From the Economist: The Case for Death Duties

[Guy Berger]

Economics focus

The case for death duties

Oct 25th 2007

From The Economist print edition

How to improve an unpopular tax

Jac

TAXES on estates when their owners die arouse passions that politicians ignore at their peril. In America there has been a long-standing campaign to get rid of the federal “death tax”. Thanks to George Bush's tax cuts, it is supposed to be repealed in 2010, though only for one year. In Britain a recent proposal by the opposition Conservatives to slash the burden of inheritance tax swung the polls their way to such an extent that Gordon Brown, the Labour prime minister, cancelled an election he had planned this autumn.

The current unpopularity of death duties is perplexing considering how long they have been around. America introduced its federal estate tax in 1916. Britain's death duty goes back further. Taking modern shape in 1894, it can be traced back to 1694 when probate duty was introduced. Since 1986 it has confusingly been called inheritance tax although it is nothing of the sort. Like America's estate duty it remains a levy on the amount left by the deceased and does not tax what individual beneficiaries receive.

The hue and cry about death duties is all the more puzzling since they affect few people. In Britain, 6% of estates pay the levy, which raised less than 1% of total revenues in the last fiscal year. In America, between 1% and 2% of estates have typically been subject to the tax over the past two decades and it has contributed only about 1% of federal revenues.

The gut dislike of death duties seems to arise because the tax clashes with heartfelt dynastic instincts. Until recently this was a worry only for the super-rich, but now many ordinary people fear that, thanks to rising house prices, they may be dragged into paying death duties. Given the low take from the tax, it is easy to see why politicians on either side of the Atlantic have been so receptive to public worries. Cutting estate or inheritance tax seems to offer a big electoral hit at small fiscal cost.

But good politics does not mean good economics. Taxes should be assessed on three grounds: how they affect incentives, how fair they are and how simple. Estate taxes score well on the first two, less satisfactorily on the third. Whatever their merits, however, a tax that targets beneficiaries, rather than the estate of the donor, would be more effective.

Any tax on capital will tend to dissuade people from accumulating the wealth in the first place, but a death duty is arguably one of the better options. As Alan Auerbach, an economist at the University of California, Berkeley, pointed out in a lecture given in London a year ago, it falls on unintended legacies—money put aside to pay for old age, for example—as well as intentional bequests. Since unintended bequests are, by definition, not planned they should be unaffected by the prospect of the tax.

Another argument for death duties is that big bequests make people less likely to work and to be enterprising. Winston Churchill put the argument succinctly in 1924 when he argued that the tax was “a certain corrective against the development of a race of idle rich”. Economic research published at Syracuse University in America suggests that the more wealth that older people inherit, the more likely they are to quit the labour market.

The fiscal cost of abolishing death duties may seem trifling, but it still means that for a given level of public spending other taxes must rise, which may harm incentives more. This was a point readily appreciated by both Churchill in his 1925 budget and William Harcourt, who introduced estate duty in 1894. Both chancellors of the exchequer used extra revenues from death duties to lower the income tax.

Death duties can also be justified in terms of fairness. A thriving economy will generate great fortunes, but there is good reason to check these becoming entrenched through inheritance. The estate tax offers a modest counterweight against the development of a new plutocracy to rival the industrial barons of America's Gilded Age. Furthermore it also taxes wealth built up through windfalls rather than thrift and effort. For example, recent gains in the housing market have accrued mainly to people who happen to belong to the right generation and who own property in the right places.

Death by a thousand cuts

The case for retaining estate taxes in Britain and America is weaker on grounds of simplicity. In principle, the tax is quite straightforward; in practice it is anything but. It may not raise much revenue but it has been a goldmine for the tax-advice industry. In Britain the tax has generally fallen on the not-so-wealthy and the ill-advised.

The complexity of death duties is not a reason to do away with them but rather to reform them. By sticking with a tax on donors' estates, Britain and America have become the exception. Other developed countries now tax wealth received by beneficiaries. One advantage of this approach is that it does more to tackle wealth inequality, which arises from large inheritances rather than big estates. It creates an incentive for wealth to be spread among several beneficiaries, whereas the estate duty simply reduces the wealth that it taxes in a direct transfer to the state.

Another advantage of a genuine inheritance tax (not a false friend like Britain's) is that the tax authorities can set different rates according to how close heirs are to the donor. In France, for example, distant relatives are taxed more than children. Because this seems fairer for families, taxes on beneficiaries may have more political staying-power than old-style death duties.

