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April 13, 2005

Comments

This is a no-brainer, but they have the votes in the House!

Note that the ATM tax is coming to get you. The admin is either counting on that to partly offset the above windfall to the top 2% of decedents, or being even more fiscally irresponsible than I fear.

Running a massive deficit and buying foreign goods with some of the money works pretty well as long as foreign nations are willing to hold the dollars and bonds while the dollar depreciates. Effectively that lets us tax the rest of the world. Especially ironic that China is accumulating so much of our debt and so many dollars. Bush really likes stealing from the poor to give to the rich it seems. How long the rest of the world will put up with this is open to question, but I wouldn't be surprised if they get away with it until a democrat can be found to take the rap.

I think the estate tax reflects a value. Specifically, it's wrong to hoard. Wealthy people spending their money into the economy is good for everyone. I don't think we should force them to do it, but I do think we should correct their behavior when they're done misbehaving.

It's not that I don't get and to some extent agree with your arguments, hilzoy, but it seems to me that so many arguments like this are predicated on, or proceed from, an assumption that all wealth and property belong to the government first, and it's their job to decide who gets to have what. Refraining from taking something from someone else is not, after all, the same as "giving" them something; if I don't steal your car, I haven't given you a car, right?

Like I said, I get where you're coming from. I do. Personally, I'd like to see our government at all levels do fewer things, so it wouldn't have to take so much from anyone at all. (And before I get accused of wanting starving poor people in the streets, I mean by that that I'd rather we use what we do have to create contexts where the government doesn't need to do so much, where lower- and middle-class people can get by with a reasonably decent standard of living and be easily able to take care of all their basic needs -- food, shelter, health care, etc. -- on their own.)

What the hell is an ATM tax?

st, I think rilkefan meant the AMT, the Alternative Minimum Tax -
An "ATM Tax" , I guess would be a Federal levy on cash machines....

I'll take an undoubtedly inept crack at this: AMT is a tax that was designed to ensure that the wealthy with lots of deductions paid some tax. Problem is, it wasn't pegged to inflation, so now it is starting to bite into the middle class, particularly for families with decent income but lots of dependants and legitimate deductions.

And as the years go on and more people are affected, it becomes a larger portion of our Federal revenue, meaning the tax becomes more and more expensive to repeal. So it is best we fix it and find better revenue sources now than later.

It's not that I don't get and to some extent agree with your arguments, hilzoy, but it seems to me that so many arguments like this are predicated on, or proceed from, an assumption that all wealth and property belong to the government first, and it's their job to decide who gets to have what.

I've always thought that sounded reasonable. What I own is mine not because I say so but because the government does. Enforcing ownership (in case of theft) is something the government does. Otherwise my house would be mine only as long as I, with my shotgun, could fend off the robbers.

I think we should start calling it the Paris Hilton Tax or maybe even The Walmart Tax.

Or the Mars Candy and Gallo Winery Tax, as they were the ones who initially started the push to repeal it.

All you've done in that case, Kyle, is hire someone else to hold the shotgun. It's not as if its intrinsically more moral for them to do it than for you to do it. In any case, the flipside of your argument is that if I can convince the guy holding the shotgun that what's yours is now mine, well, too bad for you, right?

Phil: I do not, as it happens, believe that the government owns everything. I do believe that it is legitimate for a democratically elected government to tax its citizens, and, that being the case, to decide what form those taxes should take. Similarly, I believe that, as a professor, I have the right to decide what form my assignments to my students will take, including such things as: whether they will involve exercises that need to take place at specific times (as, say, some forms of lab work do), or at a range of times (as going to the library during its hours of operation does), or at any time the student finds convenient; but this does not mean that I think of myself as owning my students' time, or as being able to arrange their entire lives as I see fit.

Phil: I do not, as it happens, believe that the government owns everything. I do believe that it is legitimate for a democratically elected government to tax its citizens, and, that being the case, to decide what form those taxes should take.

Well, certainly in the case of land, the government did own it at one time and, at least in this country, gave it away or sold it at extremely reduced prices. So your property rights exist only because of an initial, sometimes suspect claim, of the U.S. government. And although you may own a car, I doubt you built the car from materials you mined and fabricated yourself. You earned money in a job that you then used to purchase the car. No matter what your job is the government provides you protections and a structure to make sure you don't receive your salary in widgets. Also, in the knowledge society we live in the only "property" we have to trade is often intellectual property, and that property is certainly a property that would not exist without the government to define and enforce the rights flowing from it.

