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June 06, 2006

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Darn, I forgot to work this (via Washington Monthly) into the estate tax part:

"Federal troops aren't the only ones looking for bodies on the Gulf Coast. On Sept. 9, Alabama Senator Jeff Sessions called his old law professor Harold Apolinsky, co-author of Sessions' legislation repealing the federal estate tax, which was encountering sudden resistance on the Hill. Sessions had an idea to revitalize their cause, which he left on Apolinsky's voice mail: "[Arizona Sen.] Jon Kyl and I were talking about the estate tax. If we knew anybody that owned a business that lost life in the storm, that would be something we could push back with."

If legislative ambulance chasing looks like a desperate measure, for the backers of repealing the estate tax, these are desperate times. Just three weeks ago, their long-sought goal of repeal seemed within reach, but Katrina dashed their hopes when Republican leaders put off an expected vote. After hearing from Sessions, Apolinsky, an estate tax lawyer who says his firm includes three multi-billionaires among its clients, mobilized the American Family Business Institute, a Washington-based group devoted to estate tax repeal. They reached out to members along the Gulf Coast to hunt for the dead.

It's been hard. Only a tiny percentage of people are affected by the estate tax—in 2001 only 534 Alabamans were subject to it. And for Hill backers of repeal, that's only part of the problem. Last year, the tax brought in $24.8 billion to the federal government. With Katrina's cost soaring, estate tax opponents need to find a way to make up the potential lost income. For now, getting repeal back on the agenda may depend on Apolinsky and his team of estate-sniffing sleuths, who are searching Internet obituaries among other places. Has he found any victims of both the hurricane and the estate tax? "Not yet," Apolinsky says. "But I'm still looking.""

Very few people are subject to the estate tax. If anyone is worried about those poor small businesses and family farms that would have to be sold to pay it, consider this:

"The Congressional Budget Office estimates that, had the 2006 exemption level of $2 million ($4 million per couple) been in place in 2000, the number of taxable farm estates would have dropped by more than 90 percent, and the number of taxable family-owned businesses by almost three-quarters. At an exemption level of $3.5 million ($7 million per couple), as will exist in 2009, fewer than 100 family businesses and only 65 farm estates would have paid any estate tax." (emphasis added)

Welcome back Hilzoy.
What is it about the rich (with few exceptions) and their desire not to pay taxes? The well to do,(in the Australian system) are the only ones who can reduce their taxable income to any extent and still they bitterly complain. In all my dreams of one day winning the lottery, I have no worries about paying taxes, it only seems fair. As I understand it we have no death taxes here. They were abolished in the 80's I think (everyone was taxed not just wealthy). Absolutely no chance of them being reintrouced while we have a conservative govt.

Nice sense of priorities these folks have. My wife is a civilian employee of the Army. On Friday, another person in her office was told that he's being laid off effective June 15 because Congress hasn't gotten around passing a defense appropriations bill (??) and the Army has absolutely no money for anything but Iraq and Afghanistan, which are funded with short-term "emergency" spending bills. This is a guy that they just hired a few months ago because there was way more work than the others in the office could keep up with, in part because some of the civilians have been in Iraq as reservists and in part because they're going to be losing their green suiters when some deploy this summer and others have to do specifically military work in their absence.

Why this line of argument wouldn't support legalizing marriage for gays who plan to have or adopt children while banning it for heterosexual couples who don't, as well as for infertile and elderly couples, is a mystery.

Hilzoy, I suppose you meant "Why this line of argument... while allowing it for heterosexual couples who don't..., is a mystery."

Well, just watched two hours on the French Revolution. Liberte, Equalite, Fraternite (we need a gender-neutral word here.} Can't say I learned much I didn't know, but I have gotten inspired. Stimulated. How the heck do we handle injustice, inequality, aristocratic arrogance? Marat, Danton, Hebert...and the immortal Robespierre at least had a plan. How many Waltons does it take to fill a breadbasket?

Not a good day today.

How many Waltons does it take to fill a breadbasket?

Research project!

(Note to NSA: this post made in jest. No actual beheading of actual Republican donors is intended.)

The thing that drives me nuts about the anti-estate-tax is the dishonesty of their arguments. Forget the "death tax" framing for a moment. How anout the "it's my money" argument? Well, who does "my" refer to? If it's the decedent, well, they're dead and have no rights whatsoever. If it's the inheritor, how is it their money? What have they done to earn it? Under what Lockean claim of "mixing labor with the land" is it theirs? As you rightly point out, the answers are nothing and none. Their situation is not in any way of their own doing and thus does not confer any inviolable right of ownership.

If the burden of a tax is the degree to which it takes from those who have a compelling claim of ownership, the estate tax is the least burdensome tax possible. It should be a favorite of those who truly believe in private property, but instead those who claim such belief treat it as anathema. It's an anomaly that's hard to resolve without seeming to cast aspersions on estate-tax opponents.

These people are all “hereditary elites”?

The real value in many small businesses is their commitment to their local communities. Many times that ongoing commitment is due to the continuity of family ownership.