Days after Mr Brown's embarrassing retreat from an election, his chancellor announced measures that will enable more married couples and civil partners to pay lower death duties. As so often, however, hasty decisions are not the best ones. The right way to take the sting out of the “death tax” is not to tinker with it through piecemeal cuts. Rather, the solution is to turn it into a levy on inheritance.

[Jazzmoose]

Excellent article! (I guess you can tell I agree with it...)

[robviti]

my father is first generation italian american, one of 13 children. he fought in WWII, bought a gas station and fixed junk cars until he got a rambler dealership. he worked his ass off all his life to provide for his family, and he did quite well. he's paid taxes on all of his earnings for 65 years. he employed many workers over the years (who also pay taxes), paying half their social security taxes and contributing toward their retirement. so when he dies, the federal and state governments feel they have the right to take 50% of what's left, money that he already paid taxes on? he has to pay a "death duty" to prevent creating a dynasty of the idle rich? fuck that! because my father did well, i was able to go to grad school and become a psychologist who works for less than $40,000 a year helping people with little or no money. my brother is a librarian and is very involved in local church and civic activities. there's no idleness in my family, and i resent the idea that my dad's money might go to fund the war, subsidize tax breaks for corporations, or prop up some politically corrupt venture. you want to narrow the gap between the rich and the poor? provide real opportunities for people's health, education, job training, career guidance, and retirement investments.

[Edward]

Jazzshrink,

Presently, the unified credit operates to exclude $2 million from each person's estate for estate tax purposes. A married couple can, with very little tax planning (i.e., by utilizing a bypass trust), double that amount to $4 million. Additionally, a person may each and every year give, gift tax-free, $12,000 to as many people as he or she desires. A couple with four children could then, if they so desired, transfer $96,000 to their children every year without incurring any type of tax liability.

If you already know all of this, I apologize - I am not about to pry into your personal affairs and you are certainly entitled to your opinion. My point, though, is that the estate tax presently affects no more than the wealthiest 1% - 2% of Americans. Also, since a decedent's appreciated assets receive a "step-up" in basis to fair market value at the decedent's passing, it is incorrect for anyone to claim that the estate tax taxes money/assets that have already been taxed. Many unrealized capital gains are never taxed because of this step-up in basis.

Of course, many politicians wanted (and still want) to increase the unified credit significantly (the amount sheltered increases to $3.5 million in 2009, after which the estate tax is repealed entirely for one year only to return in 2011 with a greatly reduced unified credit - only $1 million will be sheltered), but others stand in their way by refusing to accept anything other than the complete repeal of the estate tax.

As for the article, it is interesting and well written. I especially like the acknowledgement that, "[t]he estate tax offers a modest counterweight against the development of a new plutocracy to rival the industrial barons of America's Gilded Age."

Edited November 9, 2007 by Edward

[connoisseur series500]

It hurts when the tax starts biting into farmer's assets. They are often asset-rich, cash-modest.

[Jazzmoose]

Oh, come on. Archer-Daniels-Midland can afford it.

This idea that the estate tax was affecting average Americans is, and always was, pure bullshit.

[medjuck]

It hurts when the tax starts biting into farmer's assets. They are often asset-rich, cash-modest.

As I recall this was an argument made by Bush but there is not one documented case of anyone having to sell a farm because of estate taxes. (Actually as I write this it seems to me unlikely that there aren't some small farmers with $4M in assests-- maybe they get special depreciation allowances or something. )

[Edward]

It hurts when the tax starts biting into farmer's assets. They are often asset-rich, cash-modest.

As I recall this was an argument made by Bush but there is not one documented case of anyone having to sell a farm because of estate taxes. (Actually as I write this it seems to me unlikely that there aren't some small farmers with $4M in assests-- maybe they get special depreciation allowances or something. )

The argument is an emotional one used by those who want the estate tax repealed (oh, those poor billionaires!). Family farms and business are eligible for special treatment under the Internal Revenue Code:

Center on Budget and Policy Priorities

Congressional Budget Office

[Dan Gould]

Oh, come on. Archer-Daniels-Midland can afford it.

This idea that the estate tax was affecting average Americans is, and always was, pure bullshit.

