Posted on 09/27/2018 8:21:23 AM PDT by SeekAndFind
The federal estate tax boils peoples blood on both sides of the aisle, but often for the wrong reasons. Democrats argue that the rich shouldnt be able to create family dynasties by concentrating wealth. Republicans argue that the estate tax generates less than 1 percent of federal revenues and so might as well be abolished.
Neither of these arguments gets to the heart of why the estate tax is so dangerous. What Democrats miss is that the rich have available to them all sorts of accounting and legal tools to avoid, or at least mitigate, their tax bills. Lowering the estate tax exemption will not take more from the rich. It will simply reach into the pockets of the not-so-rich who are less able to avoid it.
What the Republicans miss is that, like the income tax before it, the estate tax is only one legislative tweak away from becoming a tax on everyone. Politicians established a clear precedent with the income tax. In arguing for the 16th Amendment, they assured voters that the income tax rate would start at 1 percent and only apply to the rich. Within a generation, the income tax rate started at 19 percent and applied to almost everyone. In light of this, the argument that the estate tax only applies to a few rich people rings hollow. Politicians have a solid track-record for transforming taxes on the rich to taxes on absolutely everyone.
The real damage from the estate tax isnt what it costs people when they die, but how it alters their behaviors while they still live. Where that damage falls on family businesses, the tax discourages business owners from creating jobs.
When a business owner dies, the estate tax is levied on the value of the business. If much of the businesss value lies in productive assets like machinery, buildings, and land rather than cash, the heirs may have to sell these productive assets just to pay the tax. And as assets are typically worth more to the business than the cash that their sale raises, the business is doubly harmed by having to liquidate necessary physical capital at bargain prices.
The good news is that, according to estimates based on IRS data, only between 250 and 1,000 inherited family businesses owed estate taxes in 2016. The bad news is that thats just the tip of a very large iceberg.
The larger effect of the estate tax occurs long before the business owner dies. The estate tax encourages business owners to divert resources that otherwise would have gone into expanding their businesses or hiring toward preparing heirs to avoid or afford estate taxes. Based on demographic data, for every business owner who dies and whose business owes estate taxes, there are 38 more who would have owed estate taxes had they died sooner. That brings the total number of family businesses living under the shadow of the estate tax to between 10,000 and 35,000.
Family businesses affected by the estate tax are among the 1 percent most valuable businesses, and that means that they are also likely to be among the 1 percent largest employers. According to census data, such businesses employ between 900 and 2,600 employees each. In other words, the family businesses that are most likely to trigger the estate tax when their owners die are providing somewhere between 26 million and 32 million jobs that could all vanish. This is the iceberg.
The estate tax generates less than 1 percent of the federal governments revenue, yet it threatens tens of millions of jobs. Not only must heirs who inherit family businesses divert productive resources to pay the estate tax, but the family businesses they inherit are commensurately weaker because of efforts taken while their owners were still alive to mitigate the eventual tax liability.
The estate tax raises almost no revenue and it endangers millions of jobs. The one thing it does well is to provide a platform for politicians who want to be seen to be doing something about the rich. Thats a luxury those of us who work for a living cant afford.
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Antony Davies is associate professor of economics at Duquesne University. James R. Harrigan teaches in the department of Political Economy and Moral Science at the University of Arizona. They host the weekly podcast, Words & Numbers.
“Democrats argue that the rich shouldnt be able to create family dynasties by concentrating wealth.”
Why the hell not? Do people not own their own wealth?
The rich liberals create “foundations” to hide and transfer wealth.
The estate tax helps the large farmers get the small farmers land for dirt cheap under the guise of protecting the food supply... the law needs to go.
Farms have had generous exemptions built into the estate tax law for a long time.
Small farms aren't sold off to large farmers the way you describe because of the estate tax. They're sold off in those cases because the estate tax exemption requires the farm to continue operating as a family-owned enterprise -- and many second-generation farm families are unwilling to do that.
Side question: If there is no estate tax, is there a step up in the basis value for capital gains upon death or do the heirs get hit for the full capital gains on grandpa's stock and real estate upon sale?
"Congress is not empowered to tax for those purposes which are within the exclusive province of the States."Justice John Marshall, Gibbons v. Ogden, 1824.
Thank you for a very good post.
Here in Oregon the Death Tax finances a socialist state government, which finances layabouts, social psychopaths and the dregs that use drugs, legal and otherwise.
I truly resent what my death will finance via Oregon’s Death Tax. Portland is horrible, just like Seattle and San Fran are. Salem, the state capital’s main streets are full of homeless derelicts who not only clutter our streets, but puke on them and leave used syringes there.
And Oregon’s taxes in general are literally driving established businesses out of the state. This is our reward for living in a state that is governed by democrats for two or more generations.
No.
Remember, we’re dealing with people who consider tax cuts “expenditures.”
” Politicians have a solid track-record for transforming taxes on the rich to taxes on absolutely everyone.”
Oh, does this idiotic statement open up a can of worms! Why shouldn’t everyone pay to get the same service from the government. Does the middle tier not get support from the police or the military or the people that fix the roads or teach their children? This is a democracy, and the right to vote for the person you wish and the laws enacted are a Constitutional right. Do the only votes that count belong to the rich. If they are paying the bill, shouldn’t they have the only say in it?
This thought process is the major reason the libs expanded taxes in the way they did. It started out as voluntary pay and was not really implemented until 1861 as a mechanism to finance the war effort. In 1862, the IRS was formed. All the 16th amendment did was allow the Federal government to tax the income of individuals without regard to the population of each State.
The tax law, like almost all laws, grows as lawmakers use it for pork, try to make it fairer (when?), use it to stimulate a sector of the economy, or just want to raise revenue. So it’s no longer an account for raising the funds needed to pay their bill. It’s now become an investment fund for campaign fodder feel good programs. Whether they are needed by everyone, used by anyone, or are implemented at all in nothing more than paper.
Will Rogers said it best: The difference between death and taxes is death doesn’t get worse every time Congress meets.
rwood
Bottom line - TAXATION WITHOUT REPRESENTATION!!!
Edit to add; unless they are Democrats.
What’s not mentioned is that the Death Tax is essentially double taxation, taxes on wealth that has already been taxed. Perhaps even triple taxation if SS has been deducted.
If the step-up basis goes we’re all screwed. Who has records of something bought decades ago?
Years ago my father established two trusts, one revocable and the other irrevocable, as a strategy for the estate tax. The tax thresholds were later raised and the trusts would have been unnecessary. But he paid significant money to a lawyer because of the estate tax. So at least that tax provides work for lawyers.
The government WILL get its vigorish.
No one seems to argue that congress and the United States do NOT have an unlimited right to the lifeblood of Americans.
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