A $7 million exemption is still not enough to keep many small businesses in the family. A $20 million company is still a very small company. They may employ dozens of people and contribute in significant ways to the community – but there is not a spare few million to pay this tax. When the descendents are forced to sell or liquidate the business just to pay the death tax it is often the whole community that suffers – not some “hereditary elite”.

Maybe you think it is fair that children have to face the choice of selling the family ranch that has been in the family for generations, or incur a lifetime of crushing debt to keep it – I do not. They have the assets (land and equipment) accumulated over generations – but very little in terms of liquid assets.

So I guess it is better to subdivide that 5,000 acre ranch and sell it off to the developers in order to pay this tax. Ranching is damn hard work – why would you want to spend the rest of your life doing that hard work to do nothing more than pay off this debt? Anyone in their right mind will just sell out.

And I don’t buy that this money would have to be made up some other way. There are two ways to balance a budget. I hear it is frowned upon to print up your own money so in general I have to cut spending when faced with a shortfall.

Why should you work hard all your life to have something to pass to your children if the government is just going to get it? Why bother? Why encourage your children to carry on a family tradition when the government is going to take the means?

“80% -- on estates above $3.5 million” – so the rancher whose land value has appreciated to $4 million dollars over the course of several generations should have to pay $3.2 million in death tax. Why not save the paperwork and just pass a law that says your entire estate passes to the government at your death?

Am I wrong, or would the estate tax kick in under Hilzoy's 80% proposal for estates above $3.5 million; the first $3.5 million would be exempt? Just as today the first $1 million or so is exempt.

Why bother? Who thinks like this? Bill Gates, Warren Buffet, the CEO of Exxon? Apparently not. Show me one time in American history, including when the top marginal income tax rate was 91% in the early 1950s, when anyone adjusted their entrepreneurial behavior like Pavlov's dog to Federal tax policy, although I have noticed Larry Kudlow is cooling his heels in his current dead-end gig and wearing that same pinstriped gangster suit because he's holding out for no taxes, and will begin to actually produce something other than hot gas once that happens.

If I were you, OCSteve, I would quit my job right now, empty the 401K and have a good time, because it is obvious that there is no point in anything. Come to think of it, I'm going to do the same. I asked a homeless guy the other day what his problem was and he told me he didn't see the point in working because of the stinking estate tax.

Frankly, I think taxing only those occasions when people whine about taxes would raise more revenue than the current system, because whining about taxes is a bottomless resource which actually increases as you tax it. But it doesn't decrease as you reduce the tax on whining.

Secondly, this idea that the finances of the government are identical to the finances of a family sitting around the kitchen table trying to figure out how to pay the medical insurance bill is crapola.

If it IS true, then the first thing my family wants to cut is the war in Iraq. If you don't mind, I'm pulling the troops out at noon today.

In case someone wants to say the government should be run like a business instead, tell me what the profit margin should be. And should my quarterly dividend rate be higher than Citigroup's or Altria's?

Finally, any bill which addresses the problem of the uninsured should be named the "Defense of Adult Fetuses Who Happen To Clean Your Toilets Act" The reason why Dobson and Robertson are against abortion is because they resent the fact that all of those aborted fetuses are not available to drive down the already low wages they pay the adult fetuses who scrub their toilets.

Me? I'm pro-choice and anti-abortion. Raise the minimum wage to $30 grand per annum.

Clean your own effing toilets. Nobody taxes that activity.

I would be happy to make an exception for ranchers and farmers. Unfortunately we would then have 280 million ranchers and farmers in these Pavlovian United States.

OCSteve: to repeat: "At an exemption level of $3.5 million ($7 million per couple), as will exist in 2009, fewer than 100 family businesses and only 65 farm estates would have paid any estate tax." Now: paying estate tax obviously does not equal having to sell one's business/farm in order to pay it, but it might. Similarly, though, some people have to sell assets in order to pay other kinds of taxes. This happens, but with the estate tax it happens for a vanishingly small number of people.

About 80%: I said a marginal tax rate of 80% on estates over 3.5million. This means that the first 3.5 million is tax free, and the 80% is paid on the remaining $500,000, for a total tax bill of $400,000, not $3.2million.

The whole point was to allow for most inheritances, but put huge taxes on the money above a certain level. And note that these taxes need to be raised from someone: if it's not someone's inheritance, it will be someone else's paycheck or real estate or investment income. So generalized anti-tax sentiment doesn't address this.

Don't you get something like 15 years to pay off the estate tax bill? I don't get the sense that you suddenly need to come up with several million by next April 15.

OC Steve: As the Republican party has controlled the House, Senate and White House for six years now, the cut-federal-spending argument is getting a little thin. the american people want this level of spending.

they also "want" not to pay for it. (they also don't want their children to pay for it nor for inflation to wipe the debt away.) we've run out of choices.

if we won't have estate taxes, i guess we'll need to go to a change-in-wealth tax. we can all start paying annual capital gains taxes on assets we still hold. that should be full time employment for a few million appraisers.

"Taxing inheritances does not discourage people from working or investing or doing anything else that needs encouragement."