I don't think you do think the government owns all your stuff (pace Kyle and, apparently, Freder, who think Congress owns their televisions and blue jeans). I was just reacting to language like this, hilzoy:

Alternately, we could use the money to do some serious good . . . Or we could give it all to the likes of me . . .

They aren't proposing to give it to you, they're proposing not taking it from you. (Or your parents, as the case may be.)

I agree that democratically-elected governments have the right to tax their citizens. I also believe there have to be limits on what they can take, as, obviously, do you. We just disagree on where those limits should be, and what their purposes should be. (And I say this as someone without a dog in the fight; nobody in my family will be leaving anyone an estate of any kind, as nobody owns anything of any significance, including homes.)

Phil: I understand that you object to taxation in general. But like it or not, I don't see the U.S. making it through the next decade without significant tax hikes, given the unsustainable deficits being run up. With that in mind, what's going on now is a transfer of taxation from one group of people to another. By removing taxes on estates and unearned income, the Bush administration's long-term effect on the tax structure seems likely to be a transfer of taxation to those who work from those who don't, a result which strikes me as pretty repulsive (and perverse in terms of incentives).

Hilzoy, thanks for another thoughtful, well-written post, but I have to say you failed to mention another compelling reason to oppose repeal of the estate tax-- it will actually raise taxes and create a paperwork nightmare for many Americans!

Entirely apart from any long-term fiscal impacts, repeal of the estate tax benefits the super-rich while either doing no good or actually harming the rest of America. because the current estate tax provides that 99% of heirs (i.e., where estates are less than the rather generous exemption amounts) can "step up" the "basis" of inherited assets.

Right now if you inherit a house (or shares of IBM) from your Great Aunt Bessie and sell them when you receive them, you owe no tax. Under estate tax repeal, you could be required to 1) figure out what Great Aunt Bessie paid for the house or stock (taking into account any improvements to the house or reinvested dividends for the stock), and 2) pay tax on the difference between current value of the asset and what she paid. This would be both a complete nightmare for families to deal with and a tax increase on more families than would benefit from estate tax repeal.

A (more) detailed, technical explanation (concluding that repeal benefits about 7,500 estates, while increasing burdens on at least 71,000 less wealthy estates, is here.

Or, take a look at what this (AFAIK completely apolitical) law firm has to say about it--

"Families of modest wealth may bear the brunt of paying for whatever relief the wealthiest Americans wind up with if the carryover basis, deemed beneficial only to estate administration lawyers in 1977, remains and forms the legacy of this quite extraordinary example of tax relief at its worst."

Finally, the Post also attempted to point out the problem today (interesting that the ed. board makes this point, but Weisman's "news" article never does).

Sorry for the long post, I'll get off my soapbox now, but this really is one of the worst ideas around, and this aspect of it is completely unknown to people. Luntz should do a poll asking if people want more paperwork and taxes on middle class families after their relatives die and see what comes back then.

All you've done in that case, Kyle, is hire someone else to hold the shotgun.

Indeed. What do you think taxes pay for?

In any case, the flipside of your argument is that if I can convince the guy holding the shotgun that what's yours is now mine, well, too bad for you, right?

If credit card companies can convince Congress that the bankrupt still owe them interest when the original debt's been paid twice over, well too bad for them.

Yes, I think you've got it.

First, hizroy, may I borrow your parents for a while?

Second, a quibble. You say: "With a trillion dollars over a decade, we could take a large chunk out of our projected deficit...". Unfortunately, the official projections already assume that the estate tax will spring back to life in 2010. The House bill, if enacted, will make the new official projections a trillion dollars worse than already projected.

Phil,

There are two separate issues involved here. It is one thing to say, "taxes are too high and the government should do less, etc."

But whatever the appropriate level of taxation, the money has to come from somewhere, and a fair part of hilzoy's argument is that the estate tax is a good place to get some of it from. In other words, we have to allocate the costs - large or small - of government to the people somehow, and eliminating the estate tax shifts the burden away from a very wealthy segment of the population.

"Fifth, as I wrote last September, the repeal of the estate tax is just one of a number of proposals made by the Bush administration that would have the collective effect of creating an American aristocracy, whose wealth could be passed from generation to generation without ever being taxed, and which could not be spent down or squandered. This is, in my view, fundamentally unjust, and we should oppose it."

