In a piece yesterday from the Tax Policy Center, Ben Harris argues against some theoretical anti-estate tax analysis done by Doug Holtz-Eakin, former CBO director and McCain campaign economist. While Holtz-Eakin's theory seems plausible, Harris calls it just that -- theory. I think Harris is on the right track. But I think considering the estate tax from a different theoretical point of view might turn out to support Harris even more strongly.
Holtz-Eakin says this incentive is particularly important for small business owners. If you rid get of the estate tax, they have a greater incentive to work hard, because they can leave the company to their children. Harris' statistics show this to be somewhat irrelevant:
Most small businesses are worth far less than the exemption level (currently set at $7 million per couple and higher for many small business owners who value their firms at below market price). We estimate that only 100 small businesses and family farms would pay any tax in 2009, assuming current law is extended.
I would say that there are also easy ways to fix this problem. For example, make sole proprietorships exempt from the estate tax. That's probably what most of those small businesses are anyway.
But I think the Estate Tax gets more interesting when you talk about morality. That's what makes it a fun and controversial topic. One anonymous commenter to Harris' piece explains one common view:
Neither increasing or (sic) decreasing economic growth will ever justify, in my mind, the Govt robbing dead people.
Right. But trying to ensure that Paris Hilton can always be a useless human being that lives to have the paparazzi snap pictures of her downing martinis seems to damage the moral righteousness of estate tax opponents.
Instead, I'd argue that the estate tax might be the most moral of taxes. When I'm dead, I probably care much less about my money than I did when I was alive. I hear heaven does not accept U.S. currency. So if I had the option of being taxed when I'm dead, or when I was alive, I'd choose the former option.
But what about my children? Surely I'd want to leave them all that money I made when I was alive, right? I mean, sure. I would probably want to leave my children a nice little going away gift. But I think responsible parents would be more concerned that they raised their children well and brought them up to be successful, hard working people on their own. If they need to rely on my money, then that's a problem.
I think this argument also matters from an economic standpoint. If the Paris Hiltons of the world were actually productive human beings, I think our economy would be better off. Therein lies the incentive a death tax creates -- to make sure to raise children that will be productive when you're gone.
So I say increase the estate tax substantially for all people and lower income taxes. Sure, it may inspire people to die with less in savings, but I suspect that effect will be pretty negligible since our nation's savings rate can't get a whole lot lower anyway. And besides -- just think of all the great consumption spending baby boomers would feel compelled to partake in before their time is up. Talk about economic growth!
I think the side that anti-estate crusaders never seem to answer to me is why giving someone money while you're alive is taxable but waiting until you're dead to give it to someone should be tax-free?
I mean, isn't a little silly that if you give your son a million dollars, he's got to pay income taxes on it, but if you die and leave it to him he doesn't? There's already a family gift tax exemption, why does death create such a larger one?
Even sillier, if I pay my son $50,000 a year for 20 years to work for my company as an employee, all that money is subject to income and payroll taxes that will exceed 30% of the wages; but if he never does a second of work and inherits $1million in cash, no taxes at all are due?
Certainly we can come up with a better structure for transference of businesses (maybe by deferring taxes or allowing them to be paid over a period of time).
This tax is purely about envy. Rich people have lots of money they want to give to their children and you are green with envy. You don't like that their children get something that your children don't, you don't like their children get something that you didn't get as a child.
Ultimately, it comes down to the dirty human emotion that we can't be happy when someone else has something that we don't have.
I got over it, can you?
Youre' pretending every other tax doesn't exist if you think that's the impetus; why is this specific transfer of wealth exempt from taxes while nearly all others are subject to taxation?
@tehdude,
In some senses, you're right. On the order of individuals, wanting other people not to be rich is selfish; and insofar as this tax is selfish, it's bad. But on the order of society, "equality" is a better description. It may be selfish for me not to want my neighbor's kid inheriting a million dollars, but it's not selfish for me to want America to be different than Feudal Europe.
Without estate taxes, it doesn't take many generations for the rich to dominate both the economy and the government and become an aristocracy, and that's profoundly unAmerican. America has always been more comfortable with the idea of selfishness than other countries (enlightened self-interest anyone?) and equality is the bedrock of American values. Don't hate on the estate tax.
Conservatives and market brutalists usually go to the "resentment argument" when all else fails. It is basically the argument made by Nietzsche, Ayn Rand, and other alpha wannabes that all morality is simply the resentment of the weak or the "losers," as we call them now on CNBC.
