The Estate Tax Stays

The Wall Street Journal recently published a front-page story about the estate tax.

Under current law (passed in 2001), the tax is scheduled to disappear next year (but come back with a very low exemption in 2011). President-elect Obama will quickly push to abolish the repeal and instead freeze the exemption at $7 million for a couple, with a marginal tax rate of 45 percent on estates above that.

I find this a very appealing solution; $7 million currently exempts all but the top 1 percent of estates and is surely enough to keep most small-business owners’ firms intact for their heirs.

The very rich will have to pay taxes on the estates left to them; but given the income tax cuts they have received in the past eight years, and given the widening of the income distribution, especially at the very upper end, this minimal estate tax seems a reasonable move toward a little bit more equality of lifetime incomes. It goes a bit of the way toward restoring vertical equity.


Kristine

As a moderate republican from a LONG line of whom I affectionately refer to as "right-wing-nut-jobs" I applaud this change. You would not believe the number of times I've been labeled a crazy liberal over this issue.

I always tell my family, if the type of inequality in this country continues, we will have a revolution (eventually). And the poor won't be coming for the rest of them with garden tools. Not having an estate tax only reinforces a burgeoning aristocracy in this country.

My idea (I believe I first read it on Mankiw's site) to help the equality equation is take the increased revenue from the estate tax and put it into an education fund. Instead of having affirmative action for minorities, you use it for lower classes. So Harvard would be required to have X% of their incoming classes from families earning less than $60k per year or the like. Individuals who jump from middle to upper class are out there - but they are not very common.

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DaveV

I think we should have a graduated scale starting from 10% at $2 million and rising to a maximum of 45% after $7 million.

It is true that small businesses and farms need to be protected for heirs, but a large percentage of of rich estates is based on gains from stocks and other asset appreciation. Most of these gains have never been taxed a dime, since the belief was that they would be taxed when they were sold.

P.S. To those who are against any estate taxes, eliminating estate taxes would enable many rich people to pay no taxes. How? If a lady had $1 billion in untaxed stock gain she could borrow a few million every year for living expenses, using the stock as collateral. When she dies the estate could sell some stock to repay the loan. Thus, without an estate tax, she could live a great life style and never pay a dime in taxes.

William

"Equity" should not be the reason for taxation. The estate tax is double-dipping by the government, and they use a class-warfare justification so that the masses will support it.

Christophe

Estate taxes are worse than highway robbery.

Equality of lifetime incomes? Hold your horses Ellsworth ;)

RAG's To Riches

ya know greed is not in, it never was and never will be for those of us committed to Social Science. It has always been about real freedom, real justice and the germ of an idea for a real possible social order that values the contributions of each and everyone of its individual members (not just a few).

So Spare Me Your Criticism.

browning

Somebody had to ride to the rescue of the estate planning industry. No estate tax means no estate tax lawyers, accountants, brokers, etc.

Andrew

@ DaveV

In your example, wouldn't the gains be taxed when the stocks sold after the lady died? I don't see why it would matter if the taxes were paid before or after she died.

J

" this minimal estate tax" - how in the world can you possibly say that a 45% tax is "minimal"?

Kelly

@ Andrew

Since I just finished taking a course on tax law, I can tell you that the answer is no. The lady's heirs will pay taxes on the gains in stock when the stock is sold, but only those gains that occur after her death. No one will ever pay taxes on the gains that occurred during her lifetime, unless she is subject to the estate tax.

This is why I believe the estate tax makes sense, especially since people with estates of $7m or more likely have many assets they would never have to pay tax on.

Tucker

Estate taxes aren't double taxing. They tax capital gains. My grandparents built a house for $50k in 1955 that is now worth $3M. If my grandmother sold it she would pay capital gains tax, but if she left it as inheritance that capital gain wouldn't be taxed. Or in DaveV's case the stocks that were left as inheritance wouldn't be taxed, only those sold by her estate to pay the loans she took out. The heirs would get the remains tax free.

Andrew_M_Garland

There are 7 of us, and you have $7. Equity demands that you give each of us a dollar. That is only fair. We would let you keep a dollar, but you know how to get them for yourself, so you can always get more.

Victor Galis

The estate tax is meant to preserve social mobility and level the playing field for future generations. In the absence of an estate tax, the rich would just pass massive amounts of money from generation to generation.

Jeff S.

"...a little bit more equality of lifetime incomes."

Really? Why don't we just stop doing this step by step and average incomes for everyone in the country then.

(anonymous voice) "Well, obviously, that's an absurd idea. That's socialism's ideal."

Then why are we even walking in that direction? The forcible re-distribution of wealth only has one goal: income equality. One person might be happy with just re-distributing the top 1% of income so they can feel like Robin Hood, but what happens when the next person wants to "help" by re-distribution? And the next? Every step seems justified to some, but who can say for sure when enough is enough?

JP

@ Dave V

In addition to Andrew's comment, if it is correct, the bank she borrows her living expenses from would also have to pay tax on the interest income generated from the loans. The encroaching government always gets theirs, always.

"To take from one, because it is thought his own industry and that of his fathers has acquired too much, in order to spare to others, who, or whose fathers, have not exercised equal industry and skill, is to violate arbitrarily the first principle of association, the guarantee to everyone the free exercise of his industry and the fruits acquired by it."-- Thomas Jefferson, letter to Joseph Milligan, April 6, 1816

KevinH

There's a common myth that capitalism means being able to do whatever you want with your money, and that freedom spurs economic growth. This myth is belied by the fact that every single economic collapse is caused by people doing something they shouldn't have with their money. From buying tulips, to borrowing too much, to buying securities that they didn't understand.

The real strength of capitalism is that it rewards ability. If you do something I can't or won't, you get more money. That basic reward system ensures that people are always striving to do more, and to do it better. Inheritance flies in the face of this basic principal of capitalism. Getting money not because of your ability but rather because of the accident of your birth decouples reward and ability. Inheritance ensures that once a family becomes wealthy, nearly all realistic outcomes have that family staying wealthy, irrespective of their contributions to society. This stifles economic mobility; reducing the incentives for hard work and ingenuity across the board. This makes everyone worse off.

For that reason I don't see why estates should have any form of tax exemption. Any small business/farm can be earned slowly over time by transfer of private stock in lieu of some payment, and any portion of the business not transfered at the time of death can have the taxes paid with a loan. If the next generation really has the skills and abilities that got that business off the ground in the first place, this will be a small burden. At the same time it forces the recipients of large forms of wealth to have the skills to match it's scope.

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Kimota94

William said:

"“Equity” should not be the reason for taxation. The estate tax is double-dipping by the government, and they use a class-warfare justification so that the masses will support it."

Wow... you think the masses care if someone with over $7M dies and has their estate taxed before the money trickles down to the heirs?! What social group are you hanging out with? I don't think I even personally KNOW anyone with an estate worth more than $3M, let alone $7M!

You Americans really DO hate taxation at a genetic level...

Jeff

As long as we have a step up in cost basis at death, the estate tax is not double dipping.

Mike B

Let's hope they also remember to index the new threshold to inflation.

Adam

#15 (KevinH) summarizes my thoughts better than I am able. As Buffett likes to ask, if we were given a chance to create all the laws in the world prior to our birth, but would not know in advance where and to whom we would be born, would we want some people to start their journey with billions, and some with less than nothing?

The best system gives us all an equal starting position, but rewards us for our hard work and intelligence after that.

teej

It has always amused me that the same political party that is against handouts will defend to the death the right of children of rich people to get free handouts.