I'm just quoting that part for emphasis, because one of the first reasons, IIRC, for the estate tax, was to prevent the creation of the kind of hereditary aristocracy that Europe had.

Also, the Estate Tax provides benefits to society, by requiring the people who've had the benefit of the best educations and childhoods that money can buy to work, and put that expensive education and upbringing to use, rather than just sit around and live off the work of their parents.

And there's all the same reasons that make progressive taxes work, relating to the marginal utility of money, and so on, which is longer than I want to get into here.

But the trillion dollars of debt that'd be required should be enough reason for anybody to oppose the repeal of the estate tax. Bush keeps saying he's going to cut the deficit in half in six years, but he just keeps making it bigger.

And I say this as someone without a dog in the fight; nobody in my family will be leaving anyone an estate of any kind

But Phil, you do have a dog in this fight. The very fact that you won't be on the receiving end of a huge estate means that if the tax is repealed, you'll have to help cover the deficit or sit and stew over a loss of services.

However, this is a toughy for me. I have to justify the tax somehow other than "The hilzoy's of the world have enough", especially since she's spending her time teaching rather than skiing (although "anti-hoarding" is interesting too). Perhaps one can support it based on something that hilzoy said in the past. She said that her family's abundance has allowed her to choose a job that she enjoys (the "enjoys" part I recall from past remarks, it isn't mentioned here). Now, I'd guess that her professor's salary doesn't come close to what her forebearers earned to make that fortune in the first place. In short, she voluntarily throttled back her income production during prime earning years costing the government (us) tax revenue over the course of her life that we would have received had she been been earning what it took to make and grow the family fortune. So, its only right that this deficit should be made up at a later date, namely at the point of her inheritance.

I, for one, appreciate that hilzoy is giving of her time in an important area whereas others in her position are working hard on tans and the draining of umbrella drinks. I'm sure there are many in her position working in the fields of education, non-profits, charities, relief agencies etc. who don't earn what they could but are doing what most of us would call "good". The difficulty is that WIC doesn't run on ethics opinions (in hilzoy's case) it runs on money. We all surely benefit from more ethical humans, but it doesn't directly help fund WIC.

And, in the end, can't the rich avoid most of this by giving away some of their fortune to their children and favorite charities while they're alive?

PS. I dislike "Unearned Income" about as much as many must dislike "Death Tax".

I, for one, appreciate that hilzoy is giving of her time in an important area

Important area? Philosophy?? I'm reminded of the bit in Hitchhiker's guide:

Philosopher 1: We'll go on strike!

Philosopher 2: That's right, you'll have a national philosopher's strike on your hands!

Deep Thought: Who will THAT inconvenience?

Philosopher 2: Never you mind who it will inconvenience, you box of black legging binary bits. It'll hurt, buster, it'll hurt!

:-)

And, in the end, can't the rich avoid most of this by giving away some of their fortune to their children and favorite charities while they're alive?

Charities, yes (as far as I know); children, no -- you can only give $10,000 per person per year without getting taxed pretty severely. And that raises another point -- if the estate tax is eliminated, shouldn't all other taxes on wealth transfers be eliminated as well? Otherwise we're creating a death incentive.

But whatever the appropriate level of taxation, the money has to come from somewhere, and a fair part of hilzoy's argument is that the estate tax is a good place to get some of it from.

I get all that, Bernard. Believe me, I do, and always have -- I'm just uncomfortable with the idea that their money is somehow less theirs than mine is mine and yours is yours. Or that there's somehow no moral component to this just because they're a large target of opportunity. And don't think I don't blame the current administration for exploding the deficit in the first place and putting us in the position where we have be this worried about it anyway.

Besides, if I had it in my power to ensure that my sister's kids, who have gone without so much in their lives, could coast through adulthood and never have to work a day, I'd do it in a heartbeat.

Anyway, I'm on to Kyle's house to pick up my new TV. Since the government owns everything, and We The People are the government, it follows that I can just have it.

David: Nope, I won't lend my parents to anyone.

