Posted by October 23, 2017
There is usually a provision in any “tax reform” bill to eliminate the estate tax, or in Tea Party parlance, the “Death Tax”. The rationale for such proposals is that no person should be taxed twice on income: once when he earns it and once when he dies. All of which is nonsense. No person who ever accumulated an estate ever paid a dime of estate tax – his children who did nothing to accumulate the wealth pay it. Neither is it some devious socialistic scheme created during the New Deal. The forerunner of our estate tax came about in Britain as one of the ways they funded the Napoleonic wars. Most industrialized nations charge some form of estate tax, although about 20 OECD countries have repealed their estate taxes.
There are no “good” taxes or “bad” taxes, there are only competitive taxes and non-competitive taxes. A tax is competitive if it does not influence taxpayers (or in this case, decedents) to change their behavior – for example, becoming Swiss citizens or residents rather than US. If the US estate taxes are too high, the Tina Turners of the world will give up their US citizenship and become Swiss, and, theoretically, the sheiks will not come to live in the US.
Of course, that is only theory. No one knows how these rates affect behavior. For example, the estate tax rate in the US is 40% (on estates over $5.5 million, or $11 million for married couples). The rate in Switzerland is 15%, while the rate in Poland is 7%. If tax rates were everything, the grand high and exalted would be making a bee-line for Poland. They’re not. So the question is how much grace do we have to allow the current $12 millionaires in order to squeeze even more out of foreign $12 millionaires.
There are also efficient taxes and inefficient taxes. Since 2001, in our zeal to protect the “family farm” and the “mama-papa store” from the tax, the exemption level for estate taxes has gone from $1 million to the above stated $5.5 million or $11 million and collections have gone from $38 billion in 2001 to $20 billion in 2015. Some, such as the Tax Foundation, say that the complexity of the law leads too much work for the money. That is not necessarily true.
The estate tax and the income tax provide a huge incentive for charitable donations. The Alexander Throttlebottom wing of the local art museum and the Bolivar Shagnasty Laboratory at the university are only partially the result of ego-stroking and civic-mindedness. For example, suppose Ales got a million shares of Alpha Corp in 1990 as part of the star-up and it’s worth $50 million. Alex can get about $12 million off of his income tax and $15 million of the estate tax by donating the shares to the museum, in addition to the opportunity to tell his favorite Uncle to sit on it. The estate tax works as an incentive to give to charities, and their mission will be negatively impacted.
The other sector that will be decimated is the estate planning lawyers. There are probably more fees spent on avoiding the tax than the amount collected. But few will cry at lawyers’misfortune, alas.
Given that less than 1% of all families ever pay any estate tax, their should be no popular support for repeal. When you ask where the revenues to replace this will come from, look be very skeptical about the answers, especially if they involve the magic growth that will come from repeal.
We’re not the most expensive (that’s Japan at 55%), but most of the OECD countries have lower rates. We should try to get closer to the middle of the pack. I’d say a 30 percent top rate and some real simplification of the reporting would do a world get us where we want to be.
Death and Taxes 