I don't think this is all that true; some people get a lot of utility out of being able to provide for their children, probably the wealthy in particular, and so taxing that will tend to disincentivize some work, since they won't be able to reap the utility of giving to their children. Just because they'll die doesn't mean they don't get any utility out of something. Otherwise, why would people leave an inheritence at all? Regardless of which side of the debate you're on, the tax will distort behavior from non-taxed behavior. How much it will is hard to predict a priori.

About 80%: I said a marginal tax rate of 80% on estates over 3.5million

My mistake, careless reading on my part. I stand corrected.

So now where do you get the $400k in that scenario? Most likely you either borrow it and incur the debt or you give up and sell it – same thing, smaller scale.

If I were you, OCSteve, I would quit my job right now, empty the 401K and have a good time, because it is obvious that there is no point in anything.

Not that I have to worry about it – but if I was in this situation (heirs that stood to lose much of their inheritance) – I would pretty much do exactly that. When I retired, rather than passing on the company/farm/ranch to my heirs I would simply close the doors and liquidate everything. I would tuck away whatever the exemption amount is as their inheritance, then I would proceed to use every loophole available to distribute everything that was left before my death.

How is this fair in any way:
-tax the original income.
-tax any interest or dividends generated by investing that income.
-tax any appreciation generated by investing that income (and interest and dividends).
-tax the hell out of it all when you die.

How many (more) times can you tax the same dollar? Sorry – April 15th is still too close in history for me…

Hilzoy,

Both he and his wife had medical coverage through his job; however, his job requires that he be able to use his legs, and so the day of his accident was also the day on which he lost his job, and thus his (and his wife's) medical coverage.

I know for most American readers this is doubtless a reasonably ordinary story. Hey, that's the way it is and move on without much, or any, comment. But to me,

This. Is. Insane.

If you didn't wait until April 15 to do your taxes, and say turned them in on Feb 15, you would have been incentivized to complain two months earlier about paying them. Then we could have had this discussion two months earlier.

So, I guess you are right. Taxes influence behavior! ;)

Here's the deal, though. You want your marginal rate of whatever it is cut. I want my absolute tax rate cut to zero.

Every complaint you have about your last dollar taxed I have about my first dollar taxed, Whom do I petition, short of revolution?

If you really don't like taxes so much, do something about it, like those folks in the Baghdad suburbs who are silently cowed by guys obsessed with hair gel should do something about their problems, instead of asking me to foot the bill.

I still can't get over the fact, OCSteve, that you breath air that my tax dollars cleaned up over the past 30 years.

I am deeply put out. Where's my copy of "Atlas Shrugged", for God's sake?

Smile.

OCSteve: Not that I have to worry about it – but if I was in this situation (heirs that stood to lose much of their inheritance) – I would pretty much do exactly that. When I retired, rather than passing on the company/farm/ranch to my heirs I would simply close the doors and liquidate everything. I would tuck away whatever the exemption amount is as their inheritance, then I would proceed to use every loophole available to distribute everything that was left before my death.

Which would be fantastic for the economy, for whatever charities you support, potentially for your heirs if it means they get a part share of what they'd inherit down the line (in the UK, you can make a gift and exempt it from death duty if you kindly refrain from dying for at least seven years afterwards: big estates have used this loophole to pass on part or all of the estate from the owner to the owner's heirs in a grace period).

Let's suppose you had an estate worth $8M to leave to your heirs, OCSteve. You sit down with your accountant who tells you that you can leave up to $3.5M to your children or other heirs without attracting inheritance tax. If you sit down with your accountant/tax lawyer early on, you could also begin to plan a transfer of your estate bit by bit to your heirs - which, if it's a business they expect to run after your death, sounds like sound business planning to me. If it's a trust fund, or you die before you do any planning with your accountant, well, you may be stuck with only letting your heirs get $4.4M instead of the whole $8M. Forgive me if the thought that your heirs "lose" $3.6M of the money they expected to get fails to fill me with sympathy: I don't expect to ever have $3.6M to "lose".

Yukoner:

"This. Is. Insane."

Well, most Americans prefer untaxed insanity to taxed insanity.

Toilets get cleaned; guys lose their income and run up big medical debts.

But ideologies are preserved and the socialist hordes are beaten back.

I wonder if the Hilzoy's friend would get cheaper medical care in Baghdad at my expense?.

Not that there is anything wrong with that. But I want those clinics that weren't built in Baghdad at my expense to be built here.

Or not. Whatever preserves ideologies.

OCSteve: as someone pointed out above, one can spread out the payments, so one doesn't have to come up with the whole sum at once.

That said, it's not as though our choice is: tax estates or don't tax estates. It's: tax estates or tax something else, or cut spending, which the GOP congressional leadership seems completely unwilling to do. If we tax something else, the people we tax will, of course, have to come up with their taxes somehow, possibly at real cost to themselves. That's why I said that generalized antitax sentiment isn't germane here: this is about allocating the tax burden.

The double taxation argument is horsepuckey. It basically comes down to the assertion that making money through labor ought to be taxable, but making money by shuffling money around should be exempt. By any reasonable assessment of what actually creates value it ought to be the other way around.