Phil: I probably shouldn't have used the word 'give' in my original post. I don't think that my money, or the money that will be mine if my parents leave their estate to their kids, is less mine than anyone else's. I just think that when the government has to decide how to structure taxes, it should include an estate tax. And I don't think this just because I regard myself as a tempting target: I think there are explicitly moral grounds for doing this. First, that you want to ensure that everyone pays something like their fair share of taxes, and since we don't have a wealth tax in this country, the only way to capture revenue from unearned wealth is to have an estate tax or something very much like it. Second, that it's undesirable to have a hereditary aristocracy in this country, and an estate tax is one of the ways of preventing one from emerging. Third, that it's best, other things equal, to have a progressive tax structure.

Anyway, I'm on to Kyle's house to pick up my new TV. Since the government owns everything, and We The People are the government, it follows that I can just have it.

You alone are not "We The People."

Phil with a gun is not the same as the executive branch acting under the laws of the democratically elected legislature, even though they're both "guys with guns."

Well, just for the record, I don't own a gun. I'll be armed only with a bunch of elderberries.

I'm just yanking your chain a little, Kyle. I find the idea that the government actually owns all your stuff as . . . interesting as believing that humans are regularly abducted by alien spacecraft. The fact that someone is responsible for protecting something doesn't give them ownership over it. It makes them a hireling. The government no more owns my car than the guard at the bank owns my money.

ALso, the fact that someone has the power, and even the legal authority, to take something away from you doesn't make it moral for them to do so. Anyone who has had their perfectly good home "condemned" so that some political crony can build a shopping mall or baseball stadium knows that.

All you've done in that case, Kyle, is hire someone else to hold the shotgun. It's not as if its intrinsically more moral for them to do it than for you to do it

I don't think that's quite accurate. What we have done is agree to pool resources to hire people with shotguns who will act according to rules and restrictions that we have agreed upon, and under the direction of officials we have elected to supervise them. That's a long way from an individual hiring guards.

It's also a long way from saying that the shotgun-bearers therefore own your stuff.

" I know whereof I speak, since I am one of the relatively small number of people in this country who would actually benefit from the repeal of the estate tax."

Your positions make much better sense to me now. When people don't have to earn their money... taxes really aren't as big of a deal.

Imagine how you might feel Hilzoy if you were more like myself who worked 80 hours a week for much of your career and the gov't came along and told you that you couldn't just give it to your kids.

Why don't you just give more of your money to the gov't and leave the rest of us alone?

The government no more owns my car than the guard at the bank owns my money.

Time to define ownership. Is it control? Is it posession? It seems to me the big difference between the guard owning "your" money or not owning your money is merely a matter of whether he wants a life of using it to run from retribution. It's theft, sure, and it's immoral, OK, but on the ledger, it's no different than if you'd made the money legitimately his as a gift.

ALso, the fact that someone has the power, and even the legal authority, to take something away from you doesn't make it moral for them to do so. Anyone who has had their perfectly good home "condemned" so that some political crony can build a shopping mall or baseball stadium knows that.

I haven't talked about morality since I started, by saying it's wrong to hoard. I don't disagree with you on this at all, but, as you point out, law and morality don't always jibe.

It occurs to me that I see an analogy to what I'm talking about in the computer. Within the computer, users "own" files. That ownership is enforced by the operating system. In a sense, the OS owns every file in that it dictates the very terms of ownership, permissions, and under what circumstances those can change. If the OS (through bug or design) changed the ownership of some file, that's that. There's an administrative user who ignores permissions and effectively owns everything, but even that power is granted by the OS.

Users may not think the OS (or the admin) owns their files. It's a straight-forward way of looking at it, but I think it ignores the pliability of the system. Sure, Congress doesn't own your TV now, but they could own it just as legally as you own it, if they decide to. I think the idea of ownership encompasses both control and posession, and this gray area comes from instances where those two don't coincide (you control your money, but the guard posesses it; Congress controls my TV but does not possess it).

And there is some looping control here. We wrote the OS that now enforces the permissions that create our ownership. We created the government that now enforces the laws that create our ownership. Partly it's a question of how far back in the chain of authority you want to look: "I own it" because "the USA says so" because "we've all agreed that's what we want it to say" because "that's what's moral" because "God said so." I stop looking for authority at the people who made the government. Some won't stop until they get to God. Some will shorten it to just "mine."

"Your positions make much better sense to me now. When people don't have to earn their money... taxes really aren't as big of a deal."

