The Temporarily Disappearing Estate Tax | Hacker News Reader

The Temporarily Disappearing Estate Tax

gregmankiw.blogspot.com

16 pointscwan41 comments

The problem with the estate tax is that it was passed in the name of getting back at plutocrats but has worked over the years mostly to make it difficult to keep family businesses intact when the founder dies.

Insane as was the political compromise that led to this final 1-year "repeal" of the tax, this compromise likely will lead (assuming half-reasonable action by Congress this next year) to having a more lasting exemption amount that gives significant relief to many in the middle class beyond 2010. The family business problem will remain. Thus, one should be able to pass, e.g., a $3M estate to heirs without problem but, if you get to $10M and up, there will be a high tax hit.

Still a highly unsatisfactory situation for the public, and one that has the politicians squirming as well, especially since the estate tax (speaking in relative terms only) does not really raise that much in revenue for the federal government.

From the article itself: "Currently, the tax applies to about 5,500 taxpayers a year." (Emphasis mine.)

5500. We're not talking about upper-middle-class family business owners. We're talking about people who are seriously rich.

Still a highly unsatisfactory situation for the public, and one that has the politicians squirming as well, especially since the estate tax (speaking in relative terms only) does not really raise that much in revenue for the federal government.

This is because the estate tax threshold has been getting higher in every year since 2001. If Bush had left it alone, this would not be the case. Also, there are good reasons for an inheritance tax aside from revenue generation.

There is an interesting thread here (including my detailed post outlining some of the history on this issue) on whether inheritance should even be allowed (http://news.ycombinator.com/item?id=1009053).

You may find the relevant figures for the estate tax in 2001 here (http://gift-estate.com/article/tax2001.html). At that time, the exemption was $675,000 and everything beyond that basically got taxed at significant rates, obviously affecting a lot of middle class people. If the tax is allowed to revert to the old rates in 2011, there will likewise be a significant impact on middle class people. That is why the politicians are squirming and why the exemption amount will likely be increased for 2011 and beyond to something that excludes many such people from the impact of the tax.

By the way, I have worked as a business lawyer with family businesses since 1984 and am pretty familiar with their concerns in this area (for example, in almost desperately trying to use vehicles such as family limited partnerships as a way of trying to avoid or minimize this tax and thereby preserve their businesses for their kids on death). Those concerns are real and they do not apply simply to the ultra-rich (who, by the way, have ample mechanisms available to them - e.g., foundations - to bypass the estate tax altogether).

From the article itself ... about 5,500

At 2,426,264 deaths in the US per year, the top 0.2%.

Nope. The tax may apply to a small number of people, but it isn't the top x-percent. There are a lot of strategies for getting around the estate tax, and the people who pay it are not the richest people but instead are upper middle class people who (for whatever reason) don't employ the strategies.

The it-only-hits-a-few people argument also has at least two other issues. One is that these things morph over time: the AMT was created to apply to just several dozen people, and now Congress passes a patch every year to make it apply to hundreds of thousands of people instead of millions of people.

And anyhow, how can a tax be fair because it only applies to a handful of people? Isn't that the same thing as the tyrannical many taking from the few? I would prefer to have a tax system where everyone pays enough in taxes such that they want to keep the overall system as small as possible.

> From the article itself: "Currently, the tax applies to about 5,500 taxpayers a year." (Emphasis mine.)

> We're not talking about upper-middle-class family business owners. We're talking about people who are seriously rich.

Actually, we're not.

The super rich aren't subject to the estate tax because they've arranged their estates so it doesn't apply.

For example, neither Buffet's nor Gate's estates will pay a dime.

You remember Buffet. He's the guy who pushes the estate tax while selling insurance to help people pay it.

Well, that's not really the gist of the debate going on here. Gates and Buffet have given away the vast majority of their money to charity. That's very different than attempting to work around the estate tax through insurance, trusts, etc in order to pass as much money as possible on to your heirs.

