to get cancer before 50.
Cheers
– perry
“Yes, this may seem a bit on the extreme side, but we are coming into extreme times. ”
That isn’t extreme at all. I have a lot more extreme reforms in mind ,that would seriously change the landscape around in how power is distributed, invested, and applied.
“events may well overtake us which will make this solution seem quite moderate.”
civil war. This time, the South won’t be stuck on the morally inferior position.
Suek said:
“Not so. It is levied upon the estate before distribution. Income status of the beneficiaries is irrelevant, therefore.”
Point taken; I was incorrect. I do think, though, that the effect of the tax is visited on the beneficiaries, and has the effect of reducing the magnitude of what I still believe to be a windfall to them. The point you raise does render it appropriate, I think, to tax the windfall at ordinary income tax rates and not a special increased rate against the estate. And there should be provisions akin to income averaging and such to ameliorate the bite inherent in realizing revenue in a lump sum.
Ymarsakar said:
“You know, Johnston. If the government hadn’t stolen the wealth of families. They could have raised themselves from abject poverty and gotten themselves secure with some funding.”
I must say I find this persuasive, and it seems to me to be responsive to DQ’s original inquiry about why the inheritance tax is uniquely bad as opposed to “the govt is corrupt so all taxes are bad.” You’ve brought me around, at least to the extent mentioned above, that an inheritance should be treated as ordinary income to the recipient, not as some special thing subject to an increased special tax.
BTW, I also think the threshold before there’s any inheritance tax should be maintained, so I think it should be treated as ordinary income only above that threshold, or some functional equivalent.
The ultimate question is, do you understand Adam Smith’s “invisible hand” or not? Do you understand that in the aggregate, people looking after their own interests spend money better, more innovatively, more productively, and in a way that is much better for society as a whole, than government does or ever can? Do you understand that the more power government has (and money forcibly taken from others represents power), the more corrupt it becomes and the worse off society is? Do you even understand the Laffer curve (tax at a lesser rate and you get more income when people are set free to enjoy and control more of the fruits of their labor)?
If you understand that freedom of speech means that there will be disgusting speech to tolerate and protect as part of the deal, then why can’t you understand that freedom of property means some people may use their own property in ways you don’t like, but it is the freedom that is sancrosact? The Founders understood this:
http://www.fff.org/freedom/fd0811e.asp
The inheritance tax is “what else can we get away with” from the current government’s viewpoint. There is no moral basis for it. Yes, that money has already been taxed. From the taxpayer’s viewpoint it is more rapacious, redundant, outrageous theft under cover of “the law” (i.e. at the point of a gun) which is at base unConstitutional.
And yes, I too say cut spending and shrink the government; it does not need to replace the tax level it enjoys now. A smaller, more limited government will stimulate the economy, too.
One last point: You say, “The person from whom the money is taken no longer needs it.” Every corpse for themselves, I guess.
But that’s not how most people see this: they see a family and its wealth. If granddad dies, that’s a tragedy, but it’s not *his* money as much as *the family’s*. Granddad just did a good job managing it. It’s this element of continuity that you seem to be entirely missing in your premise. (You seem to think of heirs more as ingrate leaches than as partners-in-family.)
Now you’re correct that by current tax law, most of the tax hit can be avoided by, in effect, incorporating the family as a business (whether by corporation, trust, etc.) Much of the visceral push-back you’re seeing is against this very idea – people don’t *want* to see their family as a business, and deeply resent having traditional family organization penalized by tax fiat. In essence, they think of a punitive-level inheritance tax as an attack on traditional family structures.
Now maybe you think that traditional family structures should be changed. But you shouldn’t be surprised by the unique resistance to inheritance taxes (vs. other tax types); it’s that family thing.
Cheers
— perry
Sparcatus, interesting idea. I don’t know what the practical effects would be, but it sounds worth exploring. Being a simpler person, I have a much more simple solution, which I’ll post, probably today or tomorrow.
Yankee Bruce, I can’t wait for Bookie to get back, too. While I’m having a lot of fun with this, I’m not a blogger at heart and I will be more than happy to turn things back over to her much more capable and interested hands when she gets back in town next week. Plus, I miss our lunches; she is a fascinating lunch companion.
Zabrina, I agree with you about cutting spending and shrinking government. But I place my highest priority on balancing the budget (I’ll post about that in the next few days, too). I’m not thrilled about reducing any taxes until spending is reduced to the level of income, and that doesn’t seem likely any time soon. Yes, I know, the real discussion here is about reinstating a tax, not reducing one, but the principle is the same. Reduce spending and get the government’s financial house in order first. Then we can talk about reducing spending below current levels of taxation and reducing the taxes accordingly.