Which of course explains the tremendous push by people in the shoes of hilzoy's parents, but on the other side of the partisan aisle, to reduce their level of taxes by any means whatsoever, including in the case of the estate tax, blatantly lying about the numbers of persons affected by it.

"you couldn't just give it to your kids."

Uh, you can. Go see a trust and estates lawyer.

Wow. Way to misrepresent hilzoy's position, smlook. Have a Karnak.

Why don't you just give more of your money to the gov't and leave the rest of us alone?

"The rest of us" don't inherit estates over $3.5M, dude. That was a major point of the post, I do believe. If you've accumulated that much in the bank, I think you can afford to cut back on those working hours.

"Imagine how you might feel Hilzoy if you were more like myself who worked 80 hours a week for much of your career"

smlook: congratulations on having made enough money to leave your kids over $7million (Democratic proposal). Since that's the only case in which, if I had my way, the estate tax would affect you at all.

And, of course, the estate tax only covers the portion of your estate over that threshhold. So if you have an estate of, say, $8million, your kids would get $7.5million. Boo hoo hoo.

For me, hilzoy's fifth reason, avoiding the creation of an aristocracy, is crucially important. I've commented on this before, but don't mind saying it again. We already have taxes on dividend income and capital gains lowered to 15%, and there is pressure to lower investment income still further. Repeal the estate tax and you seriously increase economic inequality, and not the kind that derives from differences in effort or ability.

I don't think that makes for a healthy society.

It seems to me that estate tax repeal could have a short term negative impact on the economy. Under the old rules, rich parents needed to give money away at the maximum rate (I think $20k per person is correct -- and so $40k to a son and daughter-in-law -- figure for what was/is tax free) permitted by the tax code. And what did those kids do with the money? They spent it.

With repeal, rich parents have no incentive to give anything away. Or to buy insurance that would cover the tax liability anyway.

No it's all very well to argue, as smlook does, that inheritances shouldn't be taxed. The thing is, since revenue needs to be collected, the question arises where else should the money come from. None of the proponents of estate tax repeal have given what I consider a rational answer to this question.

And if it makes a difference, I got a good whacking from the AMT this year, and can expect -- sometime long hence, I hope -- to be an estate taxpayer as well. If it gets fully re-instated.

Did I work for that money? Of course not -- no estate taxpayer does. My dad did, and I don't begrudge him a dime of it. The question is, when the time comes, should the next dollar to pay the government's bills come from the money my father made, after he no longer needs it, or from some single mother working 2 jobs to get ahead.

CharleyCarp is exactly right. Despite the "death tax" rhetoric and the formal structure of the tax, it doesn't actually affect decedents. They don't care so much, because they're dead. The economic impact of the tax falls on the ones who inherit the money. And somehow I have a hard time seeing a moral problem with taxing windfalls from inheritance at least as heavily as we tax, for example, windfalls from winning the lottery.

Charlycarp,

I believe the estate pays the tax (hence the name) and merely reduces the inheritance to the recipient. So technically the dead taxpayer is paying the tax.

With that technicality aside, I think you get to the heart of the matter. Children rarely contribute to the creation of the estate. The idea that it is their money is quite strange.

it doesn't actually affect decedents.

It affects them before they die -- if what they really want to do is leave their money to the kids, and we heavily tax that option, then the incentive for them to make more money is reduced (the argument goes).

I thought the argument was that Farmer Joe and Shopkeeper Sam's kids were being forced to sell the farm/store to pay the taxes.

well, DaveL and Jay beat me to the punch, but i'll make the point anyway.

Income, I learned in law school, is defined somewhat recursively as "income from whatever point". (Since law school is over 10 years ago, I probably have that wrong.)

But it's not true. When my parents die, I will receive "income". My aggregate wealth will certainly go up upon the distribution of their estate; how is it that the distribution is not "income"? It is, unless the tax code says otherwise (which, of course, is the point of the discussion).

But what is the philosophical basis, especially in our (theoretical) society, to excepting that income from taxation? Gifts are taxed (to the giftor, which seems only fair) as is gambling proceeds and lottery payouts. Once we've decided to tax "income", shouldn't we tax it consistently?

yes, i understand that our societal notions of self-reliance are balanced by our societal notions of protecting the family. But this balance should, then, be reflected in the tax code by allowing a substantial exemption, NOT by eliminating the tax altogether.

I thought the argument was that Farmer Joe and Shopkeeper Sam's kids were being forced to sell the farm/store to pay the taxes.