I think a lot of people get nutty about this tax simply because it is mistakenly called the "death tax". In reality the tax is basically a transfer tax and you pay the same amount of tax whether you give away your assets while you are alive or your estate gives them to someone after your death.

Re: Losing the farm argument

IMO, the only people who lose farms or businesses because of the estate tax are those who didn't realize they would be subject to it. There are many many ways to lessen or even avoid the estate tax. The only thing required to do this is a good attorney and/or accountant. You can buy life insurance (the proceeds of which are not subject to the income tax) to pay for the estate tax. You can give away your estate over a longer period of time and thereby take advantage of the annual gift exclusions. You can create trusts that will shelter some of your assets from the tax.

As long as the exemption amount is high enough and adjusted for inflation regularly I have no problem with the estate tax in practice or in theory. $10 million would be a good exemption amount, IMO.

Why encourage your children to carry on a family tradition when the government is going to take the means?

Because maybe your children will be better off in the long run having to make it in the world by dint of their own talents, gumption and sweat, instead of hitting the accident-of-birth jackpot.

I always thought personal responsibility and pulling oneself up by one's bootstraps were conservative values--at least they are when affirmative action or welfare are the topics under consideration. Funny how quickly those values can be jettisoned when it's convenient.

I'm buying a new car in the coming weeks. I'll be taxed on the income, taxed on the purchase price of the car, periodically taxed on the value of the car, and taxed on any money I make should I eventually sell the car. Cry me a river, Walton family.

(Actually, I will get a $3000 credit, since I'm buying a Prius. Hooray for taxes as social engineering!)

I do find it funny that, as soon as large amounts of wealth enter the picture, folks who would otherwise put a premium on personal responsibility and productivity suddenly become keenly interested in hard-luck cases (inasmuch as ending up with the after-tax sale price of a multimillion dollar ranch or business constitutes "hard luck"). Gone is the notion that resources should go to the most productive, who will then put them to the best use. Rather, it is the hapless heir who just can't manage to parlay a 4 million dollar asset into an additional half million dollars who is the real victim in our society. Take away the estate, and that inability to cope would make that person a lazy bum and a drag on society to a lot of free-market conservatives. But, it seems, wealth imbues the beneficiary with an intrinsic moral worth.

It appears my mind-link with Uncle Kvetch is now complete.

Indeed, Gromit. 8^)

As for the "double taxation" argument, one of these days I'm going to go into a drugstore to buy some shampoo, and when I get to the register to pay I'll throw a big ol' hissy fit and refuse to pay the sales tax: "This money has *already* been taxed! How DARE you!" Should be good for a laff.

Here's my take on this: those with sufficient means and determination are going to build themselves a sort of spillway to keep the flow of money from doing any governmental work. Those with insufficient means and determination are going to have the bejesus taxed out of them.

I don't particularly believe that estate transfers of wealth deserve special treatments compared with other transfers (low or high).

But as far as taxation and spending go I want to note that "the American people want it" doesn't cut it for me because so far as I can tell "the American people" desire the current level of spending or quite a bit more with noticeably lower levels of taxation.

That isn't a realistic balancing.

If they can't have that they want lots of spending that benefits them with other people paying for it.

That may be a rational desire, but it isn't realistic balancing. I like to pretend that most people would be more realistic about such things if the balancing trade-offs were more transparent. That is why I tend to dislike very different tax rates for very different things.

But anyway. On the specific problem of the estate tax, I don't see a reason to eliminate it entirely, nor do I see a reason to make it dramatically different from other taxes.

Blue Neponset:

"I think a lot of people get nutty about this tax because it is mistakenly called the "death tax".

No mistake whatsoever. Frank Luntz pulled on Newt Gingrich's coat tail one day when he was giving a boring anti-estate tax back in the early l990's and whispered, "Hey, call it a 'death tax', instead. Let's see what happens!"

The crowd went nuts and torches were lit. Plus, tombs and graves all over town cracked open and it was like the "Night of the Living Dead". Conservative cadavers have been gnawing on liberal flesh ever since.

Good news, though. Apparently (I forget why) Luntz is on the outs with the RNC. Maybe we can hire him over to the liberal side and have him gaze hypnotically at the auto-suggestible American population in their Skinner boxes and say "Look into my eyes! Forget 'death tax.' It is now called 'free ice cream'"

There will be a stampede of farmers and ranchers and small businessmen who will croak just to be able to be the first to pay the "Free ice cream".

Terry Schiavo herself will rejoice about the day she died just because what she really did was receive free ice cream.

It's all about framing.

Slart:

"from doing any government work".

Which is why I think satellite laser technologies should be employed to draw little circles around such people from space with a note attached for would-be enemies that "individual not defended by U.S. military because of Randian use of tax dodges."

Keeps the flys off me for awhile.

Sebastian: If they can't have that they want lots of spending that benefits them with other people paying for it.

Well, yes: but you're not describing "the American people": you're describing the extremely rich people who support the tax cuts. They're all for lots of spending that benefits them - but they absolutely don't want to have to pay for it themselves.