Want to bet whether their heirs benefit from those "charities"?

Sure. Why not? "Want to bet" isn't really an argument in any shape or form.

Edit: Interesting. After looking into the Foundation (http://en.wikipedia.org/wiki/Bill_&_Melinda_Gates_Founda...) I've actually become incredibly impressed by the transparency and general properness with which they have composed themselves. Given the track record of the foundation, I see absolutely no reason to suspect them of foul play now or in the future.

> The super rich aren't subject to the estate tax because they've arranged their estates so it doesn't apply. For example, neither Buffet's nor Gate's estates will pay a dime.

Surely that's the problem? Why should an estate with $10 million have to pay this tax if an estate with $10 billion doesn't?

> Surely that's the problem?

That may be "the problem", but the solution is subtle.

It's either a waste of time or dishonest to argue for "hitting the super wealthy". It's a waste because they have the resources to evade. It's dishonest if you know that but use "the wealthy" as an excuse to hit other people, which is what always happens.

This is one of those evil taxes - you pay a life time of taxes and accumulate stuff, and then when you die, it gets dinged another 55%.

It seems like one of the least evil taxes to me. $3.5 million or more worth of assets are absolutely irrelevant to a corpse. So the great evil is that the descendants of someone who amassed a great fortune only get $1.5+ million that they did absolutely nothing to earn, after presumably having every conceivable advantage growing up? To me that seems much less evil than taking a fraction of what a living person actually worked to earn and might still need.

Of course, I usually reserve the word "evil" for killing, raping, arson, dragons, Satan and that kind of thing. Taxes seem to have a much less dramatic effect on their victims.

This looks at the tax from the perspective of those who will inherit, and concludes that since spoiled kids don't deserve big inheritances, the estate tax is fair, just and moral. But what about where the money goes? Does the government deserve it? I don't think so. One might be able to make an argument that the money should go to society, because the system is what made the creation of wealth possible. But that's not what the estate tax does, the estate tax takes the money to the government. Arguing that spoiled kids have not earned it is a lot easier than arguing that the government is deserving.

What about looking at the tax from the perspective of the individual who created the wealth? What the tax does is encumber the creator of the wealth from deploying it as he/she sees fit. Why do we want to encumber creators of wealth?

TO CLARIFY: the gift taxes that are part of the estate tax complex encumber creators, not just corpses. If you remove the gift tax, I have no problem with the estate tax because nobody would ever pay it.

Why want to encumber an aristocracy, not creators of wealth. The creators in question are dead. Thomas Paine covers this in his pamhlet _Rights of Man_.

How can a corpse deploy wealth? If they wanted to do something with that wealth, which I agree they have the right to do, wouldn't it make sense to do it while they still have the ability to have thoughts?

It makes more sense to me for the government to get it, because that reduces the need for them to take wealth from people who are alive and might be able to use their wealth.

> "Arguing that spoiled kids have not earned it is a lot easier than arguing that the government is deserving."

Isn't "the government is deserving" the crux of the Gates/Buffett argument? That government has provided them, as wealthy people, far greater services than the average person? (In the form of providing safety, protecting property, supplying an educated workforce, enforcing market rules, etc)

The general idea being that you simply can't become fabulously wealthy via anything short of barbarism without government, so the government does deserve something more to further these services that they're providing?

If Gates/Buffett really believe that the government is deserving, why have they arranged their affairs to pay as little tax as possible? Including (but not limited to) essentially zero estate tax?

Forgive me if I'm not convinced by an argument that suggests that others should be compelled to do something the proponents of the argument relentlessly avoid.

To be fair, I think their argument is more accurately phrased: the government is more deserving than the heirs (after a reasonable threshold, natch). Or, more generally, society is more deserving.

I don't see a logical conflict in their preference for private charity over government redistribution.