That is the argument. But it's false.

We already have taxes on dividend income and capital gains lowered to 15%, and there is pressure to lower investment income still further.

Isn't this a good way to ensure that boomers can (and will) get out of their growth stocks and into income stocks as they need/desire the money to retire? Won't this movement ease the pressure on SS?

The problem seems to be that there's no trade-off required. No, "we'll lower these tax rates so that you can replace lowered SS payments with higher dividend income".

Some see those taxes going down as a boon to only the rich, say, those affected by the estate tax. I see it as a boon to those whose pensions are run by say, CalPers who can get out of Dell and into Kinder Morgan as their boomer constituents need more funds. Does anyone have any links to numbers about boomers who have some interest in the stock market (either through direct investment or a pension plan) and those who do not?

I should also admit that I'm not a huge fan of the estate tax. I'd rather tax gifts and inheritances through the income tax system (with some level of exclusion), largely in the interests of efficiency. But since that's not on the table, keeping the estate tax in some form is what we're stuck with.

DaveL,

The elimination of the stepped up basis, if it (and capital gains taxes) survives, may act as a form of inheritance tax as assets are sold. In that it is taxed at a level based on the income of the recipient, it may seem more fair than an estate tax, but it will allow a potentially permanent deferral of taxation on those assets if individuals can afford to hold rather than sell. If some of the assets produce income (business or stock) it will be easier to avoid selling and avoid taxes. Thus very wealthy families may retain more of that wealth more easily than families with less wealth will be able to accumulate it across generations. The less wealthy will sell a greater portion of appreciated assets than their wealthier counter parts.

The rich will tend to get even richer over time.

Children rarely contribute to the creation of the estate. The idea that it is their money is quite strange.

Are gifts that you give to your children while you are alive theirs, despite the fact that they did nothing to earn them? Say, for example, Christmas presents?

But it's not true. When my parents die, I will receive "income". My aggregate wealth will certainly go up upon the distribution of their estate; how is it that the distribution is not "income"? It is, unless the tax code says otherwise (which, of course, is the point of the discussion).

Interesting. If your parents, instead of giving you their house, land assets, business, etc, instead sold you all of the above for $1, are you taxed on the imbalance in trade as income? Serious question, here.

Phil,

It's all a matter of point of view, deceased or beneficiary.

Sure, if a parent gives a child money, it is theirs. But a child doesn't have an intrinsic right to the money in a parent's wallet, even a dead parent. Presumably the parent can bequeath it to whoever they want, within limits of law. It's not a birthright.

Now if a person gives a child, or anyone else, a gift exceeding $10K, then that person is obligated to pay a gift tax. The estate tax is a similar proposal only the limits are higher.

" I know whereof I speak, since I am one of the relatively small number of people in this country who would actually benefit from the repeal of the estate tax."

Dahling, I should have realized you came from *that* Hilzoy family! Are you one of the Newport Hilzoys, or from the Suffolk branch?

Slarti ,

Yes.

From the hre="http://www.irs.gov/businesses/small/article/0,,id=98968,00.html">IRS

"The gift tax applies to the transfer by gift of any property. You make a gift if you give property (including money), or the use of or income from property, without expecting to receive something of at least equal value in return. If you sell something at less than its full value or if you make an interest-free or reduced interest loan, you may be making a gift."

And currently gift taxes apply at $11k, not $10k as I stated previously. Credits may be applied against the estate tax.

Let me try that link again on gift tax.

From the IRS

Sure, if a parent gives a child money, it is theirs. But a child doesn't have an intrinsic right to the money in a parent's wallet, even a dead parent.

I didn't say they did. I was responding to what appears to me a ludicrous assertion: That the gift of an estate doesn't really belong to the recipient because they didn't help create it.

I hope I've made clear that I'm not opposed to the concept of an estate tax. I'm just uncomfortable with some of these rather novel notions -- and the moral implications that flow therefrom -- of who does and doesn't own things and who does and doesn't have rights to take things from other people.

Thanks, Jay. I should know better, because I've actually read that page before. I guess "better retention" should be on my Christmas list for next year.

Hilzoy,

Thanks, but I haven't quite gotten there, yet.

But, I suspect I will by the time I decide to retire... if I ever do retire that is...