The people who won't benefit by the tax cuts but support them anyway - who are a far larger number, as far as I can tell, than the small minority who will benefit - may want lots of spending, but at least they also want to have to pay for it themselves. (Assuming, of course, that they've done the math.)

A $7 million exemption is still not enough to keep many small businesses in the family. A $20 million company is still a very small company.

Let's not confuse the value of the business with the estate tax liability. When businesses get to be worth $20 million, hardly a "very small company," they generally have multiple owners, outside investors and the like. Even $7 million businesses seldom have only one owner. Even if in the family, shares are owned by children as well as parents. It's only the individual's share of the value that counts as part of the estate.

They may employ dozens of people and contribute in significant ways to the community – but there is not a spare few million to pay this tax. When the descendents are forced to sell or liquidate the business just to pay the death tax it is often the whole community that suffers – not some “hereditary elite”.

Why? If it's a successful business, and it must be if it's worth all those millions, surely it can be sold as a going concern if the heirs don't want to run it. Or it can support the payment, over fourteen years I think it is, of the estate tax.

Maybe you think it is fair that children have to face the choice of selling the family ranch that has been in the family for generations, or incur a lifetime of crushing debt to keep it – I do not. They have the assets (land and equipment) accumulated over generations – but very little in terms of liquid assets.

So I guess it is better to subdivide that 5,000 acre ranch and sell it off to the developers in order to pay this tax. Ranching is damn hard work – why would you want to spend the rest of your life doing that hard work to do nothing more than pay off this debt? Anyone in their right mind will just sell out.

A free-market approach suggests that the property ought to be put to its most valuable use. If that is real estate development rather than ranching what is wrong with that?

"I think a lot of people get nutty about this tax because it is mistakenly called the "death tax".

I suspect that people get nutty about it because they mistakenly think that through their estate's perpetuity they can live forever.

It's like the over-the-top demands that weathy people put into their charitable bequests (See, for example, "The Barnes Foundation"). "My exacting preferences will dictate the use of this money for centuries! I may be dead, but my name, my money, my identity will live on!"

Mr. Harvard got pretty good mileage from his gift, as has Mr. Yale. Funny thing is, it seems to me that the estate tax encourages this sort of thing.

Frank Luntz pulled on Newt Gingrich's coat tail one day ... and whispered, "Hey, call it a 'death tax', instead.

I know someone who attended Penn with Luntz. Apparently, the poor man was mocked incessantly by cute liberal girls. And he never forgot. Merely another example, of course, of how liberal academia oppresses conservatives.

OCSteve: I'd recommend re-reading the last of hilzoy's cites above...

At an exemption level of $3.5 million ($7 million per couple), as will exist in 2009, fewer than 100 family businesses and only 65 farm estates would have paid any estate tax.

Let's repeat that, since it's the kind of all-important fact proponents of the repeal of the estate tax often overlook:

At an exemption level of $3.5 million ($7 million per couple), as will exist in 2009, fewer than 100 family businesses and only 65 farm estates would have paid any estate tax.

That's... amazing. Unbelievably amazing. This is what they're supposedly going to the mat to save: the fortunes of fewer than 165 (I've seen some sources that peg it at less than 100) families. It boggles the mind.

Slart:

"from doing any government work".

Actually, I was waxing (or attempting to) hydroelectric; should have included a reference to the penstock of taxation for full effect.

I've read (I think from sources I trust) that there have been no family farms estate-taxed apart. Not sure what "family farm" means, though - if it's a farm run by one family I can imagine that being worth under $7 million is more or less automatic, unless we're talking about a fig tree or vegetable patch in a nice part of Palo Alto...

That's why I said that generalized antitax sentiment isn't germane here: this is about allocating the tax burden.

“allocating the tax burden” – that is really my beef here more so than the death tax itself. I simply don’t have a dog in that race. I’ll never get close to any current or future exemption and I don’t have children – so it will never affect me alive or dead. Out of control spending and what the people want vs. what they want to pay for are all valid points – beyond that I am not anti-tax per se. In terms of the death tax, it is just one more way to shift the tax burden from the general population to “rich folks”.

I’m far from “rich folk”, but there are many aspects of “allocating the tax burden” that do impact me directly. Why does the tax burden need to be allocated? Why can’t everyone pay the exact same flat percentage? Why have we decided that one income level should be exempt from income taxes (and even get credits) while other income levels should pay the bulk of the country’s taxes, and anyone who is "rich" should get nailed to the wall? Yeah, progressive, I know. Why am I (childless, zero exemptions) asked to subsidize those who made the decision to have children? Why does each child entitle you to a tax break - because you are churning out (hopefully) future tax payers? Why do I carry more of the burden because I choose to rent rather than carry a 30 year mortgage? The government wants to encourage child-rearing and home ownership? So ding me because I don't toe that line.

That is all I ask – a system that asks the same of everyone - exactly the same on a percentage basis. OK, some cutoff at the poverty line, but no credits anywhere and a straight percentage for everyone else. I don’t mind paying my fair share – I mind that so many others (richer and poorer) do not.

Institute a flat percentage income tax, or lose it altogether and go with a national sales tax. Hell, just eliminating the IRS knocks 11.3 billion off the tab for 07 alone.