The fact is that a death tax is simply emblematic of a government dedicated to taking everything it can, whenever it can. Yeah, let's take away the billionaire's estate. His heirs have no right to it, and he has no right to control where it goes. Its not his, its the "people's" or "the government's". Its total bullshit. It is nothing less than legalized theft, because they didn't take enough away from the person during his life, take it now, its the last chance.

Why don't the liberals be honest and just argue for confiscatory taxes while people are making their fortunes?

Oh yeah, that's right - its a political loser.

[Edward]

Wow! Great analysis, Dan! How can anyone argue with such compelling arguments as, "It's total bullshit."???

Have you engaged in any in-depth study of tax policy? Do you have any notion of what the overall tax burden on the wealthy is in the United States vis-a-vis other first world countries? Do you think that the wealthiest 1% - 2% owe society and the government NOTHING for creating the infrastructure that has contributed so greatly to their sucess? - Warren Buffett certainly disagrees with you on this point, but apparently he is just a liberal.

Moreover, how exactly do you reconcile the aggregation of wealth in a tiny segment of the population with the important notions of capitalism and economic mobility? If the estate tax is repealed, then, relatively quickly, this country will be run, at least economically, by an elite plutocracy. How easy do you think it would be for anyone to join the ranks of this exclusive group?

The Congressional Research Service calculated that, in 1999, when the top marginal estate tax rate was over 50% and the unified credit was much lower, the average "effective rate" (i.e., the estate tax burden as a percentage of estate value after expenses) was 12.4%. Obviously, if you are among the wealthiest 1% - 2% who is going to be affected by the estate tax, you can avoid paying any taxes to the government through estate planning and charitable bequests.

[Dan Gould]

Wow! Great analysis, Dan! How can anyone argue with such compelling arguments as, "It's total bullshit."???

Have you engaged in any in-depth study of tax policy? Do you have any notion of what the overall tax burden on the wealthy is in the United States vis-a-vis other first world countries? Do you think that the wealthiest 1% - 2% owe society and the government NOTHING for creating the infrastructure that has contributed so greatly to their sucess? - Warren Buffett certainly disagrees with you on this point, but apparently he is just a liberal.

I hardly give a shit what tax policy is in the rest of the developed world, which even now continues to lag behind the U.S. in economic growth. You on the other hand, I am sure would like to see a wholesale adoption of other country's tax policies, starting with gasoline tax (let's see how the economy runs on $8 a gallon gas instead of $3) and confiscatory taxes on the wealthy.

And the wealthy paid an enormous amount of their "bounty" from the society and government in the taxes paid while they were making their fortunes. This is about taxing their fortunes AGAIN, after they've been earned and taxed before.

We have a fundamental philosophic agreement. I don't believe that confiscatory taxes for the purposes of redistribution of wealth is good policy.

Moreover, how exactly do you reconcile the aggregation of wealth in a tiny segment of the population with the important notions of capitalism and economic mobility? If the estate tax is repealed, then, relatively quickly, this country will be run, at least economically, by an elite plutocracy. How easy do you think it would be for anyone to join the ranks of this exclusive group?

Save me from the Krugman/Edwards warmed over pile of crap.

Joining the "elite plutocracy" will be as hard as it is to come up with a big idea for something that people really want, or some service that is needed but is not provided.

And what the hell does estate tax have to do with the ability of people to get rich, or for wealthy people to become super-wealthy? Or are the wealthy just waiting for the opportunity to have no worries about the estate tax, so that they can pull that drawbridge up behind them and "keep" other people from becoming wealthy?

Obviously, if you are among the wealthiest 1% - 2% who is going to be affected by the estate tax, you can avoid paying any taxes to the government through estate planning and charitable bequests.

Then why does the estate tax matter? See your first statement - you can't have it both ways, either the estate tax is saving us from an "elite plutocracy" or the wealthy tax plan their way out of it anyway, in which case it has no impact anyway.

[Edward]

I hardly give a shit what tax policy is in the rest of the developed world, which even now continues to lag behind the U.S. in economic growth. You on the other hand, I am sure would like to see a wholesale adoption of other country's tax policies, starting with gasoline tax (let's see how the economy runs on $8 a gallon gas instead of $3) and confiscatory taxes on the wealthy.

Do not put words into my mouth. The point is that the tax burden on the affluent in this country is far less than it is in most first world countries, so talk of it being confiscatory is greatly exaggerated.

And the wealthy paid an enormous amount of their "bounty" from the society and government in the taxes paid while they were making their fortunes. This is about taxing their fortunes AGAIN, after they've been earned and taxed before.

