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.
And when has there been a time of no deficit spending and no federal debt, my dear Stephanie? Not in the last 50 years or longer. Not just dumb, Harf-like!
The author's point here is that these two provisions of the tax code provide an incentive for someone to make financial decisions for no other reason than the tax consequences. Suppose the person in that example I presented has a great opportunity to sell his business late in life, and with a great benefit for that company's employees, customers, suppliers, etc. If the guy keep the business -- despite this great opportunity for all involved -- simply to reduce his family's tax obligations, then something is wrong with the whole system.
Simply put the “death tax” is double taxation. You paid taxes, died and pay them again. Different tax scenarios are handled by financial planners, or personal planning and responsibility - not the government. The government must cut spending and not steal from the caskets of tax payers.
The author recognizes the public interest in this kind of tax policy (a capital asset will have a stronger benefit to the economy as a whole), and is simply pointing out this one situation where the U.S. tax code does not give preferential tax treatment to capital gains.
The solution to this problem is not to have an arms race between two escalating tax rates - one for the death tax, the other for capital gains, but rather, to minimize the tax on both to the lowest practicable level to reduce the influence of tax considerations on what should primarily be economic decisions.
The author has it backwards.
sitetest
The Federal debt currently stands at about $19 trillion. Seizing all of the assets of every person on the 2014 Forbes 400 list of the wealthiest Americans will only generate $2.29 trillion -- once. This would be a classic case of killing the goose that lays the golden eggs.
That’s how the “death tax” was implemented in the past, but it doesn’t have to be that way. A “death tax” that functions just like the capital gains tax, where the tax is paid on the capital gains of the estate and not on the total value of the estate, would eliminate the double-taxation problem.
You are worried about “the public interest” in what a person does with their own capital? The author is only worried about the gov’t sticking it to “the rich” and the public interest is confiscation and redistribution. You think investors base their decisions solely on tax policy? Profit is the objective.
The biggest disincentive against civil asset forfeiture of estates is that it wouldn’t work very well, and (more importantly) it would only work once.
The Federal debt currently stands at about $19 trillion. Seizing all of the assets of every person on the 2014 Forbes 400 list of the wealthiest Americans will only generate $2.29 trillion — once. This would be a classic case of killing the goose that lays the golden eggs.
You are of course assuming that they would keep the property. I propose that they would sell it off to various cronies or perhaps at auction and then do the same thing, CAF, once those people passed on.
But still I believe you are correct in the long run, the Goose would still be dead.
Both taxes are double taxation.
I’ve re-read that example. I can make no sense of it from the standpoint of the guy selling or bequeathing it. If it’s bequeathed, it’s going to get sold anyways to satisfy the death tax unless the inheritors have ~3 million laying around. If he sells it before death, then he pays cap gains, and then the heirs get to pay 55% on the excess of the exemption.
The best part, to fulfill the most IMPERITIVE obligation every American has (which is to deny the government every cent they legally can) would be to fold the business into an irrevocable common law trust and name the desired heirs as beneficiaries.
Cost???? Whose money is it?
If it weren't for the $22 trillion wasted on the "War on Poverty", the US gov't would be in surplus, not debt.
I’m referring to “public interest” as it relates to tax policy. If a government is supposed to have no interest in what a person does with his/her own capital, then that’s fine. Set the same tax rates regardless of the source of income, and put an end to the entire discussion.
You won’t get an argument from me on that one.
I'm referring to the scenario where there is: (1) a capital gains tax, and (2) no estate tax.
Like you, I completely DETEST anyone using the term “cost” when discussing reduction of money taken from us by the government.
It doesn’t “cost” the damned government anything. It’s just citizens being able to keep their own money.
So if there is no estae tax, all inherited money goes to heirs without taxation.
The heis can only do two things with the money—save it or spend it.
If they spend it, the government benefits by sales taxes and taxes on the wages of those employed to create the thing the money is spent on.
If they save it, the government taxes any gain from interest or capital gains at the approriate time.
Either way the government at all levels gets to be an economic partner in the transaction.
America has no business taxing any dead persons assets. That is a feudal right of kings, which we overthrew 240 years ago..
Many business owners are pre-paying the estate tax via massive life insurance policies, so that the estate has ten million dollars to pay the estate taxes so the kids can inherit the farm or the business.
Too many little old ladies at risk of losing their homes when hubby dies vote for a simple seizure of the house when Dad dies.
A more likely scenario is a dramatic ramp up in investigation of Medicaid recipients and nursing home care. For example, the people who sell the house to their kids and end up on Medicaid nursing home care will get examined and the state clawing back any money from the estate that they can. There would also be more investigations on people who say “I live with Mom, I keep her out of the nursing home, let me keep the house”.
It just sounds to me like you think one person’s business is everybody’s business. I believe the only consideration a person should have is profit and wealth retention. Both the capital gains and death tax are double taxation and should not be taxed.
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