Honestly, I don't think any proponent of the estate tax would mind if the practical result of a high estate tax was that the rich just gifted their estates to private charity to spite the government. Government is just the only group with a sufficient cudgel to enforce the practice and sufficient reach to ensure that otherwise-undirected estates do give back to society.

[citation needed]

I see that both gave huge portions of their estates to the Bill and Melinda Gates Foundation. This in no way violates the principle of their position.

So the government should get it (in the form of taxes)?

Sure. Until we have a better organization, whose primary concern is the overall health of society, to distribute it.

Government is certainly a flawed organization. But we currently trust them with all our other tax dollars. I don't see any reason to hold estate tax dollars to a different standard than any other government revenue.

But the argument being made here is that spoiled kids are not deserving, so the estate tax is a just tax.

The point is: government is not deserving either, so the spoiled kids angle is bogus.

Pointing out that the government collects other taxes is simply not relevant to this aspect of the conversation.

Except that deserving isn't a binary attribute. So pointing out the government is undeserving isn't sufficient.

My point is that we as a society have entrusted government specifically with the job of redistributing wealth to better society and that makes them the better of bad choices.

The government isn't taxing the estate itself, it's taxing the transfer. See gift tax as well.

I assume you agree that there's some level of necessary taxation? You then need to make an argument that people who receive money from an inheritance don't deserve to have that income taxed, whereas an entrepreneur who builds a company and sells it to Google does.

The argument is that they already own it. My kids have rooms in my house now. You are saying they should have to give money to other people (i.e., be taxed) for those rooms when I die? They are getting food and education costs based on the profits from my company- I die so they must be taxed on that on top of the income tax? It's not income from an inheritance, it's a continuation of what they are already getting tax free. My death shouldn't have anything to do with it.

They're already benefiting from the money you've earned, but that doesn't mean they own it in any meaningful way. You have complete control over your assets, you can refuse to support your kids and they can't head to Vegas and gamble it away.

As a general rule we tax assets when they change ownership, maybe because the benefit to the recipient cushions the pain of giving away part of it to other people.

Just to be clear, the tax is on a transfer of money, not on the money itself. If you transfer only $10 million to your family, the tax will only apply to that $10 million in transfer. Similarly, if you gift them $10 million while they are alive, that money will be subject to taxes.

It may be true the government does not redistribute wealth in a way that provides value to the purpose of an estate tax. I would hardly call it evil though. If other aspects of society and government were managed well, an estate tax might be a valuable part of the machinery.

Without regard to the efficiency and quality of government, when you die, "your" estate gets taxed 100%, not 55%. This happens without government intervention. I know many high net-worth people that get upset about estate taxes. I know many that don't care. The key difference between these two types is the later accepts you can't take it with you. The former is still holding on to some feeling that they can control things after they die.

As opposed to those good taxes?

The estate shouldn't be taxed at all, but the beneficiaries should pay tax on what they receive: at 0% for charities, a low rate for otherwise poor beneficiaries, a high rate for already rich beneficiaries.

Don't a lot of people establish a living trust to avoid it anyway? It would be interesting to see what percentage of people who qualify to pay an estate tax actually pay the full amount.

A living trust serves primarily as a vehicle by which to avoid having one's estate pass through probate - it does not reduce any applicable estate tax that is otherwise payable on death.

Article says 5500 average per year fall into current estate tax. Estates taxed at 45% beyond the $3.5 million threshold (2009).

2010, tax is 15% of all assets without further action by Congress (or retroactive action).

In 2011, 55% tax beyond $1 million. Which impacts significantly more (cite?) than 5500 estates. $1 million includes property, fixtures, assets, cash.

Shame that tax code will (no doubt) impact decisions of quite a few terminal patients.

One wealthy, terminally ill real-estate entrepreneur has told his doctors he is determined to live until the law changes.

"Whenever he wakes up," says his lawyer, "He says: 'What day is it? Is it Jan. 1 yet?'"...

I've never felt so comfortable calling a dying man an asshole.

His only concern is whether he can hand off a cozy life to his spoiled progeny. Amazing. May he live into 2011.

