The Death Tax is a Good Thing

Lars Poulsen, 2000-07-08

Every so often, the United States Congress goes and does something silly. Most often, when that happens, I check to make sure that my representative has voted against the silliness, and usually she has. But last month, I think I caught her on the wrong side of an issue, when she voted for the "Death Tax Elimination Act" (HR 8-1999).

It is easy to find people lobbying for the abolition of specific taxes. More often than note, these lobbyists are being paid by the people who stand to benefit from the change. In the case of estate taxes, the people who wnat them abolished are the people with enough wealth that they know that their estate will have to pay the tax. They would rather leave the money to their children without having to pay part of it as taxes.

In general, it seems to be easy to get people to support reductions in tax rates. In practice, however, one must remember that reducing taxes also means one or more of

reducing public services
increasing the public debt
shifting the taxation to someone else

When one considers this, it is clear that one should not ask people if they are in favor of abolishing the inheritance tax, without also asking them if they are in favor of shifting the burden to higher income taxes. I believe that the vast majority of tax payers (who are not leaving a taxable estate behind) would prefer that the revenue be raised from estate taxes rather than income taxes.

Social mobility is one of the deep roots of the American dream. As a nation, we believe that a man (or woman) of ability should be able to rise on the merits of his (or her) work. The flip side of that is that those who lack the ability should be helped to slide down a bit. While we like the common man to be able to give his children a little security in their life, we don't want a hereditary elite. In this context, estate taxes is an important tool for redistributing wealth. Unfortunately, the system seems to have been loaded up with loopholes to such a degree that it is said that only the stupid pay any estate taxes; anyone with enough wealth to owe them should be able to hire a lawyer who can shelter the estate. However, that should be a call for fixing the system, not for abolishing it.

I have given a bit of thought to what I think would be a reasonable estate tax system. This is what I came up with:

I'd like anyone to be able to pass a modest inheritance to their children tax free. I think this should allow for a modest house, and the assets of a small business, such as a small farm or a "mom-and-pop" retail store.
I'd like to tax assets passed to children less than assets passed to lesser relatives and non-relatives.
I don't want to grant exemptions for assets left to non-profit organizations. While it is nice to see excess assets passed to the community in the form of charitable organizations, it pleases me at least as much to see the assets go to the community in the form of local government.
I would like the tax to be progressive.

Here is what I came up with:

The tax applies to net assets in the estate, i.e. liens and debts should be subtracted from the assets.
All property in the estate - including real estate and securities - should be assessed at net market value on the day of death. Capital gains tax should be paid as if the assets were sold on the day of death.
Where a decedent is survived by a spouse, any assets in the estate that are community property, should pass to the spouse without probate or estate tax, unless a will specifies distribution to someone else. In that case only that portion of the estate so distributed would be subject to the tax, but with only half the exemption.
An exemption of 1 million dollars should be allowed.
On the next million dollars, a tax of of 20% should be levied, and 50% on all assets beyond that.
The government should be willing to make a loan to pay half the tax against a lien on the property. Such a loan should be repaid in installments to amortize over 10 years.
Exemption amounts and rate brackets should be indexed for inflation.

At this point, I went to look up what the current code says. Under the 1986 act, rates start at 3% and ramp up to 77%. The net result is approximately (assuming the estate includes a $600,000 personal residence which is exempt from taxation):

Estate Current Law My Proposal

1 mio 120,000 0

2 mio 500,000 250,000

3 mio 750,000 750,000

4 mio 1,500,000 1,250,000

Estate	Current Law	My Proposal
1 mio	120,000	0
2 mio	500,000	250,000
3 mio	750,000	750,000
4 mio	1,500,000	1,250,000

So it would appear that I support some lessening of the estate tax burden, although I would also simplify the code and remove many of the current exemptions.

The repeated claim is that estate taxes destroy family owned businesses. I would suggest that with the simplified and streamlined $1M exclusion, modest businesses should escape taxation, and those large enough not to, are precisely those which the above reasonin says should be broken up in smaller pieces anyway.

Having passed the house, the bill is now awaiting senate action. I still hope it fails there.

If you share my intense interest in public policy issues, I'd like you to participate in the discussion on my Public Policy Forum.

  $Log: inherit.htm,v $
  Revision 1.3  2002/11/21 07:39:11  lars
  Correct URL for POLICY

  Revision 1.2  2000/08/15 01:33:17  lars
  Add reference to POLICY board.

  Revision 1.1  2000/07/09 07:44:52  lars
  Added editorial on estate tax.