End of rant.

But there is nothing "fair" about taxing only income, and not other events. As others have stated, income most often results from productive activities, or what we like to call "work." If we could only tax one sort of activity, work would probably be our last choice. We don't want to disincentivize people from working!

OCSteve: are you talking politics or economics?

i don't mean to be trite or sound condescending. as a economic matter, our tax policy is not exactly rational; as a political matter it is an expression of lots of compromises made over several decades.

want a more fair tax code? elect better legislators, or at least ones that represent your particular interest group better.

but as a political matter, your last post sounds like whining. The Republican Party is very tightly tied into various interests groups (farming, big business) that have the clout to enact tax policy that favors their interests (ag bills, corporate welfare). Not that the Democrats are exactly on the side of angels, but they've at least shown some consistency in levying taxes that approximate spending.

of course, as a childless renter, you should favor borrowing over taxes, because you have no economic interest in the problems presented to the next generation caused by massive debt. Others, you need to recognize, differ.

OCS, the mortgage interest deduction I'll admit is pure policy -- and you can take mine from my cold dead fingers. The exemptions for dependents, though, seems to me to be a recognition that a family of three on a given income has less ability to pay, as a general matter, than a single person making the exact same income.

The biggest trouble with messing around with stuff like this is that you have a number of unintended consequences, that you don't have from simply repealing the estate tax, or yacht tax, or lowering the top rate. If you eliminate the mortgage interest deduction, or cap it (as was recently discussed) at a level that is too low for some regions of the country, you immediately, overnight, substantially change property values. My house is worth what someone will pay for it, and part of that calculation is what the real net cost of ownership is going to be. Knock 20% off the value, and the county suddenly has less money for the schools, my neighbors who were planning to take out a home equity loan to pay for an addition don't do it, and the guy up the block who was going to refinance can't afford it. Indeed, suddenly a whole bunch of people can't afford their house payments.

There's a whole lot of things we'd do differently if we were starting from scratch. We're not.

OCSteve: Why does the tax burden need to be allocated? Why can’t everyone pay the exact same flat percentage?

I'm pretty strong, Steve, and recently when myself and my co-workers were clearing up after an event, I was helping to lug around heavy tables and boxes, while a couple of my colleagues were carefully carrying only light chairs and small stuff out to the van. You are likely asking, why did we do it like this? Why didn't we insist that everyone, no matter what their strength or ability, had to carry their "fair" share - never mind that a box I could easily carry would have toppled K. over if she'd tried to lift it, or that C. and J. between them couldn't have shifted a table that T. and I moved easily?

Hell, just eliminating the IRS knocks 11.3 billion off the tab for 07 alone.

Excellent! That's, like, 17 whole days of Iraqi occupation covered right there!

OCSteve - I'd be all for a flat tax with a poverty level cutoff. That's on *all* income, mind you, regardless of source - inheritance, dividends, wages, interest, pennies found in the street. The aristocons demand all sorts of exemptions that just coincidentally favor people with lots of money, and more troublesome to me, favor the increased concentration of wealth in the hands of a few families. I'll take the current fustercluck tax code over one that creates a de facto feudal state in a couple of generations, thankyouverymuch.

want a more fair tax code? elect better legislators, or at least ones that represent your particular interest group better.

I'm not sure what quality legislators we'd need before cleaning up the tax code even makes it onto the to-do list. My (probably entirely BS) law of the tax code is that it tends to accrete, not erode. There's no incentive (much less imperative) to design, therefore it winds up being a disorganized mess of loopholes, exceptions, targeted tax cuts/increases, etc.

My (probably entirely BS) law of the tax code is that it tends to accrete, not erode.

I think the saying is "Simplification is everyone's second choice."

I think second is being a little optimistic, unless there's a limit of 2.

"In reality the tax is basically a transfer tax and you pay the same amount of tax whether you give away your assets while you are alive or your estate gives them to someone after your death."

Blue Neponset,

A bit of a quibble, since I agree with your general sentiment, but even though the estate tax and gift tax are the same *rate*, the gift tax is actually lower since it is 'exclusive' of the gift, while the estate tax is 'inclusive' of the bequest.

Let me explain with a greatly simplified example. Suppose a person has exhausted his or her lifetime exemption and has an additional $1M which they are deciding whether to gift currently or wait until death to bequest. Assuming, say, a 50% tax rate, if the person makes a gift, they can allocate $666k to gift and $333k to tax, resulting in a net transfer of $666k.

If, on the other hand, he or she waits until death, the entire $1M will be subject to a 50% estate tax, resulting in a net transfer of $500k.

Of course, accrued gains muddy the picture, because bequested assets receive a step-up in basis to the value on the date of death, whereas gifted assets have the same basis in the donee's hands as they did in the donor's hands, but considering the relative rates involved, the gift/estate tax issue is much greater for most wealthy people than the capital gains issue.

I would also add that gifting has the additional benefit of removing any appreciation in value between the time of gift and death from the donor's estate, thereby avoiding estate AND/OR gift tax on the appreciation.