Enormous? Have you considered that Social Security taxes are levied on only the first $97,500 of wages, serving to significantly DECREASE the effective tax rate of high-salaried individuals versus low and middle income workers? Have you considered that long-term capital gains and qualified dividends are taxed at only 15% and that the advantages of this low rate inures largely to the benefit of the wealthy, who, unlike the lower and middle class who must consume a far greater percentage of their income on necessities, can afford to invest a greater portion of their income? Do you realize that, because of these factors, Warren Buffett pays income taxes at a lower marginal rate than his secretary, who earns about $60,000 per year.

And, AGAIN, as I stated earlier, since a decedent's appreciated assets receive a "step-up" in basis to fair market value at the decedent's passing, it is incorrect for anyone to claim that the estate tax taxes money/assets that have already been taxed. Many unrealized capital gains are never subjected to income tax because of this step-up in basis, and, indeed, are never taxed at all because the asset is not subject to estate taxes because of the unified credit.

We have a fundamental philosophic agreement. I don't believe that confiscatory taxes for the purposes of redistribution of wealth is good policy.

How exactly are these taxes confiscatory considering the rather large amount sheltered by the uniformed credit and other basic tax planning techniques such as utilizing the annual gift tax exclusion? As I stated in my prior post, the Congressional Research Service calculated that, in 1999, when the top marginal estate tax rate was over 50% and the unified credit was much lower than it is now, the average "effective rate" (i.e., the estate tax burden as a percentage of estate value after expenses) was 12.4%.

In the 1920s, the last time the richest one percent of the population owned over 40 percent of all private wealth, Supreme Court Justice Louis Brandeis warned, "[w]e can have a democratic society, or we can have great concentrated wealth in the hands of a few. But we cannot have both."

Since the birth of this country, other notable Americans aside from Justice Brandeis have provided strong reasons for disagreeing with your view on this issue:

Mt. Rushmore and a History of the Estate Tax

Save me from the Krugman/Edwards warmed over pile of crap.

Joining the "elite plutocracy" will be as hard as it is to come up with a big idea for something that people really want, or some service that is needed but is not provided.

And what the hell does estate tax have to do with the ability of people to get rich, or for wealthy people to become super-wealthy? Or are the wealthy just waiting for the opportunity to have no worries about the estate tax, so that they can pull that drawbridge up behind them and "keep" other people from becoming wealthy?

I did not get this idea from Krugman or Edwards; it came to my attention during a law school course is federal estate and gift taxation over 10 years ago.

I find it difficult to believe that you cannot understand how the repeal of the estate tax would help contribute to the creation of a plutocracy. It is easier to make money if you already have money, or do you disagree??? If I am a millionaire and I am allowed to leave my entire estate to my son untaxed (because of repeal of the estate tax), he can much more readily attain the status of "super-wealthy" than if the size of his bequest were necessarily reduced by estate tax considerations. It is easier for a millionaire to become a billionaire than for someone from a much more meager background to do so. Allow this to continue unfettered for a few generations and let's see where we are.

Money is power, and I don't know why you would think that, if there were a plutocracy, a relatively few monied families would want to share that power with any newcomer. Where are all these people with big ideas supposed to find the capital for their ventures?

Then why does the estate tax matter? See your first statement - you can't have it both ways, either the estate tax is saving us from an "elite plutocracy" or the wealthy tax plan their way out of it anyway, in which case it has no impact anyway.

No, Dan, I stated that estate planning and charitable contributions can be used to avoid paying any taxes to the government. Not paying taxes to the government is NOT the same thing as being allowed to leave your estate to whomever you want without tax consequences. Moreover, you appear to have missed the second part of my sentence, "and charitable bequests". The increase in the unified credit has been accompanied by a decrease in charitable giving, and it only stands to reason that these contributions would decrease even more significantly if the estate tax were abolished.

In summation, don't you think that there are far more important issues to this country than giving tax cuts to the richest 1% - 2%? Considering how greatly the last three "conservative" presidents have run up the national debt, forgive me for not being swayed by your "conservative" arguments.

[Dan Gould]

I'm not going to get into it with you, and I should not have replied in the first place as any discussion of tax policy obviously belongs in the Political Forum, which I chose to ignore a long time ago.

