Estate Tax: Grave Robbing or Great Equalizer?

Eddie Braverman's picture
Rank: The Pro | 21,147

In life, George Steinbrenner elevated having the last laugh to an art form. Just ask any Red Sox fan. So it's only appropriate that he'd have the last laugh in death as well, and he did thanks to a loophole in the estate tax. By dying in July of 2010 (a year in which there was no estate tax), he got over on the IRS to the tune of $500 million and probably saved his family from having to sell the Bronx Bombers. Less well known but a great deal wealthier, multi-billionaire Dan Duncan died earlier in the year and saved his family $4 billion in estate taxes.

Naturally, these two guys have the wealth redistributionists screaming bloody murder. There's even talk of Congress re-writing history by voting to make estate taxes retroactive on these guys. But it's not just big government liberals who are calling for a return to the estate tax. Some of the people in favor of estate taxes would surprise you. You'd expect the president of AFL-CIO to be in favor of soak-the-rich schemes like estate taxes, but how about billionaire hedge fund manager Julian Robertson?


ESTATE TAX BASICS

Before we get into the right and wrong of the estate tax, let me lay out exactly what it is and who it applies to. Estate taxes have been around since the income tax was born in 1916. The earliest estate tax rate was a stout 70%. It fluctuated over the past century, and the last year we had an estate tax was 2009. The 2009 rate was 45% on any estate value above $3.5 million. In other words, the first $3.5 million of an estate was tax exempt, and the remainder of the estate was taxed at 45%.

Congress screwed the pooch on the estate tax in 2010 by not coming to an agreement about the sunset provision. In 2001 it was decided that estate taxes would be phased out altogether. Each year from 2001-2009, the threshold was raised and the rate was lowered. This gave the wealthy the opportunity to die tax free in 2010. But the estate tax is scheduled to return with a vengeance in January of 2011. As it stands now, the rate will be a 55% tax on estates over $1 million.

We're not talking about the richest 1% any more. With a threshold at $1 million, we're into the top 10% of the country, maybe more. I'm thinking my dad was worth about a million when he died in 2007, and he was a mailman, mechanic, and bartender his whole life (he happened to buy a starter house for $18,000 in the 1950's in an orange grove that later became Silicon Valley). So we're no longer targeting jet-setting business moguls if the tax proceeds as planned.


ARGUMENTS IN FAVOR

It's easy to spot the estate tax proponents who are only in favor out of jealousy. They'll be the ones telling you that no one needs that much money (which is true, but entirely beside the point) and that it's unfair that some people have nothing while others live the life of Riley. Not so easy to identify, however, are the unlikely bedfellows in favor of the estate tax counter to their own interests.

Julian Robertson is one such proponent. He offers a reasonable and considered argument in favor of the estate tax:

To Julian Robertson, the founder of hedge fund giant Tiger Management and a major philanthropist, the economic and moral case for an estate tax increase was simple. "You get out of a credit crisis by getting your house in order, and in America's case bringing your deficit down. This implies tax increases." The fairest way to do it, he said, is to tax "the least deserving recipients of wealth, which are the inheritors." The tax is not just good for America, he said, but even for the heirs and heiresses. Robertson noted that "there are indicators that inheritors have difficulty adjusting to their inheritance."

In fact, most of the unlikely people in favor of estate taxes site deficit reduction as their primary motivation.


ARGUMENTS AGAINST

Aside from the immorality of taxation in general, the estate tax inspires a unique level of passion in the arguments against it. To many, it represents grave robbing, plain and simple. Here is the most popular argument against tomb raiding:

A man (or woman, let's be PC here) works his whole life. He takes risks, he scrapes by, and he's taxed every step of the way. Every penny that comes into and leaves his possession is taxed. Income taxes, sales taxes, gas taxes, etc... Taxation is the single largest lifetime expense for every American. After paying taxes his whole life on every penny he's ever touched, you want to tax what's left over when he dies? It's double, triple, quadruple, quintuple taxation. He's already paid the taxes on that money.

In other words, the government is not entitled to take a single penny of what you have built for your family when you die. You've already paid the freight.


WHERE DO YOU FALL ON THE ISSUE?

