<>Posted on 05/22/2005 11:20:04 AM PDT by FreedomSurge
The tax cut law of 2001 included a slow phase out of the estate tax by 2010, but the tax is supposed to be reinstated in 2011 when the entire 2001 law expires. This strange political compromise on estate taxes presumably will not last, so it is a good time to consider what should be done about this tax. I believe taxes on estates should be permanently abolished since they do little to reduce income or wealth inequality, benefit a vast army of lawyers and accountants whose role is to find ways to cut taxes on the estates of the wealthy, create problems for some families with smaller businesses, and do not raise a lot of tax revenue. In April the House of Representatives rather strongly voted to repeal permanently the tax on estates, so the issue now goes to the Senate, where some Democrats are promising a filibuster.
In earlier times, bequests of assets, especially property, were the dominant way to pass economic wealth from parents to children. But after the knowledge revolution took off toward the end of the 19th century, bequests of financial and material wealth have become less important in the overall economy. Instead, the most important way for parents to “bequeath” economic position is through the transmission of knowledge in the form of education, training, and other human capital. Such capital embodied in people now comprises over 70 per cent of all “wealth” in economically advanced nations, far more important than material capital.
In modern economies children of better educated, higher earning, and more able parents on the average receive greater training and schooling, better health, and are more encouraged to develop their talents than are children in other families. Primarily for these reasons, children of parents with greater human capital form an economic elite that tends to have better jobs, less unemployment, and higher earnings. But this elite circulates over generations, and there is no convincing evidence that the degree of circulation, the degree of social mobility across generations, has been falling during the last couple of decades.
Some defenders of a sizeable estate tax rate claim not any major effect on inequality, but that it allegedly brings in lots of revenue with little disincentive to wealth accumulation and other behavior. However, estate and gift taxes in fiscal 2005 are expected to contribute only $24 billion in federal tax revenues, which is about 1 per cent of estimated total federal tax receipts, and just one third of federal revenue from excise taxes. The rise in exemptions may have reduced revenue from estate taxes, but this tax did not contribute much more even a decade ago. $24 billion is not small change, except to politicians, but if the estate tax were abolished, the lost revenue could be made up without difficulty with only modest increases in income or consumption taxes.
A main reason for the small yield of estate taxes is that very rich persons with large estates often pay little to the government since they employ skilled lawyers and accountants to help them find ways to sharply cut their estate taxes. Trust and estate planning is the specialty of about 20,000 lawyers who, along with accountants, spend their expensive time discovering ways to reduce the amount owed in estate taxes. These ways include gifts, trusts that may skip a generation, insurance trusts, and charitable trusts and foundations. These talented individuals should be spending their time in more economically productive ways. Since the average estate-planning attorney earns more than $150,000, spending on 20,000 of them would be in excess of $3 billion. If another $1 billion goes to estate accountants, total spending on tax avoidance would seem to be in excess of $4 billion. This is more than 1/6th of the revenue generated by this tax, a strikingly high percent.
The estate tax is a bad way to reduce the effect of inheritances on inequality in the distribution of incomes and wealth, even for families that do leave large estates. For this tax does not consider how many children, parents, other relatives, or friends share estate resources. A parent who leaves $10 million to an only child has a larger effect on the personal inequality of wealth in the next generation than does someone leaving the same amount to be divided among several children, nieces, nephews, friends, and employees. Similarly, a large bequest to successful children with high incomes raises inequality more than does the same size bequest to children with low or just average incomes. This is why taxing inheritances rather than bequests would be a better way to reduce inequality in succeeding generations. That is, $10 million in bequests divided five ways should generally be taxed at much lower rates than the same amount given to one person, while $10 million divided among several well off children should also be taxed at higher rates than the same amount divided among children with modest incomes. Although an inheritance tax would be better than the estate tax, I am not advocating a direct tax on inheritances, for there is a better approach that indirectly does tax inheritances (see the discussion later of consumption taxes).
The estate tax also makes it harder for families to pass successful businesses on to their heirs. Despite the 2001 tax law that increased exemptions, families are still sometimes forced to sell more successful and profitable businesses upon death of the principal owner in order to pay estate duties. This is why farmers and other owners of small businesses continue to be active politically in advocating much lower estate taxes, if not their complete abolition. High tax rates on estates may be thought to be universal, but in fact many countries have low taxes on estates. Moreover, some countries, including Canada and Switzerland, essentially have not taxed bequests to close family members, although they may tax capital gains on assets transferred to children.
I cannot go deeply in this discussion into the reasons why I believe a tax on consumption, perhaps a progressive one, instead of income and corporate taxes, should form the heart of the federal tax system. Suffice it to say that consumption taxes, unlike income taxes, do not distort savings decisions, a particularly important issue for the United States.
A general reliance on consumption taxes would, among other things, replace an estate tax by indirect taxes on inheritances. The tax on inheritances would be indirect because they would not be taxed when they are received, but only as they are spent. So if a family receives a large inheritance that raises their consumption several fold, the amount they would pay in consumption taxes would also increase several fold for as long as the family continues to consume at a much higher level.
