Posted on 04/29/2015 4:11:16 PM PDT by E. Pluribus Unum
Now that April 15 has passed, you may have hoped not to think about taxes for another year. However, on April 16 the House of Representatives passed H.R. 1105, the “Death Tax Repeal Act of 2015,” which would repeal the federal estate tax, no matter how large the estate, while preserving existing law’s favorable exclusion from tax of any gain on inherited property. Coupling the repeal with the exclusion results in both decedents and recipients winning at the cost of federal revenue in a time of deficit spending and federal debt. But more importantly, it is a quiet step that likely leads to the repeal of the capital gains tax, a result we should debate rather than stumble to.
There are equitable consequences of H.R. 1105 that trouble me, but they are not why I am writing this editorial. I do not write because of the estimated $269 billion in tax revenue the bill would cost or that the bill will only help individuals with wealth of more than $5.4 million and couples with wealth of more than $10.9 million, a small fraction of the top 1 percent. No, I write because I fear that the bill’s authors have a hidden agenda—the repeal of the capital gains tax—and I believe we should debate this repeal before small, stealthy steps like H.R. 1105 make it inevitable.
More troubling is what H.R. 1105 does to the decision-making of living owners of wealth. The bill likely increases the “lock in effect” that is often cited to justify preferential capital gains tax rates. The concern regarding lock in is that taxpayers do not sell appreciated capital assets but wait until they die to avoid the income tax. As a result, investors and businesspeople do not make the socially and economically best decisions but the least taxed ones. H.R. 1105 increases this incentive. Despite the existing favorable capital gains rate, no economically rational person would sell appreciated assets because any tax is higher than the 0 percent rate at death, especially as this favorable rate would be achieved without tax planning.
It is possible this result is intended to force the repeal of the capital gains tax. After this heightened “lock in” is criticized, the public would have a choice. The public would direct Congress either to repeal the Death Tax Repeal (politically harder than allowing the 2001 death tax repeal to lapse) or to eliminate capital gains taxation entirely and, with it, the lock in problem. It is for this second option that the advocates of H.R. 1105 are likely working.
It should not be surprising that politicians may be attempting something in steps that failed when the repeal of capital gains taxation was presented to the public. But we should not be fooled when the latter choice is presented as an unintended consequence of H.R. 1105.
Let us not forget at least one result of the removal of capital gains taxation: the shift of the tax burden from capital owners to workers. In turn, this shifts taxes from wealthier to less wealthy taxpayers at a time when the president’s tax rate is lower than his secretary’s and $1,000,000 income taxpayers earn well over 50 percent of taxable capital gains. We could debate the extent to which wealthy capital owners must avoid tax to create jobs. Regardless of whether eliminating capital gains taxation will or will not produce a fresh boom in jobs, those with jobs will see an increase in their share of the tax burden.
These issues need to be debated before we start down a path that reduces taxes on capital. Even if H.R. 1105 fails in the Senate or to be signed, the reiteration of the idea of estate tax repeal (now with a favorable basis rule) makes it more palatable for the future. So let us be honest about we are doing so that the consequences of tax legislation can be intended.
McMahon is a professor at the University of Cincinnati College of Law.
Stephanie Hunter McMahon is a douchebaggette moron. By her logic, if her kid was hooked on crack, giving him more would make sense...
Maybe she took one too many elbows to the head in her wrestling days! ;)
I mean, you build a business against all odds. It is successful. No matter. You can't pass that along to your heirs, you have to liquidate the fruits of your labor to pay the taxman. Hell of a system you got there.
She sure loves the idea of other people paying extra taxes...
What a stupid economically illiterate statist b####.
Actually, there are some good points raised in this article. The issue of tax policy incentivizing financial decisions that may not be all that productive can be a serious dilemma.
Either its evil or stupidity.
Its a very simple question. What then becomes the point of working?
I get very little fulfillment working for others against my own interests.
Oh boo hoo, federal revenues might take a hit. Maybe it would finally force them to cut spending.
I might buy into her argument when the State reimburses me for an investment loss at the same rate as a capital gain. There should be no tax on an inherited estate or on capital gain. The estate was taxed to death and the capital was taxed into submission before it gained.
A serious dilemma for who? Why would you care if it’s not your money?
Suppose you spend a lifetime building up a business from nothing, and it's worth $10M when you reach the age of 90. If you die and pass the asset on to your heirs and there is no "death tax," then your heirs inherit your $10M business. But if you sell the business for $10M a few months before you die, you pay a hefty capital gains tax even under the most favorable tax scenario ... and your heirs inherit considerably less than $10M. If you're in the 20% capital gains tax bracket, for example, they'll only inherit $8M.
The author actually seems to be proposing two possible measures here. Either impose a "death tax" that taxes the capital gains at the same rate as if the estate's assets were all sold, or eliminate the capital gains tax.
In my world, their would exist neither a capital gains tax NOR an estate tax. I believe that capital formation should be encouraged as much as possible. But I also see dead people...
But another economic dislocation occurs because foundations and other tax-exempt organizations aren't subject to capital gains tax, while private investors and businesses are.
As a result, in a corporate takeover situation, the foundations don't mind having their shares redeemed for cash, while private investors have to pay a capital gains tax.
Some years ago, a company I had stock in had a lot of the shares owned by a foundation set up by a deceased big stockholder. Since the foundation had no capital gains tax, it was more than happy to vote for a takeover where the shares were redeemed for cash.
Meanwhile, we private investors, some of whom had owned the shares for many years, had a big capital gains tax.
I'm for eliminating the capital gains tax, but if it stays, make the foundations pay it too. (A lot of the foundations do damage with their liberal policies, so knocking them down a peg would be good for that reason as well.)
I’m referring to incentives in the tax code that encourage decisions that can have unintended (bad) consequences for employees, investors, etc. I’m sure a number of Freepers will post good examples of this right here on this thread.
That’s exactly how I would approach it, too.
Interestingly enough, you can avoid the estate taxes through trusts and that’s what the vast majority of the elite do. It’s precisely the people in the ~30-250K/year income range that manage to be sitting on a business or real estate that ends up with a huge appraisal value at death that get screwed.
Inheritance taxes are outright collectivist theft. 10 or 20 years before one’s patriarch or matriarch are going to assume room temperature in these instances, these people need to be quietly converting their wealth to mobile fungibles so when they pass, a brief note serves to tell the intended recipient where their legacy lies...
I didn’t delve deep into it, but whom are they “not all that productive” for? Society? It’s not societies s***, or their concern! If someone wants to drop their accumulated wealth to the bottom of the Marianas Trench on their death, so be it.
Something to think about here...
Suppose the State and Federal Government went straight to Civil Asset Forfeiture of any estate?
We all know that the Government is a voracious wolf when it comes to Tax revenue. I can easily see that coming about as an alternative to the Death Tax.
And no... I’m not being sarcastic or satirizing. I wouldn’t put it past them.
I don’t understand your concern. I take the tax consequences into consideration before selling an asset as I’m sure most investors do, but that is only one consideration. But that gets back to my question. The author is implying that people leave assets sitting around to avoid taxes and you think that is a dilemma because someone may make bad decisions, and my question is, if it is not your money why do you care?
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