It's not hard to figure out how I feel about the estate tax. To my mind, all involuntary taxation is theft. My family won't ever even be affected by the estate tax. I'm encouraging my mom to spend every penny she's got before she dies. And I won't consider my own life a success unless the check my family writes to the undertaker to plant me bounces. My sons will inherit from me what I inherited from my father: common sense and drive.

But that doesn't mean I think the wealthy are obligated to turn over the majority of what they spent their lives building because some government thinks they're entitled to take it. I understand the argument for deficit reduction, and it's a sound argument. For me, it's a matter of trust, unfortunately. Do you trust the government to pay down the deficit with the money? Or is it more likely that they'll piss it away on ridiculous pork?

We've been beating this drum all week, guys, so let's hear it. Estate tax: yes or no? If you're in favor, let us know why and even more important, at what levels you would set the tax (both threshold and rate). If you're opposed, what is it about the estate tax that really sticks in your craw?

One more thing: keep it civil for crying out loud.

It's Friday, which means there's only two working days left until Monday. Work hard and get rich, guys. There are millions of welfare recipients depending on you.

Comments (33)

Sep 24, 2010

My only real issue with the estate tax, and I am by no means the most qualified person to answer this, is that you are taxing at the highest level the very same people that paid the highest percentage of taxes over their lifetime. And yes, before everyone freaks shit and says that wealth isnt taxed I get that. But Someone making 400k a year and retiring after 40 years would have a pretty significant estate tax levied on them even after paying nearly a 50% tax rate for the preceding 40 years. Just my 2 cents.

If I had asked people what they wanted, they would have said faster horses - Henry Ford

Sep 24, 2010

The different facets of taxation cannot be discussed without talking about fundamental tax reform and expenditure reform.

I am not cocky, I am confident, and when you tell me I am the best it is a compliment.
-Styles P

Sep 24, 2010

I might be alone on this one. I'm all for it IF i could designate where exactly it went such as the national debt or the public education. My dad has always told me he will die broke and to make my own money.

Im not real sure what having $4 billion dollars in the bank will do for you when you're dead.

Sep 24, 2010
Cmoss:

I'm all for it IF i could designate where exactly it went such as the national debt or the public education.

That's an interesting notion, actually. Think if it were applied to the income tax. You could allocate your tax dollars on your 1040. That would change the economic landscape of the country overnight.

Naw. That would be too much like democracy.

Sep 24, 2010
Edmundo Braverman:
Cmoss:

I'm all for it IF i could designate where exactly it went such as the national debt or the public education.

That's an interesting notion, actually. Think if it were applied to the income tax. You could allocate your tax dollars on your 1040. That would change the economic landscape of the country overnight.

Naw. That would be too much like democracy.

We couldnt have that now can we?!

Sep 24, 2010

Isn't there some way that you could get around it? Buy a ton of bonds for your kids or something?

Sep 24, 2010

I'm for the estate tax at a reasonable level--like 15% for estates over $15 million. I actually buy all the arguments against the estate tax and none of the arguments for it. After all, deficit reduction is utter bullsh*t given the relatively small amount collected from the tax, the size of the deficit, and the obvious fact that Congress WILL spend the money, not reduce deficits or the debt. However, 15% on very large estates--well, it seems to me to be a reasonable compromise.

But I'm with eok--fundamental tax reform needs to be enacted in conjunction with these rules, like a flat tax of 12% with zero deductions.

Sep 24, 2010
Virginia Tech 4ever:

I'm for the estate tax at a reasonable level--like 15% for estates over $15 million. I actually buy all the arguments against the estate tax and none of the arguments for it. After all, deficit reduction is utter bullsh*t given the relatively small amount collected from the tax, the size of the deficit, and the obvious fact that Congress WILL spend the money, not reduce deficits or the debt. However, 15% on very large estates--well, it seems to me to be a reasonable compromise.

But I'm with eok--fundamental tax reform needs to be enacted in conjunction with these rules, like a flat tax of 12% with zero deductions.

+1 for a tax code that makes sense.

man made the money, money never made the man

Sep 24, 2010

I think the asset sales are one of the worst aspects of the tax. Its bad enough having to pay, but the fact that you need to sell your stocks (or even your sports team) to pay off the liability really changes everything.

Sep 24, 2010

You can do an A-B trust but that only shelters so much.

