The Estate Tax

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The idea for this article came when I started my car after work last week and had the radio dial set to the station that plays The Sean Hannity Show.  I usually can only listen to Sean Hannity for about 10 seconds before I put on the History of Rome podcast or a book on tape, but the caller caught my attention.  They were talking about the impending “fiscal cliff”.  The caller thought we should raise taxes on the “rich” and Hannity disagreed.  Hannity then asked her about the death tax (his words) and if I remember, the caller said she thought the estate tax should be 100% because the people who inherit the money did not earn it. This seems like the main argument in favor of the death tax, but there are a few others.  In this article I will bring up arguments for the estate tax and give my response to those arguments.

The estate tax, also known as inheritance or death tax, taxes your estate when you die.  We currently have a $5 million exemption but it could go to $1 million on January 1, or something in between if they make some kind of deal in Congress.  So right now if your estate is over $5 million, you are taxed at 35% (I think) and on January 1 it goes to 55%.  The estate tax law is very confusing.  There are exemptions, deductions, and lawyers who base their whole practice on estate planning.  However, the numbers are irrelevant, besides, who should decide what is enough?  It could be $50k for some and $10 million for others, the bottom line is that there is a tax when you die.

The caller to Hannity’s show said she was in favor of a 100% inheritance tax because those inheriting the wealth do not have a right to it since they did not create the wealth.  If they don’t have a right to the wealth, who does?  Does the government?  If the argument against the beneficiaries is that they did not earn it, then the same goes to the government. They did not earn it either. Shouldn’t the person who created the wealth choose what to do with their money?

If a wealthy man decides to buy his son a car, a house, or a yacht, shouldn’t that be his decision?  If he is alive he is allowed to do it (I’m not getting into the gift tax in this article, it is strictly about the concept of an estate tax), and it seems that people generally do not have a problem with it.  But if that wealthy man dies on his way to purchase the yacht for his son, then it should be taxed and the son didn’t earn it.  If the estate tax is acceptable, maybe we should tax everything a parent buy for their children once the children exceed the age of 18? Afterall, they did not earn that money.

A group called Citizens for Tax Justice (CTJ) has a list of arguments in favor of the estate tax.  Due to time I won’t go through them all but I would be happy to respond to any challenges you have in the comments section.  One argument they make is “simple fairness”.  They say the estate tax gets all its revenues from the wealthiest 1.2% of people.  My question to CTJ is, fair to whom?  It doesn’t sound fair to the person who worked his whole life, created 1000s of jobs, and built a fortune to take care of his family for several generations. I don’t even understand why it is fair to take from someone just because they have more than you.  It doesn’t seem safe to rob someone just because that person is rich.  I would totally understand if millionaires were selected each year at random and given millions of dollars.  In that scenario they simply got lucky.  I’m sure if you talk to any millionaire they would tell you there was luck involved somewhere along the way, but when that lucky opportunity came they were prepared and seized the moment.  I can confidently say you won’t hear too many say they woke up one day and a million dollars was sitting at the foot of their bed.  At some point they did create that wealth.

Another argument they propose is that it discourages sloth.  They say that giving someone millions of dollars will encourage them not to work.  They throw in an Andrew Carnegie quote and say that Republicans, especially, should be in favor of discouraging sloth.  It is true that a sudden windfall of cash would discourage work.  How many times have you heard someone say that if they won the lottery they would not even show up to work to turn in a resignation letter?  But why is that a bad thing? As I explained here money represents created wealth and has no value unless it is spent.  The people who inherit a load of money do not put it in their living room and stare at it.  They spend or invest it!  It is either put in the market or in th bank and it is loaned out to start-up companies and jobs and wealth are created from that money.

Do you think the 1%ers want their kids to be lazy?  Do you think there is an incentive to make sure they work?  We do not need a tax to discourage laziness, all we need is a trust.  Trusts are almost always set up for large estates.  The person funding the trust can put almost any rules they want to access the money.  I’m not an estate attorney, so I don’t know the rules, but I do work in life insurance so the topic comes up.  I’ve seen rules on trusts that say the beneficiary has to be employed, or has to be off drugs, or has to stay out of jail, and several others.  It is a way for the wealthy to control their money from the grave.  We should be promoting better estate planning over higher taxes!

The last argument I will take a look at is that it encourages charitable giving.  Again, it does encourage charitable giving if that decreases the amount taxable.  However, if we have liberty and freedom, why should anyone be forced to do anything with their money?  I also think you’d also see that people would still give to charity either way.  People do have causes and concerns in the world.  I do not know the statistics but I rarely see low-income or middle wage earners starting large charities, yet it seems like every professional athlete has their name on a charity.  Why should we expect that these super rich people who donate to charities their whole lives would forget about their charity when they pass?

Like I’ve said before, I work in the life insurance industry.  It would be great for my business if the exemption was really low and the death tax really high.  Life insurance proceeds are not taxed, so the higher the tax, the more life insurance is sold.  However, I cannot see a just reason to tax a wealth creator just because their time has come.  Why should anyone tell anyone else what they can and can’t do with their earnings?

Thanks for reading, and as always, please let me know your thoughts.

God Bless Freedom, Liberty, and Personal Property,

Slappy Jones II

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Steve
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Estate taxes drive me nuts. But for brevity sake, I’d like to add on to the “sloth” concept. If anything, I think that a high death tax rate will decrease people’s motivation to work hard. After all, the government taxes their income when it is earned (federal/state/local, social security, medicaire, payroll, unemployment taxes), spent (sales taxes), and invested (capital gains taxes). With an estate tax the government says that the remainder isn’t yours either. So what is a wealthy person’s incentive to take a risk and use their sizeable capital to start another business or invest large monies in existing… Read more »
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