That's an interesting take on it.

I read it as a father desperately trying to make sure his affairs are in order so his children can have the benefit of what he worked for.

My father (a teacher, so not a rich man by anyone's standards) made quite a few unusual financial moves, quietly, before he passed, to make sure my mother was in a safe place financially (who, given the social norms of their time, never really dealt head-on with the family finances prior to his death). The rest of my siblings and I had already moved on to build our own lives, he wanted to make sure his wife was cared for when he couldn't do it himself.

That you'd so easily begrudge a dying man looking out for his family at the end of his life without reading more than a soundbite in an article like this says more about you than about him, I'm afraid.

The obvious conclusion:

The Dead Collector: Bring out yer dead.

[a man puts a body on the cart]

Large Man with Dead Body: Here's one.

The Dead Collector: That'll be ninepence.

The Dead Body That Claims It Isn't: I'm not dead.

The Dead Collector: What?

Large Man with Dead Body: Nothing. There's your ninepence.

The Dead Body That Claims It Isn't: I'm not dead.

The Dead Collector: 'Ere, he says he's not dead.

Large Man with Dead Body: Yes he is.

The Dead Body That Claims It Isn't: I'm not.

The Dead Collector: He isn't.

Large Man with Dead Body: Well, he will be soon, he's very ill.

The Dead Body That Claims It Isn't: I'm getting better.

Large Man with Dead Body: No you're not, you'll be stone dead in a moment.

The Dead Collector: Well, I can't take him like that. It's against regulations.

The Dead Body That Claims It Isn't: I don't want to go on the cart.

Large Man with Dead Body: Oh, don't be such a baby.

The Dead Collector: I can't take him.

The Dead Body That Claims It Isn't: I feel fine.

Large Man with Dead Body: Oh, do me a favor.

The Dead Collector: I can't.

Large Man with Dead Body: Well, can you hang around for a couple of minutes? He won't be long.

The Dead Collector: I promised I'd be at the Robinsons'. They've lost nine today.

Large Man with Dead Body: Well, when's your next round?

The Dead Collector: Thursday.

The Dead Body That Claims It Isn't: I think I'll go for a walk.

Large Man with Dead Body: You're not fooling anyone, you know. Isn't there anything you could do?

The Dead Body That Claims It Isn't: I feel happy. I feel happy.

[the Dead Collector glances up and down the street furtively, then silences the Body with his a whack of his club]

Large Man with Dead Body: Ah, thank you very much.

The Dead Collector: Not at all. See you on Thursday.

Large Man with Dead Body: Right.

Estate taxes are retarded to begin with, this is just ridiculous. Why don't these people just give as a gift all their stuff to their kids while they are alive? Canada might have a 5% GST tax, but we don't have any of this nonsense.

The amount you could gift away per year, at last count (and it has been rising, recently to 13K - let's assume per spouse). With the 2009 threshold for estate tax ticking in at 3.5 million, if you are subject it simply could not gift this stuff all to your children...and that assumes you were gifting the money every year.

In the US, all you pay is the inheritance/estate tax - you don't get double taxed on the actual inheritance that you file. In Canada, while there isn't an estate tax, you get taxed on the gain as if it is income and so you pay the income tax.

If you're going to compare apples to apples, the top marginal tax rates are about 45-50%+ in Canada (http://www.aurorainternational.net/Maximum_Personal_Marginal...) - and given the estate taxes in the US apply to anyone inheriting above a million, it's relatively equivalent for those people while it's considerably worse in Canada for everyone else given that considerably more people inherit less than a million. Another point of comparison - highest marginal tax rates start at 126K (Canadian) while you have to make over 370K USD to start getting charged the highest marginal tax rates.

Addendum - re: gifts - http://en.wikipedia.org/wiki/Estate_tax_in_the_United_States - "the gift tax prevents avoidance of the estate tax should a person want to give away his/her estate."

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