My biggest problem, besides having one at all, is that it has never been adjusted for inflation. The first million exemption in 1990 was probably pretty reasonable. THAT WAS 20 EFFING YEARS AGO.

Problem 2: in the event of large land holdings (family ranches, farms, etc), each generation has to sell off part of the estate to cover the taxes owed when the eldest owner dies. That sucks fat balls.

Sep 24, 2010
Cartwright:

You can do an A-B trust but that only shelters so much.

My biggest problem, besides having one at all, is that it has never been adjusted for inflation. The first million exemption in 1990 was probably pretty reasonable. THAT WAS 20 EFFING YEARS AGO.

Problem 2: in the event of large land holdings (family ranches, farms, etc), each generation has to sell off part of the estate to cover the taxes owed when the eldest owner dies. That sucks fat balls.

Agreed. Similar to the homestead exemption, the estate tax should exclude primary residence, privately owned businesses, things like that. Taxing liquid wealth is one thing, but forcing the sale of a family business to give money to the government is just wrong on so many levels.

Sep 24, 2010

I understand the reasoning behind the estate tax. It would be rather easy to create an empire within a couple generations. With that said, it is still not a reason to STEAL FUCKING MONEY FROM PEOPLE.

That is what the estate tax is. THEFT.

Oh, you have a lot of money and just died. Guess what? Give it to me!! Ohhhhh, your wealth is wrapped up in land and homes. Cool. Sell them NOW. What are we going to do with them money? Piss it away on inefficient programs, pork barrel spending and hiring more govt employees.

1) If the government moved towards efficiency they could cut taxes, balance the govt and increase spending all at once

2) Taxes are out of control. No slicing and dicing. Take Federal, State, Local then add Sales tax, all the various other taxes, fees, fines and all the other quasi taxes, add tolls and misc bullshit that they rename, but are really taxes and you will see how much you get milked.

The tax code needs to be completely redone. Burn the fucker.

Sep 24, 2010

I think it comes down the to philosophy that earning money and paying your taxes during your lifetime allows one to choose the security that their money provides. What I mean is that if I work hard for 40 years to provide financial security for my family, that security should be in any form I wish. If that means giving a lump sum of 100 million when I die to children, then that's my prerogative. Although Robertson quotes the recipeints of this money as "the least deserving" as it is my money I am the ultimately decider on who and who is not qualified for my money. Having said this between A-B Trusts, the one time gift exemption, the annual gift exemptions etc, you could squirrel away nearly 9 mill before taxes really started. (This is off an estimate of 7 mill max for A-B, one time gifts of 1 mill from you estate from both you and your wife, and annual gifts of 13,000 to as many people as you like). Does anyone know what the real income tax rate would be if the estate tax was extrapolated to an equivalent income tax on your money while your alive?

Sep 24, 2010
physconomist:

I think it comes down the to philosophy that earning money and paying your taxes during your lifetime allows one to choose the security that their money provides. What I mean is that if I work hard for 40 years to provide financial security for my family, that security should be in any form I wish. If that means giving a lump sum of 100 million when I die to children, then that's my prerogative. Although Robertson quotes the recipeints of this money as "the least deserving" as it is my money I am the ultimately decider on who and who is not qualified for my money. Having said this between A-B Trusts, the one time gift exemption, the annual gift exemptions etc, you could squirrel away nearly 9 mill before taxes really started. (This is off an estimate of 7 mill max for A-B, one time gifts of 1 mill from you estate from both you and your wife, and annual gifts of 13,000 to as many people as you like). Does anyone know what the real income tax rate would be if the estate tax was extrapolated to an equivalent income tax on your money while your alive?

Well said, grasshopper. To answer your question, I will assume several million $$ are involved so as to leave one's marginal tax bracket close to your actual tax rate for regular income taxes. If you're at the present top 35% federal tax rate and adding the death tax, your total tax rate is about 72%. If you're clever and make use of maximum tax credits, the total is slightly less, approximately 69%. Of course you've amassed some of that wealth in the past when rates were > 35% and they are likely to be higher again very soon. So let's call it 70% for rounding purposes. Also, don't forget state income taxes at about 3 - 10% unless you live in a 0% tax state. Oh, yes, and then there's state death taxes, damn it's getting expensive...but then again, those with the millions use various trust arrangements, foundations and a plethora of other legal means to not pay the death tax especially when it is 55%. IMO, the folks who have a couple million are more likely the ones who have not planned and will be surprised to not only find out they can't take it with them, but there's less of it to take.