<B> But I place my highest priority on balancing the budget (I’ll post about that in the next few days, too). </b>
People can remember that they balanced the budget in the 1990s.
It led to the crippled military capacity Bush had to make use of it to deal with 9/11. Balanced budgets, aren’t what DQ thinks they are.
<B>Reduce spending and get the government’s financial house in order first.</b>
So somebody shoots up a convenience store. And people then think it is a good idea to tell him to use up less bullets.
How about you take his bullets away, all of em, first. Reducing “expenditure” is a poor man’s way of solving the problem of people who got stuff they shouldn’t have to “expend”. The solution is to remove their illegal property, not to get them to use up less of it.
It’s simply the difference between social and asocial. Social is where enemies have a choice. If they choose to tell you to F off, you just have to take it and go away. But if a crim doesn’t have any bullets to expend, then it doesn’t matter what he “wants” to do with his gun. He can’t shoot the gun.
A government with no money to spend, has no choice but to cut down. Whereas if the government has money, then they’re not worried. They can spend as much as they can print out, no matter what the Rest of You All think or say. Power is in their hands, not yours.
Now if the gov only had 2 trillion to spend, cause that’s all they got it and anything else is toilet money, then it becomes a matter of priorities. The issue of greatest priority to Americans will show itself in the Battle for Funding.
Starve the beast first. Debate with it about its culinary habits later.
Spartacus #39
I like it! I more than like it! It also places more economic decisions on the states and I am all for that, while acknowledging we need some central government.
DQ – You’ve done an outstanding job. I like the way you tug at the fabric of a topic … it has made has all look at the bolt at each end [particularly at the frayed end].
Bookworm, wherever you are … we expect a full report on how you spent your summer vacation and hope you avoided the travels of ‘dear leader’ who has turned the word ‘vacation’ into something one does in any week that has a Tuesday.
Sadie, Thank you! Bookworm has sent me a couple of short e-mails that indicate she is having a terrific vacation and I’m sure she’ll be happy to tell us all about it next week.
Y-man, the problem is that this beast eats anyway. I agree with you in principle, but there is no such thing as a government with no money to spend, so long as the government is permitted to spend more than it takes in.
A balanced budget amendment is the counter to that.
Government is made out of humans. Anything that modifies human behavior, also affects government. The same is true vice a versa.
There are many ways to block or modify a person’s behavior when it comes to spending.
The black and white question is, “A tax is a tax no matter what you call it. If we are going to live with taxes, why is this tax worse than all the others?”
I don’t like the fact that my family, regardless of who thinks they may be deserving, will get less than half of what I’ve spent my entire adult life working for so they can have a better life than I did.
I dislike this tax specifically because frankly, instead of just increasing the taxes that already exist and dealing with the consequences, our government tacks on another one in what feels like a final jab on the way out.
People are naturally more emotional when they think of their own death, or that of a loved one, so this one just feels personal. You might be able to argue logically that whatever taxes are in place, fair or unfair, the form should not matter, but I think most people feel this is one area where they should be able to find some respite from having to pay taxes.
Perry the Cynic — You make some great points. Stop by any time.
Don Quixote asks,
> I’m puzzled by the “has already been taxed” argument.
Perry The Cynic said it better than I did in his series of comments, on why this tax generates heat.
Plus, relying on yearly gifting when (as Perry said) an accident alone obviates that path, is no way to run a taxation scheme.
Relying on yearly gifting is also a bad idea because you gift liquid assets. Perhaps the truly wealthy can do that, but even then, they ought to have significant value tied up in assets.
But the real problem is that any modestly successful family business will have nearly ALL of its assets tied up in the family business. There’s not much in liquid assets to “gift”. By forcing the value out of the business into a liquid gift, you’re harming the economy, period, by deliberately reducing the value of the business, and the driving focus on improving the business.
I don’t see the estate tax as equivalent to the list of other taxes you list, DQ. All those others are based on interactions and activities within the economy. The taxation level of each may be too high or too low (ha!), but that’s a different argument. The estate tax is just a scheme to grab a chunk of money, period. Why not establish a “50th Birthday Tax” and grab 25% of all worth? It’s the same principle, really. It’s another mechanism to grab a chunk of money based on a life event, not on economic activity.