But I will leave you with this:

On the one hand you continue to assert that it is the estate tax that keeps us from a "plutocracy" yet at the same time, you say that "estate planning and charitable contributions can be used to avoid paying any taxes to the government." The implications of your argument is that only stupid rich people pay anything in Estate Taxes, but its an estate tax that keeps us from a plutocracy. To which I can only say

Jim, please move this thread, and Guy, please put a little more thought into where you post these articles.

[Brownian Motion]

Dan's under there somewhere.

[connoisseur series500]

Enormous? Have you considered that Social Security taxes are levied on only the first $97,500 of wages, serving to significantly DECREASE the effective tax rate of high-salaried individuals versus low and middle income workers? Have you considered that long-term capital gains and qualified dividends are taxed at only 15% and that the advantages of this low rate inures largely to the benefit of the wealthy, who, unlike the lower and middle class who must consume a far greater percentage of their income on necessities, can afford to invest a greater portion of their income? Do you realize that, because of these factors, Warren Buffett pays income taxes at a lower marginal rate than his secretary, who earns about $60,000 per year.

This is very true, and I agree all the way. Very effective argument.

[Morganized]

I hardly give a shit what tax policy is in the rest of the developed world, which even now continues to lag behind the U.S. in economic growth. You on the other hand, I am sure would like to see a wholesale adoption of other country's tax policies, starting with gasoline tax (let's see how the economy runs on $8 a gallon gas instead of $3) and confiscatory taxes on the wealthy.

Do not put words into my mouth. The point is that the tax burden on the affluent in this country is far less than it is in most first world countries, so talk of it being confiscatory is greatly exaggerated.

And the wealthy paid an enormous amount of their "bounty" from the society and government in the taxes paid while they were making their fortunes. This is about taxing their fortunes AGAIN, after they've been earned and taxed before.

Enormous? Have you considered that Social Security taxes are levied on only the first $97,500 of wages, serving to significantly DECREASE the effective tax rate of high-salaried individuals versus low and middle income workers? Have you considered that long-term capital gains and qualified dividends are taxed at only 15% and that the advantages of this low rate inures largely to the benefit of the wealthy, who, unlike the lower and middle class who must consume a far greater percentage of their income on necessities, can afford to invest a greater portion of their income? Do you realize that, because of these factors, Warren Buffett pays income taxes at a lower marginal rate than his secretary, who earns about $60,000 per year.

And, AGAIN, as I stated earlier, since a decedent's appreciated assets receive a "step-up" in basis to fair market value at the decedent's passing, it is incorrect for anyone to claim that the estate tax taxes money/assets that have already been taxed. Many unrealized capital gains are never subjected to income tax because of this step-up in basis, and, indeed, are never taxed at all because the asset is not subject to estate taxes because of the unified credit.

We have a fundamental philosophic agreement. I don't believe that confiscatory taxes for the purposes of redistribution of wealth is good policy.

How exactly are these taxes confiscatory considering the rather large amount sheltered by the uniformed credit and other basic tax planning techniques such as utilizing the annual gift tax exclusion? As I stated in my prior post, the Congressional Research Service calculated that, in 1999, when the top marginal estate tax rate was over 50% and the unified credit was much lower than it is now, the average "effective rate" (i.e., the estate tax burden as a percentage of estate value after expenses) was 12.4%.

In the 1920s, the last time the richest one percent of the population owned over 40 percent of all private wealth, Supreme Court Justice Louis Brandeis warned, "[w]e can have a democratic society, or we can have great concentrated wealth in the hands of a few. But we cannot have both."

Since the birth of this country, other notable Americans aside from Justice Brandeis have provided strong reasons for disagreeing with your view on this issue:

Mt. Rushmore and a History of the Estate Tax

Save me from the Krugman/Edwards warmed over pile of crap.

Joining the "elite plutocracy" will be as hard as it is to come up with a big idea for something that people really want, or some service that is needed but is not provided.

And what the hell does estate tax have to do with the ability of people to get rich, or for wealthy people to become super-wealthy? Or are the wealthy just waiting for the opportunity to have no worries about the estate tax, so that they can pull that drawbridge up behind them and "keep" other people from becoming wealthy?

I did not get this idea from Krugman or Edwards; it came to my attention during a law school course is federal estate and gift taxation over 10 years ago.