There is one curious paradox in this argument. When the "weak" succeed in planning and organizing to curtail the dominance of the "strong," then the "strong" are suddenly seized with fits of anguished resentment. Ayn Rand, for example, believes morality is a hoax. But then she somehow believes it is very immoral, just so unfair, when trade unions, democratic organizations, or others gang up on on the "powerful."
However, there is something to be said in defense of Paris Hilton. At least she isn't one of those rich kids who does something "useful" like become president or run an investment bank. She may smash champagne bottles, but at least she does smash up the nation or gamble away her cash and grab $700 billion from the taxpayers. We would be much better off if the entire capitalist class were kept on allowances and turned into childish little attention-seekers like Paris. They would be far less dangerous.
Here's another perspective: when a joint endeavor (such as, say, a family) is hurt by the death of a member and becomes vulnerable, is that really the appropriate time to seize even more (physical) capital on top of the (human) capital that death has stolen from it?
Are you seriously making this argument? The floor on this tax is like 3.5 MILLION dollars this year. That's how much hurt and "vulnerable" families can take tax free. Doesn't sound like much of a burden to, oh, about 99.9% of americans.
I assume all the good liberals, like the Kennedys, would also welcome the abolition of all family trusts - where the really rich bury the money and escape all inheritance taxes.
I'm sure all stinking rich Hollywood types, as well as rich shysters like John Edwards, who contribute so heavily to the Dems would also favor doing away with said trusts.
Yet I never ever hear the Dems mention that. Could it be because they're total effin hypocrites?
Seriously Ed. Everyone that survives in politics, liberal or conservative, has to have some hypocrisy. That's just the way it is, even in America, where we're way better at minimizing it than most countries on Earth. It shouldn't be, but it is. Not all dems are hypocrites any more than all reps are hypocrites. We should all be able to agree that politicians, by and large, are hypocrites.
A few points to keep in mind when considering the estate tax:
1) It is often noted that most other countries do not have a "death tax." True; instead they tax the inheritance as income to the beneficiaries. I don't see anyone plumping for that.
2) One frequently hears the argument that the estate tax is double taxation: "why should money that was already taxed during the decedent's life be taxed again?" This ignores the likelihood that much of the value of a typical estate represents unrecognized (and untaxed) capital appreciation.
3) A feature of the current system is a "step-up basis," i.e., the "acquisition price" of property in an estate is revalued to current market value as of the date of death. The logical corellary to eliminating the estate tax is "carry-over basis," meaning that both pre- and post-death appreciation is taxed when the property is ultimately sold. Anti-taxists want both no tax at death AND a step-up basis, equivalent to having your cake and eating it too.
4) One always hears about the family farm having to be sold to pay the estate tax. This is largely mythical (most any farm large enough to be taxed is held by someone savvy enough to hire sophisticated estate planners). The argument can be defanged at almost no cost to the treasury with a simple statute: "[true] family farms are exempt from estate tax."
I have no problem in principle with an estate tax, but if you want to maximize revenue and be equitable, it would be best to lower the exemption to, say, $20k, and lower the rate to, say, 10%. If the tax is good enough for the rich to pay, it should be good enough for the middle class to pay too.
That aside, this article is pretty ignorant. There are plenty of productive people who were born rich and there are plenty of unproductive people who were born poor; the idea that a confiscatory estate tax would turn an otherwise unproductive person into a productive person is foolish. As someone once wrote, there is a leisure class at both ends of the socioeconomic spectrum.
Its funny that the author used the example of Paris Hilton.
His claim that children of the wealthy, like Paris, would be productive if they knew their inheritance would be heavily taxed is wrong, at least in Ms Hiltons case.
She lives almost entirely off of her own promotional efforts. She is worth a few million bucks, as last I read, due almost entirely to her night club appearance fees, her cosmetic and clothing endorsements and a past record deal.....and she no doubt pays a considerable amount in income taxes as well.
She is productive, and so are many others like her,...she's just not 'productive' to your Leftist tastes.
I second that. The girl deserves some props. But was the "leftist" dig necessary?
It took about a minute's research to find a news story saying that Paris's grandfather donated 97% of his wealth to a family charitable foundation. The story says he disapproves strongly of his granddaughter and her antics.
If Paris Hilton got anything by inheritance, it's social access and name recognition. Oh, and a genetic boost from several generations of very rich men marrying very attractive women.
Another minute's research shows that the Hilton Foundation places special emphasis on projects run by nuns. Ironic, isn't it?