So my conclusion is that the estate tax should go, or at least have greater reduced rates, since this tax has little effect on inequality in a knowledge economy, encourages costly avoidance behavior to take advantage of various tax loopholes, raises only a modest amount of government revenue, and reduces incentives to form family businesses and other entrepreneurial activity. Estate taxes do not even tax the right base if the aim is to reduce the effect of inheritances on inequality in the personal distribution of income and wealth. The energy and political capital spent on supporting high estate taxes is better spent on trying to raise opportunities to children from poor families by improving their education, training, and health.
bump for later read
And the arguments with taxpayers are frequent and involve large amounts of money--imagine trying to figure out what an estate including significant amounts of illiquid or intangible assets is worth--with no real comparable valuation evidence. Farms, family businesses and similar assets provide comparable challange.
And the author is correct about the creative avoidence scheme. Since the tax return requirement is effective, all of these schemes come to the surface and are the subject of expensive arguments.
End of the day--having been a tax lawyer for many years, my view is that the net return from the death and gift tax is negligible--perhaps less than zero. The obvious tax that should be repealed tomorrow.
Do they know any other word these days?
And yes, estate tax needs to go, permanently.
I have thought that the estate tax should be equal to the capital gains rate levied on estates over 1.5 million with no charitable deductuions. What say you?
Stoopid me. I thot the Foundling Fathers meant for taxes to pay for existenstial servitudes, not level out incomes or wealth.
Iff'n they had wanted to level incomes,would they have mandated a graduated income tax, rather than ban ANY income based taxes?
stoopid me, must needs to go back to gramary school, and relearn both spelling and voodoo socialization.
With all due respect to your view which is shared by a number of members of Congress, I do not agree.
For one thing, if you characterize it as a death excise tax and make it payable at the time the estate is settled as is current practice, you run into the same enforcement problems and expense as you do with the estate tax. But for less money. So it is again a tax that costs revenue instead of brings in revenue. So why would you do that?
If you try for the same result by carrying forward the deceased's basis to the heirs so that you think you will ultimately collect capital gain tax at some point in future history when the asset is sold, you run into another set of problems.
The constitutional authority for the income tax is limited to taxing "income". As you look at current asset values, in large part, with obviously many current exceptions (less after the real estate bubble collapses), valuations in excess of basis reflect not increases in real value but instead declines in the purchasing power of the dollar. So much of this so called capital gain is not gain (or income) at all.
Now I know this argument comes up from tax protestors on a regular basis and gets shot down by the courts however at some point, someone is going to fund a real challange to the capital gains tax; on behalf of a real taxpayer who has an asset that is clearly worth less than it was worth in 1916 but which has a greatly inflated price as a result of inflation.
And get good quality expert witnesses from prominent economics departments; and put on a real persuasive case that demonstrates clearly that the tax is being levied on return of capital and not on income.
And do a thoughtful job of selecting the forum in which the case was going to be tried--either the Court of Claims or a district court with a judge who is open minded on the real legal issue presented.
The courts ought to kick the capital gains tax out on the grounds that it is not constitutional.
It wouldn't be hard to find such a case - there are a number of qualifying cases in real estate, many dating from the '40s or '50s. The problem is finding the funding for the legal challenge.
I suppose it's fodder for a class action suit, as repellent as I find those to be.
The estate tax is nothing more than state-sanctioned grave robbing.
No.
Can't have a refund suit as a class action. No jurisdiction.
After paying taxes on his property during his life time, why should the deceased have to pay taxes on his property AFTER death? (I know the beneficiaries do it, but in effect the dead person is paying.)
Is it that we can't sue the IRS? Sorry to sound as ignorant as I am about legal matters, but I thought I had heard of cases where people sued the gov't in Federal courts.
As a tax policy proposition it is almost impossible to develop an argument in favor of the death tax. It doesn't raise any tax revenue; it is fundamentally unfair; and it is a disincentive to economic activity. It is just a bad tax and it ought to be repealed.
No.
But jurisdiction to sue for refund of taxes is limited to the taxpayer. That is why you have to be so careful about who your taxpayer is in this kind of case.
It would seem that Buffet and Soros like the estate tax because it encourages lots of liberals to leave money to liberal leaning foundations. This is what Buffet and Gates have already announced their intention. They would probably do it if the estate tax were gone.
This is the real point. By the force of government we are restricting the options of our citizens (at least the wealthy citizens) and this forces them to complex schemes to evade the restrictions. (Giving the money to charity is the easiest way to evade.) But this restriction on their freedom to decide is part of an income tax redistribution system that should be fought as a feature of socialism or communism that it is.
The people who disagree with this tax should call it a communistic tax at every opportunity.
When the estate tax goes then capital gains taxes will remain. Capital gains are a different form of income tax. It stifles growth by causing investors to hold off selling property that has made significant gains, and is anti investment as well.
When Steve Forbes proposed a flat income tax he also eliminated taxes on pensions, interest, and capital gains. He was very pro-business and savings in this proposal and it was a good one for the country as a whole.
As far as any exemption, why have one? I am for taxes applying to everyone, even though giving an exemption such as you suggest would only apply to the larger estates. This is like income redistribution again. I would prefer to see the capital gains tax eliminated altogether. Or failing that, imposed on all gains equally.
In the case of the estate tax, I want it in full force over the next half century.
I figure the current generations have made the deficit and SS problems, well over the next 30 years so much private wealth will go to the government, that they can pay off most of the national debt and take care of SS.
The worst thing would be to remove the estate tax and pass that debt on to the unborn.
If you want to see this country collapse long term, get rid of the estate tax before it wipes out the debt it could.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.