Just before the April tornados, I posted some information about the Ryan tax plan. My focus was on the income tax provisions, including examples of how the plan would exempt investment income from taxation while eliminating most income tax deductions. In that post I mentioned that the plan would eliminate the estate tax completely. I received the following comment/question from a friend.
If I work hard, and save money, after paying the requisite taxes on that income myself, and then also paying taxes on the dividends and interest as I invest that money, do you think it's reasonable that if I want to give some or all of that money to my kids to supplement their lives, that they should then be taxed on that money as income? Generally speaking, I think one layer of taxation from an "income" standpoint (the taxes I paid) should be reasonable. In addition to what I paid as income tax, the kids are likely to spend some of that money, and when they do, aren't they being taxed as well - via consumption (sales) tax?
Since then I have taken a hiatus from writing the blog so I am finally cleaning out the in box.
Of course, implicit in the question is that the Ryan tax plan would not pass (Under the Ryan plan, not only would the estate tax be eliminated, but all taxation on dividends, interest and capital gains would cease).
Before I offer my opinion, let’s look at where the estate tax currently stands. For 2011, estate tax is due on taxable estates of more than $5,000,000 (or $10,000,000 for married couples). For the first time in history, the joint marriage total survives the death of a spouse – but this provision has many qualifications and a qualified estate tax expert should be consulted to understand this provision and its planning implications. For taxable estates, the maximum rate is 35% of the taxable estate.
This limit is set high enough so that most estates, including most family owned farms and businesses do not trigger an estate tax upon transfer at death. In 2007, estates over $2,000,000 were subject to tax, yet only 38,031 returns were filed (at a time when time when the number of deaths in the year was approximately 2,400,000). While no statistics are available for 2011 yet, it is safe to assume that far fewer estates are subject to tax than in 2007 since the size of the minimum estate subject to tax has more than doubled.
In the past, the estate tax rate has been much higher. As recently as 2001 the maximum rate was 55% on estates larger than $3,000,000. Yet this seemingly punitive tax rate did not result in the ruination of many estates due to the many planning strategies available (family LLC’s, life insurance programs, trusts…).
Indeed, we have yet to see any of the Walton family (Wal-Mart) in bread lines due to the burden of estate taxes. In fact, last time I checked, the family still held on to one of the world’s great fortunes.
So, what were some of the reasons the estate tax was established and are those reasons still relevant? Of course, raising revenues is one of the most obvious reasons for the estate tax and in times of record deficits, any reduction in estate taxes would exacerbate the deficit. The other reasons in favor of the estate tax are more interesting – to prevent the corrupting influence of wealth concentration on democracy and to help capitalism.
Thanks to Koch Industries and the Koch brothers, we can see how concentrated wealth can be used to influence government. Through the financing of right wing think tanks, false grass roots political organizations, direct lobbying and lavish entertaining of politicians (including judges) as well as direct campaign contributions they have fought to reduce the influence of unions, loosen environmental laws, reduce worker safety rules, and reduce worker job rights. They have been effective. With the recent Citizens United Supreme Court decision, their ability to more directly assert their influence on policy has been magnified. Whether you consider this to be a corrupting influence or free speech is a matter of opinion. My opinion is that speech is free, but the megaphone through which they can amplify their opinion is very expensive and even Unions cannot match their influence, thanks to the money they use to buy influence.
How is capitalism helped by an estate tax? The reason for this position is the same that led to the creation of anti-trust laws. Concentrated wealth can be used to crush ideas in the marketplace. Without protection can large companies (and large fortunes) be used to crowd out new and better ideas? Obviously.
Does the estate tax result in double taxation of accumulated income? Yes, it can. But there are several situations where appreciated property is inherited without ever being subject to tax on the appreciation, so there are no absolutes on this subject.
Are the reasons for the imposition of the original estate tax still valid? I believe that they are, and for that reason I do support an estate tax. With estates under $10,000,000 (for married couples) being exempt from tax, and planning strategies available to larger estates, the burden on the wealthy is not too high.
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