I find it difficult to believe that you cannot understand how the repeal of the estate tax would help contribute to the creation of a plutocracy. It is easier to make money if you already have money, or do you disagree??? If I am a millionaire and I am allowed to leave my entire estate to my son untaxed (because of repeal of the estate tax), he can much more readily attain the status of "super-wealthy" than if the size of his bequest were necessarily reduced by estate tax considerations. It is easier for a millionaire to become a billionaire than for someone from a much more meager background to do so. Allow this to continue unfettered for a few generations and let's see where we are.

Money is power, and I don't know why you would think that, if there were a plutocracy, a relatively few monied families would want to share that power with any newcomer. Where are all these people with big ideas supposed to find the capital for their ventures?

Then why does the estate tax matter? See your first statement - you can't have it both ways, either the estate tax is saving us from an "elite plutocracy" or the wealthy tax plan their way out of it anyway, in which case it has no impact anyway.

No, Dan, I stated that estate planning and charitable contributions can be used to avoid paying any taxes to the government. Not paying taxes to the government is NOT the same thing as being allowed to leave your estate to whomever you want without tax consequences. Moreover, you appear to have missed the second part of my sentence, "and charitable bequests". The increase in the unified credit has been accompanied by a decrease in charitable giving, and it only stands to reason that these contributions would decrease even more significantly if the estate tax were abolished.

In summation, don't you think that there are far more important issues to this country than giving tax cuts to the richest 1% - 2%? Considering how greatly the last three "conservative" presidents have run up the national debt, forgive me for not being swayed by your "conservative" arguments.

Game....Set.....Match......

Now what do you guys think about the new Mosaic sets coming out???

[connoisseur series500]

And, AGAIN, as I stated earlier, since a decedent's appreciated assets receive a "step-up" in basis to fair market value at the decedent's passing, it is incorrect for anyone to claim that the estate tax taxes money/assets that have already been taxed. Many unrealized capital gains are never subjected to income tax because of this step-up in basis, and, indeed, are never taxed at all because the asset is not subject to estate taxes because of the unified credit.

How exactly are these taxes confiscatory considering the rather large amount sheltered by the uniformed credit and other basic tax planning techniques such as utilizing the annual gift tax exclusion? As I stated in my prior post, the Congressional Research Service calculated that, in 1999, when the top marginal estate tax rate was over 50% and the unified credit was much lower than it is now, the average "effective rate" (i.e., the estate tax burden as a percentage of estate value after expenses) was 12.4%.

No, Dan, I stated that estate planning and charitable contributions can be used to avoid paying any taxes to the government. Not paying taxes to the government is NOT the same thing as being allowed to leave your estate to whomever you want without tax consequences. Moreover, you appear to have missed the second part of my sentence, "and charitable bequests". The increase in the unified credit has been accompanied by a decrease in charitable giving, and it only stands to reason that these contributions would decrease even more significantly if the estate tax were abolished.

Your posts have been marvellously eloquent on the issue, Edward, but I should clarify some facts.

As a former financial planner, I learned a little about this stuff.

1. The stepped up basis doesn't mean that taxes had not been paid along the way. Dan is correct in saying that these assets are essentially taxed twice. Mutual Funds and stocks receive "stepped up value" upon death, but taxes were paid on dividends and mutual fund capital gain disbursements along the way. Qualified assets do not qualify for stepped up calculations. There's no way to avoid paying income tax on IRAs and 401ks.

2. The gift tax exclusion is a virtually insignificant sum for wealthy people. I haven't kept up on it, but it people were allowed to give their kids $11,000/yr a couple of years ago. That's per kid, by the way. It isn't very much when you are talking about millions.

3. Charitable trusts allow people to tie up their money into an account which allows them to receive the income from the money tax free so long as they are alive. Upon death, the assets go to the charity. That means that the wealthy person is able to avoid paying taxes while they are alive. I guess you know this already. You'd be surprised how few people are willing to do this. They don't like to give up control of their money. When you are rich; you are your money! Such people find it difficult obtaining any kind of identity independent of their money. It's pretty sad.

4. The Unified Credit moves up and down in an unpredictable fashion. The Bush Administration moved it to a very high level, but it was only $600,000 a few years ago. That's not very high at all. Please note that there are State Estate taxes as well. Those percentages can be very high as well. Anyway, it is very possible that the Unified Credit will get reduced again. Right now, it's at a pretty high level which would exclude quite a few from estate taxes.

