Death to Death Taxes

I hate taxes! I don't necessarily hate the concept of them (we all pitch in to fund highways, public services, libraries, etc.), but I dislike the way they are implemented (the more you make, the more you pay -- the percentages increase as you make more, encouraging people to work less) and used (lots of dollars wasted by the government). So as a result, I pay my taxes, but look to do all I can to minimize them.

One of the most notorious taxes is the death tax. It's particularly bad because in many cases it represents double taxation -- a tax upon assets which you've already paid tax on. How crazy is that? But as they say, "dead people don't vote" so it's an easy way for politicians to add income without upsetting very many people.

This article from Forbes talks about recent changes in the death tax laws and where our nation currently stands regarding this issue. Here's where we were heading:

As late as August the momentum clearly favored a full repeal of the federal estate tax, a levy that affects only the top tier of taxpayers but carries with it an enormous amount of political baggage. And there's a whole host of reasons why change is good here, even if it's for all the wrong reasons. In fact, right when it got back from summer recess, the Senate was set for a procedural vote on a repeal bill that had passed through the House last spring with flying colors.

Then, things changed suddenly:

But Hurricane Katrina had struck the Gulf Coast by then, and Congress shifted its priorities and attention elsewhere. The Senate canceled the vote.

And here's where we stand now:

Now pro-repeal lobbyists are scrambling to get the matter back on the Senate calendar and push it through before lawmakers get caught up in election-year posturing. But there is no hint in sight that a Senate vote on the bill, H.R. 8, will be scheduled before the winter recess.

It's turned into an uphill fight:

They've got a steep road to climb. How would it look to bail out rich estates when thousands were still homeless and desperate across the South? But the fact is, estate tax reform would help a whole lot of middle-class families just trying to pass along their life's work to their sons and daughters.

Iowa Sen. Chuck Grassley, the Republican chairman of the Finance Committee who had supported repeal, said last month that talk of reforming or ending the estate tax was "unseemly" in light of the tragedy in the Gulf. Another problem: Congress is trying to raise hundreds of millions for hurricane relief, and cutting estate taxes out now would make efforts to earmark funds that much harder.

The Brookings Institute, which could be fairly described as opposed to repeal, estimates an immediate repeal would cost $400 billion in revenue over a decade. Even a repeal set to start in 2010 would cost $290 billion, Brookings said.

Moreover, a full repeal could choke off charitable donations to the tune of $15 billion annually, since many estates seek to trim their tax liabilities by earmarking a portion to charities, Brookings estimates.

So for now, here's where we sit:

The current top rate on estates that qualify for the tax--those over $1.5 million--is 47%. By 2009, the rate will drop to 45%, and the exclusion will increase to $3.5 million. But because of an oddity in the law, in 2011 everything reverts back to pre-Bush 2001 tax reforms, when the exclusion topped out at $1 million and the top tax rate was 55%.

And here's where we could end up:

Talk of compromise is swirling. Kyl has proposed a reduction in the rate to make it match the capital gains rate, or 15%. That's a big drop from 47%. He also proposes raising the exemption to $4 million to $6 million. Some other proposals lower the rate to 30% or 35%.

Almost everyone agrees on raising the exemption, even the anti-repeal Center for American Progress, a group led by former Clinton Chief of Staff John Podesta, whose proposal calls for a $2.5 million exclusion.

My position is that our nation needs to get its spending under control. We're spending way too much in too many areas. But politicians aren't good at making tough decisions -- they prefer instead to keep spending and let future generations worry about the mounting debt. The problem is, we're running out of time. Before too long, the bill will come due, and when it does it won't be pretty.

Comments

[David]

Just a policy thought on the death tax: the government needs to raise money from some kind of tax. At the highest level of generality, it can either have an income tax or an estate tax (setting aside the details of both). If that's our basic choice, why not favor the estate tax? After all, you're gone, so you can't enjoy whatever wealth you've accumulated. It seems to me that we might be better off if we INCREASED estate taxes and reduced income taxes. In fact, until income taxes are zero, there could always be room for higher estate taxes to generate the same revenue for the federal government.

[Michael Jaz]

Whoa there FMF, when did you get all political? Railing against progressive taxation, and calling the estate tax a "Death tax" sounds like you've been listening to too much O'Reilly and Limbaugh. Their arguments are facile, and you parroting them here is a bad idea.

First, Progressive taxation does NOT "encourage me to work less", nor does it to anyone else I know. Do you actually know someone who thinks: "I hope I don't get that promotion, because then I'll have to pay more taxes"? It's not like you get a HUGE jump when you go into a new bracket. Read the tax table sometime: the increased percentage is applied only to the portion of your income above the breakpoints. There is no pay amount that will cause you to come out behind someone in a lower tax bracket.

Second, here's why "death tax" is a misleading moniker. It's a play on the expression that "there's nothing certain, but death and taxes." So people think everyone gets hit with the "death tax." It's -- certain.

Well, your own post puts the lie to that. There's a cap on the tax: it's only on estates above a certain range. Now, home prices are pushing up the value of even modest estates, so there's probably reason and value to the idea of increasing the cutoff point.

Here's a real howler: to say that this is an easy tax, because "dead people don't vote." It really makes you sound like you're transcribing Fox News Channel. For each dead person, there's a GROUP of people who are impacted by these taxes: their families. It doesn't even make sense to say that this tax doesn't impact voters. It impacts MORE voters, per payee, than a straight income tax increase! And since this is taxing someone who has never owned this property (although they likely have gained some benefit from it) it's not "double taxation." The person who originally paid taxes on it is dead!