Slarti: I'm pretty sure that the IRS takes a very dim view of transactions which are not at arms length. A "sale" of assets which is actually a gift will be taxed as a gift.

Phil, I don't understand how you differentiate between the estate tax, FICA, income tax, and property tax. In no case does the government own, or assert that it owns, the taxpayer's assets.* In each case, the government enacts a requirement that a person pay a certain sum based on a set of stated criteria.

*The government thinks it owns the money I give it pursuant to these laws. Inasmuch as the money is in the government's checking account, and I have no dominion, control, or other indicia of ownership over funds I have already paid, this view by the government is hardly farfetched. That the government thinks it owns money or other taxable assets that a taxpayer has not turned over (voluntarily or otherwise) pursuant to one of the tax statutes is something I have never seen asserted by any government, or proponent of taxation. Rather, I've only seen it invoked in the form of a straw man. The County does not think it owns my house, and if I object to paying property taxes by saying "but it's my house," the County shrugs, and hands me the property tax bill: "Of course it's your house, that's why we're giving YOU the bill."

Isn't this a good way to ensure that boomers can (and will) get out of their growth stocks and into income stocks as they need/desire the money to retire? Won't this movement ease the pressure on SS?

To the extent boomers hold their stocks in 401(k)'s, IRA's, or other retirement accounts it doesn't matter. It's ordinary income as I understand it when you take it out. The real beneficiaries are those who have substantial assets outside of retirement accounts.

When Theresa Heinz Kerry released her tax return last year there was a lot of huffing and puffing on the right about how little tax she had paid on her substantial income. Anyone actually looking at the return would have noticed that, among other things, she benefitted greatly from the 15% tax rate on dividends.

It's ordinary income as I understand it when you take it out.

Ah, but there are ways to escape the bonds (so to speak) of ordinary income, and get some income post-retirement tax-free.

From the NYT:

President Bush called the elimination ''a matter of basic fairness.'' He said, ''The death tax results in the double taxation of many family assets while hurting the source of most new jobs in this country -- America's small business and farms.''

Despicable.

Re Jay's 5:52 post: I'd see eliminating the basis step-up as a starting point, but I'd go further.

Eliminating the step-up should be a no-brainer. The original theory was that it was needed because there was a double taxation problem if unrealized capital gains were subject to both income and estate tax. That's dubious in theory, and it becomes completely untenable when you take away the estate tax, as we have for all but a tiny portion of estates.

But I'd also go back to the basic concept that income means "income from whatever source derived." I don't see the conceptual justification for treating gifts and inheritances differently from other kinds of income. Quite the opposite, in fact. The reason that they're not subject to income tax under the current Code is that they're specifically excluded. I'd change that. I'd leave an exemption at least big enough to cover Christmas and birthday gifts and the like, and probably much bigger than that, but beyond that level I'd generally treat gifts as taxable just like any other kind of income.

There is no chance that this will happen.

Tad Brennan: that would be the Cambridge MA hilzoys. (Money originally from publishing: great-grandfather moved to this country as a penniless 6 year old immigrant (or so we were always told; it turns out that his dad was one step ahead of the law, having fleeced widows and orphans, etc., but the family was penniless soon enough), made tons of money (despite the existence of an estate tax!); my great-uncle then ran the family company into bankruptcy, leaving little bits of money here and there, though the bulk of it was in the now-worthless shares of the family company, except for those belonging to the great-uncle who ran it into the ground, who had told everyone it would all be OK while himself, in the only smart business move he ever made, moving his money into IBM. This, from a man who decided not to buy CBS for $750,000 because, and I quote, "there is no future in television". Ha ha ha. I have always been glad about the demise of our family fortune, having watched other people deal badly with excessive sums of money, especially when they didn't earn it.)

This, from a man who decided not to buy CBS for $750,000 because, and I quote, "there is no future in television".

Words fail me. Apoplectic laughter, however, does not.

DaveL,

The stepped up basis already goes away for holdings over $1.3 million in 2010 if current law doesn't change. Large gifts continue to be taxed to the giver.

Yes, but that still doesn't make sense. If I own stock with a value of $1 million and a basis of $100K, why should the gain be taxable if I sell the stock and give the proceeds to my kids but tax-free if I leave them the stock when I die and they sell it the next day?

Charley, I'm just going by people's own statements in the comments. If, after all, a child does not own the gift of an estate left him or her by a parent -- as Jay has asserted above -- who does own it?

