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.
See #20, removing the Estate Tax is irresponsible, a very liberal thing to do and will pass on massive debt (which is ours) to future unborn generations. To me that kind of thinking is pathetic.
Let's just say I consider your viewpoint extremely short-sighted, and that I disagree for a wide variety of reasons (including that the death tax is immoral according to my personal moral code). SHRINKING GOVERNMENT, especially by starving it and making its life a living hell would be a nice first step, IMCO.
If you would like to be added to this ping list let me know.
John Linder in the House(HR25) & Saxby Chambliss Senate(S25), offer a comprehensive bill to kill all federal income, SS/Medicare payroll, and gift/estate taxes outright, and provide a IRS free replacement in the form of a retail sales tax:
H.R.25,S.25
A bill to promote freedom, fairness, and economic opportunity by repealing the income tax and other taxes, abolishing the Internal Revenue Service, and enacting a national retail sales tax to be administered primarily by the States.Refer for additional information:
Why this question needs to be asked is beyond me.
Strikes me that the estate tax should go, but that the amounts inherited or received as gifts should be taxed as what they are to the recipients: income.
Tax is levied on "income from whatever source derived".
Income is an increase to net worth.
Rich relative dies, and his property passes to me via his will. He is dead. Should HE be taxed? No.
I am alive. And my net worth has increased, perhaps dramatically. This is income, and it should be taxed to me along with all the rest of my income.
A flat tax that taxes ALL income equally and has no deductions has to include income received as gifts and income received through inheritances.
"Capital gains" are just a special type of income.
Has net worth increased?
Yes.
Then it should be taxed.
Of course, have a tax code like that and the base will expand quite massively (think of the amount of increase in net worth every homeowner has in the current real estate boom).
And if the base is expanded that massively, then the overall income tax rate, the flat rate, can decrease quite dramatically.
A dollar is a dollar is a dollar, however you came by it.
Right now, we have a system in which a dollar given to you as a GIFT by some rich benefactor is not taxed at ALL (to you), a dollar you earn on an investment is taxed at a low rate, but a dollar you earn by WORK is taxed at the highest rate of any dollar in the economy (income tax (federal and state) PLUS social security tax PLUS Medicare tax).
So, we punish work the most, and reward inheritance and gift for nothing the most with our system.
Reversing that is class warfare.
The fair solution is to treat a dollar as a dollar, and tax all of them the same.
Does this you mean you believe it should stay or do you believe you should ignore this generation's debt and pass it to the unborn?
I think we should pay our bills, how about you?
I think what's mine is mine, and if I keel over I get to decide who gets what's mine. I do not believe it appropriate that my property can be again pillaged at the point of a gun after my death. It's appalling and immoral. Got a problem with that?
I think we should pay our bills, how about you?
Bills, shmills. Cuts are the answer. Not taxes.
Great, can't wait for your group to chime in on personal responsibility in not leaving our national debt to the unborn.
In the Year 2010, thousands of very rich old men will be armed to the teeth and won't let anybody near them.
"Loving niece" my arse! Don't you come one step closer!!
Problem with that view is that the Death Tax does not raise any net funds to pay any of this stuff with--you may think the function of government is to transfer funds from one citizen to pay another citizen's bills--that's great, particularly if you are a transferee. You are entitled to your view.
But to argue that you are doing it with proceeds of the Death Tax is uninformed. Because after a real accounting for costs of collection, the Death Tax does not really raise any net proceeds to pay anything with.
Let me assure you David, with over half the population with assets getting old and dying, you are about to see as much as 25% of all personal wealth go to the government in estate taxes.
The estate tax will be probably bigger than the Federal income tax to the treasury because of all of the older people passing on over the next 20 years.
It would be a crime to suspend this tax until at least the next 25 years goes by. The people who created this country's deficit should be obligated to put what they could into paying down their debt and not pass it on to the innocent unborn.
bump for later
That was a pretty good liberal argument. It doesn't hold water, but it was pretty good.
Well over 99% of the estates are below the exemption level; and even by doing that, the cost of collection is somewhere around the tax amount realized. When you load the direct collection costs with the unavoidable IRS administration overhead costs applicable to the estate tax function, at least in my view, it is pretty clear that you lose money on the tax.
Reduce the exemption? The tax becomes unenforceable and the collection cost goes up dramatically.
I also subscribe to the view that there are a number of other problems with the Death Tax from a policy point of view--you may not agree but the votes are there to make repeal permanent, even among the fuzzies who agree with your point of view, and the tax is going to be permanently eliminated in the near term.
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