5. Amazing figure that the effective tax rate worked out to an average of 12.4%. It would then appear that it is because most of the estates being taxed (back in 1999 when the study was done) didn't amount to a significant figure beyond the excludable amount. On the one hand, it represents a reasonable tax rate. On the other hand, people who were taxed weren't quite so "rich" in the first place!

Loved the other arguments you made regarding avoiding a plutocracy and stuff. I won't argue anything there. In fact, I learned some things.

[connoisseur series500]

Wow! Great analysis, Dan! How can anyone argue with such compelling arguments as, "It's total bullshit."???

This is funny!

[Dan Gould]

Loved the other arguments you made regarding avoiding a plutocracy and stuff. I won't argue anything there. In fact, I learned some things.

Wait a minute. Have you ever known a rich person who has refused to get richer because his investment might make someone else rich, too? You agree that in the future, rich people will not use their money to make more money, because they will dilute their power? After all, according to Edward,

Money is power, and I don't know why you would think that, if there were a plutocracy, a relatively few monied families would want to share that power with any newcomer. Where are all these people with big ideas supposed to find the capital for their ventures?

This is the most ridiculous thing I have ever read on this forum, but I can only say that I hope I live long enough to see the rise of the plutocracy because I can't wait to see how they are going to re-write the Constitution and most of the laws to ensure that no one else can get rich and powerful like them.

There. Now I am done, and the rest of the liberals can make as much fun as they want. You think I have a fucked up view of the world, but like I said, we have a philosophic difference, and now I know that it is so immense that I cannot believe that I am communicating with intelligent, educated human beings, Edward's apparent knowledge of tax law notwithstanding.

[marcello]

Very lucid post (#17) by Conn.

The people who are wealthy enough to be subject to the death tax have financial instruments such as trusts, to shelter pass through income to a large extent. With the escalation of real estate prices in major markets, that means a lot of people. The families that get hurt by the tax are those who aren't prepared and many small business owners, farmers etc. whose assets appreciate and mabe have had poor tax planning.

Re: Warren Buffet - I think this is bullshit. I'd like to see his tax returns. He says that he does no special tax planning and just follows the tax code. That can't be true. My accountant must be reading the wrong code when tax time comes.

Buffett must be taking advantage of multiple trusts, deferred bonuses and income and the like to claim such little tax burden. He's showboating.

[Jazzmoose]

Jim, please move this thread, and Guy, please put a little more thought into where you post these articles.

Or you could just exercise control and keep your simplistic analysis to yourself. Oh, wait; I forgot who I was talking to for a moment...

[Edward]

But I will leave you with this:

On the one hand you continue to assert that it is the estate tax that keeps us from a "plutocracy" yet at the same time, you say that "estate planning and charitable contributions can be used to avoid paying any taxes to the government." The implications of your argument is that only stupid rich people pay anything in Estate Taxes, but its an estate tax that keeps us from a plutocracy. To which I can only say

No, those are not the implications of my argument. If I am a billionaire, I can avoid having my estate pay any tax to the government by leaving everything exceeding the unified credit to charity. If I want to make bequests to individuals exceeding the amount sheltered by the unified credit, then I can still do so but the excess amounts will be subject to federal estate taxation. It is not necessarily stupid to choose the latter course.

If there were no federal estate tax, then wealthy individuals would feel less compelled to make bequests to charitable organizations and be more inclined to leave their fortunes to one or more individuals. Considering all aspects of the current tax structure in this country, why do you find it so difficult to understand that this would only accelerate the aggregation of wealth in a select few???

[Edward]

Your posts have been marvellously eloquent on the issue, Edward, but I should clarify some facts.

As a former financial planner, I learned a little about this stuff.

1. The stepped up basis doesn't mean that taxes had not been paid along the way. Dan is correct in saying that these assets are essentially taxed twice. Mutual Funds and stocks receive "stepped up value" upon death, but taxes were paid on dividends and mutual fund capital gain disbursements along the way. Qualified assets do not qualify for stepped up calculations. There's no way to avoid paying income tax on IRAs and 401ks.

No, I realize that some taxes may have been paid along the way. Still, the appreciation of many capital assets (such as real estate, collectables, and a large percentage of the appreciation of many stocks and other securities) will not have been taxed at the time of the owner's death.

2. The gift tax exclusion is a virtually insignificant sum for wealthy people. I haven't kept up on it, but it people were allowed to give their kids $11,000/yr a couple of years ago. That's per kid, by the way. It isn't very much when you are talking about millions.