Ah, but there are ways to escape the bonds (so to speak) of ordinary income, and get some income post-retirement tax-free.

Tell me more.

Phil,

IANAL. In a sense, the person who created the estate owns it until it is dispersed, then it becomes part of the estate of the beneficiary.

I did not mean that the beneficiary does not own what they get after the estate is distributed.

Some people think that they are entitled to relatives estate even before the parents are dead. They think of it as their money, someday. They didn't earn it, they have no right to it until the estate is legally distributed after all expenses (including taxes) are taken care of. They could even be left out of a future will. Even Hilzoy spoke of "her inheritance" above. That is what I think of as strange. Understandable, but wrong. This sense of entitlement can be detrimental to the future recipient.

Argh,
Some people think that they are entitled to their parents estate even before the parents are dead.

Go google Variable Universal Life Insurance. How it works is, you take out a life insurance policy, pay after-tax dollars as premium, and nearly all of the premium goes into 401k-like investments. When you retire, you start borrowing against the policy value, which by then will be a very substantial amount. You schedule the loans so you're taking the policy value down to nearly zero at your life expectancy. As long as you don't take out more than you put in (IIRC), you pay no tax on it, because it's a loan. If you live longer than you expect, you've simply tapped out that account, just as you'd have tapped out your 401k by withdrawing a planned amount for a planned retirement span.

"Even Hilzoy spoke of "her inheritance" above."

-- Did I? If so, I didn't mean it in that way. I do not, as it happens, think of myself as entitled to anything from my parents; as far as I'm concerned, they have already given me more than anyone could have any right to expect, and so I can't begin to think myself into the frame of mind I'd need to be in to mind whatever they did with what is, after all, their estate.

Sorry Hilzoy,

I misquoted you a bit. From 05:35 PM:
"I don't think that my money, or the money that will be mine if my parents leave their estate to their kids, is less mine than anyone else's."

I shouldn't have mentioned it, since I didn't take you to mean it in the sense of entitlement I was talking about. But it is an example of how we talk in a way that frames inheritance as a right. That frame tends to muddy the discussion of taxing estates. It's part of the family business argument. We slip from talking about taxing a dead person's estate to talking about taking property from (about to be richer) orphans. Property that isn't theirs yet.

Actually, since you qualify "my money" in the same sentence, it's probably not a good example of anything (except of you being a good example.)

Some people think that they are entitled to relatives estate even before the parents are dead. They think of it as their money, someday. They didn't earn it, they have no right to it until the estate is legally distributed after all expenses (including taxes) are taken care of.

In general, I agree. I think there are exceptions, where the family did earn a share of it. Let's say for artists/writers/musicians -- not the rich "stars", but the many working ones. In many cases a wife or daughter does a lot of unpaid "girl Friday" work that does not really get compensated, which supports the artist's career.

My own view is that there should just be a flat limit on how much one can inherit, and everything else goes to the govt. Do Bill Gates' heirs really need all that money? Surely something like $10 million a piece is enough. The world would be better, if people knew that anything above x million would eventually revert to the govt at their death.

votermom

I'm not sure there's a one-size-fits-all number for the upper bound on inheritance, but I agree that limits on inheritance could have social benefits. Bill Gates has spoken to this issue in his own family and of his intent to give away most of his fortune before he dies. His idea of a reasonable inheritance probably isn't the same as yours though:}.

While we agree on alot of this, I am (probably pathologically) compelled to point out exceptions to your exceptions.

One of your points was that some family members contribute to a family business. To the extent they do, those contributions should be outside of the estate of the deceased and not subject to estate tax.

I believe that spouses own a share of the marital property that is not subject to estate tax. This is certainly true in community property states.

At least some family businesses have formal percentage of ownership assigned to individuals, so only the share owned by the deceased should be subject to estate tax. Absent that formal agreement, I'm not sure what recourse the "girl Friday" would have, probably little or none. But that is less a failure of the estate tax than of people failing to reward their assistant's contribution. Even without the estate tax issues, there is no guarantee that the "girl Friday" would be treated properly in the will.

These provisions fail to guarantee that the exclusion of assets from the estate is equitable, but it isn't as if these concerns are ignored.

Very nice. I hope you'll update very soon. Fantastic blog: http://www.cosmicbuddha.com/blog/archives/001169.html , Revelations of John

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