Now, I absolutely agree with you that we need to reign in spending. The problem, however, isn't because "politicians aren't good at making tough decisions." It's another quote you picked up somewhere. If you really (and by "really" I mean "actually") think about what a Congressman's is (well, should be), they make pretty tough decisions all the time.

To actually reform our government, we need to stop electing one party to all levels of government. If there were only a Democrat, somewhere, anywhere, with some decent ideas and a backbone, we'd be in business.

What I'm hoping is that the Republicans continue their leadership, but their party fractures between the business and religious wings. The Democrats may then summon the courage to follow suit, with Greens going one way and Social Democrats going another. Then we will have a more parliamentary style government (like they have in, oh, every other civilized nation) and stop this madness, where Dubya signs anything they put in front of him, because, hey, they're in his party, so it must be OK. It's like some fraternity, except that they're actually running the country (into the ground).

Tip o' the cap to you, this is a great site. But stay out of posting politics if you're just going to parrot what you heard on talk radio. Respectfully, it's just not your strong suit.

[Duane Gran]

You may find an essay I wrote (http://duanegran.com/blog/?p=187) to be of interest on this. The issue is quite complex and there are nefarious forces at work on both sides, mostly in how the debate is framed. Most reasonable people agree the the limits should be raised, or at the least indexed for inflation.

[Michael Jaz]

Duane:
Link doesn't work. Removing the ) didn't help...

[Duane Gran]

Michael,

Thanks for the note. The link behaves for me, but I'm not sure why it is failing for you. At the very least, if you search for "estate tax" (revealing a little of my bias) in the search box on my site you will rapidly find the piece. I don't mean to stir up the pot on this issue any more than has been done already, but I hope it offers some perspective and history on this debate.

[FMF]

Michael --

One question: is your net worth at a level where you're impacted by death taxes? (It's a rhetorical question -- I already know the answer.)

FMF

[Jesse]

If the government would show me that they can be fically responsible, I wouldn't feel so sick about paying taxes period. So much of the time I just get the feeling it's being wasted.

Michael, I agree with calling it double taxation - whether you tax the person while they're alive, or their estate when their dead. One instance that burns me - I pay taxes on my income year after year after year, plug some away, and when I die, the after-tax nest egg I've grown is taxed - again.

Double taxation because the dollar came in, was taxed, grew, and was taxed again. Semantics though really - enjoyed your counterpoint.

[Michael Jaz]

FMF -- No, of course not. Let me first say that I could've done a better job of laying out my point of view without attacking you personally. Please accept my sincere apologies for the strident tone. I'm a bit of a firebrand.

Now, let me be clear: I am absolutely arguing in my own interest. Were the estate tax likely to imminently impact me, I would probably be on the other side. My concern is, and the intent of my previous post was to show, that these arguments are duplicitous.

God bless you if you are indeed voting and writing to support your own best interests; I would expect nothing less. The fall of socialism is fait accompli: the cornerstone of democratic capitalism is enlightened self-interest, emphasis on enlightened. I simple terms, you do all you can to further your own causes -- without stepping on people's heads (in the present or by hampering them in the future). My problem with the current leadership is that they have finely crafted their platforms and messages to sound "fair" -- when they are anything but -- and thereby convince the intellectually lazy to support them, even when they're indeed going against their own self interest.

Jesse -- It's really a question of who is being taxed. To turn the phrase against itself: "dead people don't pay taxes." I submit that once you are dead, *you* are done; "your estate" is not you. You are not paying that tax, the heirs are paying it, and it's "new money" to them, thereby singly-taxed. Semantics indeed. Thanks for the kudos.

I'm going to start copying my writing onto my own blog, linked above (at MySpace, for now). I will be linking back to FMF frequently; can you tell me (offline @ my email address) how to add a "trackback"?

[FMF]

Michael --

I tried to eamil you, but got a bounceback, so I thought I'd post your answer on how to leave a trackback here. Do the following:

1. Write a post that refers to a post someone else has written (be sure to link to their post within your article -- it's common courtesy and some people (me included) delete trackbacks if the author isn't kind enough to link to the article they are referring too).

2. Before you publish your post, look for a box or something (I'm not familiar with myspace) that says "trackback", "sites to ping", or something of the like in your publishing software.

3. Then go to the article you're referring to and copy the trackback URL (in my posts, it's clearly marked at the end of eack post -- if you're reading an individual post. If you're looking at the homepage, it's listed in a hyperlink at the bottom of each post).

4. Paste that trackback URL into the area in your publishing software that you found in step #2.

5. Publish your post.

6. The software will leave a link on the site you took the trackback from.

FYI, I was going to respond to your initial comment in more depth, but it really wasn't worth the effort. After reading it twice, I got a feeling you were not looking at it from the same point of view as I was (hence my question). Your second comment made that clear.

BTW, just for the record, I didn't just "get all political." I've always been political. I write about money -- and there are few subjects (if any) more political than that! ;-)

Have a good weekend.

FMF

When you buy that hot outfit for your Second Life avatar, you don’ t have to pay tax on it, and neither does the person selling it to you. That may change, however, now that virtual economies are on the IRS’ radar.