I think the idea is that everyone is fighting for their first choice and never gets to their second. They did a great job with the 1986 Act, but that confluence of events is not likely to come to pass any time soon.

On the home mortgage interest deduction, it's left over (along with a few other deduction) from the days when individuals could deduct all interest paid regardless of the purpose; all the others having been stripped away over the years.

Reform of estate tax should include a step-down in tax basis to zero of all assets passed to heirs except for cash, which would be taxed at current rates.

Lewis Carroll: If, on the other hand, he or she waits until death, the entire $1M will be subject to a 50% estate tax, resulting in a net transfer of $500k.

Except it wouldn't be, because the way estate tax works is that you can leave a certain minimum amount absolutely free of tax: estate tax only applies to the amount over the limit.

Jes,

You're right, that there is an applicable exclusion amount, although for large estates it's deceptive to say that there's a minimum *free of tax* (this would be true if the estate is UNDER the applicable exclusion amount). But the way it works for TAXABLE estates is you calculate a tentative tax based on the FULL estate size and apply a credit equal to the tax on the FIRST (or 'bottom') $2M; you don't subtract $2M from the total size of the estate and then calculate the tax - the effect of that would be to lop off the top (most expensive) part of the estate, which is not the way it works. This has become a little more complicated since they decoupled the gift/estate tax exclusion amounts (remains at $1M for gifts, but has risen to I think $2M for bequests).

Anyway, in my hypothetical example above I noted that the person in question had already exhausted their lifetime exemption, so in theory they would have an estate subject to transfer tax starting from dollar one. I was just trying to illustrate that gifts are *cheaper* than bequests with an oversimplified example)

All of this is just side-issue minutae compared to the more general point of Blue's post, namely that the supposed widespread and pernicious effects of the estate tax are hugely exaggerated and distorted by those with a personal agenda.

OCSteve: are you talking politics or economics?

I’m talking my annual tax bill, and is it fair compared to my neighbors, be they richer or poorer, whether they live in a hot housing market or the back woods. Whether they have 10 kids or none. Whether they can afford to pay a tax attorney to find and exploit every loophole because that is cheaper than paying their fair share…


but as a political matter, your last post sounds like whining

I am whining. No argument. I don’t expect to set policy here by convincing the regulars of this site to join me in my crusade :) Blowing off steam in an opportune thread.


The exemptions for dependents, though, seems to me to be a recognition that a family of three on a given income has less ability to pay, as a general matter, than a single person making the exact same income.

I am not single – I have a wife and other family obligations – they are not recognized as dependents though. I have very similar responsibilities but no deduction.


There's a whole lot of things we'd do differently if we were starting from scratch. We're not.

Not a good reason for allowing the same old same old, and getting worse every year. I do understand what you are saying, don’t get me wrong. I know it would be a huge undertaking, shooting high the first few years and (hopefully) gradually adjusting. But this current mess forever is not the answer.


You are likely asking, why did we do it like this? Why didn't we insist that everyone, no matter what their strength or ability, had to carry their "fair" share - never mind that a box I could easily carry would have toppled K. over if she'd tried to lift it, or that C. and J. between them couldn't have shifted a table that T. and I moved easily?

How is 10% of a person’s income who makes $20k/year more dear to them then 10% of my income is to me? (10% I wish). How is 10% of my income more dear to me than 10% of Bill Gate’s is to him? Flat percentage – the more you make the more you pay. That seems pretty straight forward. I did say a cutoff at poverty level.

I did not say anything about cutting social nets like welfare, food stamps, Medicare, etc. The poorest among us will always have help (you can argue whether it is enough). I will help you with the heavy box – I don’t want to pick up part of your share of maintaining this country.


Excellent! That's, like, 17 whole days of Iraqi occupation covered right there!

Did not check your math – I’ll stipulate – so what? Paying your tax bill does not give you the option to decide foreign policy. If it did we would have nuked the USSR at my bequest in 1983.

How is 10% of a person’s income who makes $20k/year more dear to them then 10% of my income is to me? (10% I wish). How is 10% of my income more dear to me than 10% of Bill Gate’s is to him?

If you don't understand how $2,000 is more dear to someone who makes $20,000 per year is than $2,000,000 is to someone who makes $20,000,000 per year (or even $10,000,000, for that matter), then I don't know what to say.

Suppose you have the chance to make about 20,000. a year at a job that has little or no benefits and you have to buy gas to get there and hire a baby siter to cover part of your work day.
You can't afford to pay taxes in that senario. You can't afford much of anything, certainly not the loss of one penny. Even if you take the child and daycare out, there is no extra money.
Now suppose you can earn about 20,000. on the black market economy, no benefits of course, but no payroll deductions either.
Then you'd be living like many of my neighbors in semi-rural Washington state where people keep the wolf from the door by doing carpentry, gardening, eldercare, daycare, all kinds of stuff off the record and outside the regular economy because the alternative is to make even less money at a no benefits, taxed job.
The flat percentage tax is a really bad idea unless modified with all kinds of exemptions and condidtions. That 10% out of 20,000. hurts a hell of a lot more than 10% out of 200,000.
I don't think taxes are a disincentive to work. They are just a disincentive to pay taxes when the bite gets disportionate to the income.