I agree. However, the annual gift tax exclusion (it just recently was increased to $12,000) can be an invaluable tax planning tool for those whose estates just exceed the amounts now sheltered by the unified credit. If each member of a married couple is allowed to give $12,000 annually to each of two children, then $48,000 of (ideally, appreciating) assets can be removed from the couple's estate each year. Over the course of a decade, this amounts to a substantial sum.

3. Charitable trusts allow people to tie up their money into an account which allows them to receive the income from the money tax free so long as they are alive. Upon death, the assets go to the charity. That means that the wealthy person is able to avoid paying taxes while they are alive. I guess you know this already. You'd be surprised how few people are willing to do this. They don't like to give up control of their money. When you are rich; you are your money! Such people find it difficult obtaining any kind of identity independent of their money. It's pretty sad.

I don't doubt you in the least. I have encountered people of this mindset, though I doubt as many as you.

4. The Unified Credit moves up and down in an unpredictable fashion. The Bush Administration moved it to a very high level, but it was only $600,000 a few years ago. That's not very high at all. Please note that there are State Estate taxes as well. Those percentages can be very high as well. Anyway, it is very possible that the Unified Credit will get reduced again. Right now, it's at a pretty high level which would exclude quite a few from estate taxes.

Yes, at present, the Unified Credit will only shelter $1,000,000 come 2011. I do not think that that amount is enough for many middle class families, and I hope that it will be increased substantially.

5. Amazing figure that the effective tax rate worked out to an average of 12.4%. It would then appear that it is because most of the estates being taxed (back in 1999 when the study was done) didn't amount to a significant figure beyond the excludable amount. On the one hand, it represents a reasonable tax rate. On the other hand, people who were taxed weren't quite so "rich" in the first place!

I think that charitable giving was also a factor. If were wealthy and I had the choice between leaving $1 million to my alma mater or a reduced amount (because of the estate tax) to an heir to whom I have already left a substantial sum, I would be inclined to do the former.

[Edward]

Wait a minute. Have you ever known a rich person who has refused to get richer because his investment might make someone else rich, too? You agree that in the future, rich people will not use their money to make more money, because they will dilute their power?

What are you talking about? How, exactly, are you attributing these ideas to me?

This is the most ridiculous thing I have ever read on this forum, but I can only say that I hope I live long enough to see the rise of the plutocracy because I can't wait to see how they are going to re-write the Constitution and most of the laws to ensure that no one else can get rich and powerful like them.

I believe that I stated that the repeal of the estate tax would contribute to the creation of a plutocracy over several generations, so I guess that you are out of luck.

[Dan Gould]

Loved the other arguments you made regarding avoiding a plutocracy and stuff. I won't argue anything there. In fact, I learned some things.

Wait a minute. Have you ever known a rich person who has refused to get richer because his investment might make someone else rich, too? You agree that in the future, rich people will not use their money to make more money, because they will dilute their power? After all, according to Edward,

Money is power, and I don't know why you would think that, if there were a plutocracy, a relatively few monied families would want to share that power with any newcomer. Where are all these people with big ideas supposed to find the capital for their ventures?

This is the most ridiculous thing I have ever read on this forum, but I can only say that I hope I live long enough to see the rise of the plutocracy because I can't wait to see how they are going to re-write the Constitution and most of the laws to ensure that no one else can get rich and powerful like them.

There. Now I am done, and the rest of the liberals can make as much fun as they want. You think I have a fucked up view of the world, but like I said, we have a philosophic difference, and now I know that it is so immense that I cannot believe that I am communicating with intelligent, educated human beings, Edward's apparent knowledge of tax law notwithstanding.

Wait a minute. Have you ever known a rich person who has refused to get richer because his investment might make someone else rich, too? You agree that in the future, rich people will not use their money to make more money, because they will dilute their power?

What are you talking about? How, exactly, are you attributing these ideas to me?

It is right there directly below the spot in my post that you stopped quoting! I've bolded it above, but here it is again.

Money is power, and I don't know why you would think that, if there were a plutocracy, a relatively few monied families would want to share that power with any newcomer. Where are all these people with big ideas supposed to find the capital for their ventures?

You said it, pal. Plutocrats won't "share power with any newcomer" and therefore "people with big ideas won't find capital for their ventures". Plutocrats will sit on their money because they'd rather preserve their power than expand their fortunes.