Marginal utility, OCSteve. Your first dollar has a lot more utility to you than would your billionth dollar, or even the last hundred million of a billion dollars. That first dollar will buy you something to eat, or a tool with which you can make a living, or some good which you can resell for a profit, which you could not afford if you had no money at all. If you have $900 million instead of a billion, how has your life fundamentally changed? Actual billionaires shrug off losses like that all the time as the markets fluctuate, but that kind of loss would be the ruin of most folks.

I have two words for people who don't believe in the marginal utility of the dollar, which irrefutably prove you wrong:

Sky Mall.

Ha!

ugh: If you don't understand how $2,000 is more dear to someone who makes $20,000 per year is than $2,000,000 is to someone who makes $20,000,000 per year (or even $10,000,000, for that matter), then I don't know what to say.

Nor do I. I guess OCSteve would have stood by as K. tried to pick up a heavy box and told her he expected her to do her share and he'd carried one just as heavy.

OCSteve: So now where do you get the $400k in that scenario?

You plan for it. If keeping the ranch in the family is an important thing, the rancher will treat it as he treats fencing, seeding, grazing rotation, and every other damn thing in the operations: an expense to be factored in. A ranch that appreciates $4 million will be particularly capable of sustaining a little annual set-aside for the day when taxes must be paid.

Nell, looking at that 1997 article OCS linked to, it looks like the properties at issue are essentially fallow, or at least not capable of generating the income to carry the additional debt / insurance expense.

You can think of it as a summer home problem. That little cabin in Maine that your greatgrandfather built is going to carry a much higher tax burden than can be justified by the one or two times a year you'll actually go there after your parents are gone. It is readily imaginable that a property that was in the family before one's parents were born has sentimental value that vastly exceeds its monetary value to the heir(s), and a monetary value to third parties that far exceeds the ability of the heir to carry the taxes.

(My parents are alive and active, but old enough that rumblings of discussion about their summer home have started. Not so much about estate tax, but the not-inconsiderable annual upkeep expenses, given that some of us go there more often than others, and we have some income disparities. Many of my parents' friends went through the same thing with their parents, and are going through it with their children. These people are not rich enough to be hereditary elite, for whom these issues are easily resolved, but rich enough to have assets worth caring about).

CharleyCarp: my family had just such a property, in a part of Maine that has become very chic. My great-grandfather bought it (and he died in 1930, iirc); during my childhood, it was owned by my grandfather's second wife, who basically let everyone come up whenever they wanted, which was absolutely great. We all have wonderful memories from it, and love it to pieces -- especially me, since one summer the aforementioned grandfather's second wife was ill, and for some reason no other relatives were planning to go up there, and she didn't want to go there alone, so I heroically volunteered to spend a delightful summer in Maine -- which was one of the best summers of my life.

Alas, however, when my grandfather's second wife died and we all had to consider who was going to pay for the taxes, upkeep, etc., we sold it. Unfair? I don't think so -- much as I hated to see it go.

OC Steve writes: "So now where do you get the $400k in that scenario? Most likely you either borrow it and incur the debt or you give up and sell it – same thing, smaller scale."

No, what you do is you find a business partner and build a luxury spa on a back corner of the ranch, then you earn $400k in a matter of weeks by putting hot rocks on the backs of stupid rich people while giving them Evian mud colonics. Or whatever it is they do to waste their money.

Charley Carp writes: "Nell, looking at that 1997 article OCS linked to, it looks like the properties at issue are essentially fallow, or at least not capable of generating the income to carry the additional debt / insurance expense."

Fallow but ripe for exploitation as a luxury spa for stupid rich people, as I note above.

Anyway, such properties seem ripe for creative destruction, rather than letting them be wasted in the hands of the sentimental-but-unimaginative clinging to a way of life that is no longer feasible.

The estate tax lets the market handle the transfer to owners who can make better use of the property.

You know, Charley, billions of people manage to get by just fine without a summer house.

I'm sure families that have to sell theirs to pay estate taxes will be able to soldier on just fine.

It's sort of comical that the Republicans are doing their standing-up-for-the-poor-deserving-heirs routine the same week that they're going nuts about the threat of apartheid in Hawaii if Sen. Akaka's Hawaiian sovereignty bill passes. Apparently a hereditary elite based on property is a good thing but a hereditary elite based on descent from pre-1798 inhabitants of the Sandwich Islands is an un-American abomination.

Jon H, I think your economics if correct, but that people vote/act based on sentiment, not economics. Most of the time, anyway.

The folks fighting the estate tax repeal have for several years been demanding an example of a family farm having to be sold to pay the estate taxes.

None have emerged. Basically, "had to sell to pay the estate taxes" is an urban (rural?) legend used by children who inherit their families property but do not want to be farmers and would rather cash out. Instead of taking responsibility for their decision, they blame Uncle Sam.

Apparently, family-owned construction companies are the ones that really do run into problems under the current law. (Construction equipment is expensive.) But the answer is to create some way to handle the exceptions, not hand over a trillion dollars to the Paris Hiltons of the world.

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