T. Anstaafl

Sep 24, 2010

I want to run along with the topic on the principles of taxation. I have several grad courses in taxation but every class the professor avoids this subject because there can never be a fair, justifiable solution.

You can not deny that our government provides several services that are necessary in order for this country(state, local, federal) to properly function. Examples of these can be national defense, public safety, etc.

At the same time, we are all in this together so shoulder each of us only pay our equal proportion. Questions arise on whether we should pay equally in amount or percentage.

My personal standards is that estate taxes are a double taxation that picks on certain echelons of our society and is not equally fair. What if we went to a tax system where everyone pays equal amount when they die. Say we just tax every inheritor $10,000 whether they were given $100k or $1k. Logically that does not make sense. We need a better method of fairly dividing out the bill for public services but the answer takes a lot more than just looking at our estate tax

Sep 24, 2010
Edmundo Braverman:

To my mind, all involuntary taxation is theft.

There are countries that do not have an estate tax, so I don't think it's accurate to call the estate tax involuntary. People who pay the estate tax choose to be citizens of the US for the many benefits that being a US citizen provides, including the education system and infrastructure that their taxes create.

There is a cost of our government. Whether one agrees with all of the government spending or not is another topic for discussion. There is a cost that must be paid through taxes. So the question becomes what is the most fair way to pay the cost of government.

Opponents of the estate tax praise people who work hard and build themselves up by their bootstraps. They say their wealth shouldn't be taxed upon their death. Why? So that their children and grandchildren don't have to work hard? I can't think of a better way to pay for the cost of government than the estate tax. I think the $1 million exemption is way too low, but fundamentally I absolutely believe the estate tax is the best way to pay for government services.

Sep 24, 2010
IUHoosier08:
Edmundo Braverman:

To my mind, all involuntary taxation is theft.

There are countries that do not have an estate tax, so I don't think it's accurate to call the estate tax involuntary. People who pay the estate tax choose to be citizens of the US for the many benefits that being a US citizen provides, including the education system and infrastructure that their taxes create.
.

You say this as if the person that would end up paying the estate tax would some how not be able to garner access to the US educational system if they didnt live here. That could not be further from the truth.

If I had asked people what they wanted, they would have said faster horses - Henry Ford

Sep 24, 2010

Question: Is an estate tax a tax on the heir or a tax on the person dying?

That is to say, if the person dying made his fortune in the US, but then retired and spent the last 25+ years of his life in a country that did NOT have an estate tax, before giving it away to an heir that lived in the US, what would happen? (run-on sentence fail)

Is it based on citizenship?

If so, what if the entire family (heir included) were all US citizens living as expats in an estate tax-free country? Would the US force you to sell your assets from that foreign country to pay the estate tax?

"If you can count your money, you don't have a billion dollars." - J. Paul Getty

Sep 24, 2010

If the children are inheriting the money, that is income. It would make sense to tax that income because we do that to everybody. Still, I don't know where I fall on this, though, because after all it is post-tax money.

Sep 24, 2010

Grave Robbing.

There should be a double jeopardy type principal on taxes. If you cannot draw the line on what the government can tax you will never get spending under control. My solution: Income no matter how high or low should be 10%, all purchases should be 5%.

Sep 24, 2010

I am against ex-post-facto taxes plain and simple. The estate tax being among those taxes I am against. Redistribution of wealth is as nearly un-American as being idealistically anti-US.

-N.

"It's about the game." - Gordon Gekko
"No matter how much money you make, you'll never be rich." - Jacob "Jake" Moore
"'Oh Africa Brave Africa'. It was... a laugh riot." - Patrick Bateman

Sep 24, 2010

i haven't heard anyone complain about taxes on dividends; isn't that basically what this is: a tax on dividends, or income you didn't earn. you didn't work for it. trying to ruffle some feathers.

Sep 25, 2010

JS Mill was in favour of the estate tax as you can argue it is one of the fairest tax that exists, and generational transfers of wealth are a massive driver of inequality.

The other argument, obviously, is that you should be free to bequest your money to your children (or anyone else) without the state taking a cut.

I don't know where I stand. As was interestingly pointed out, I'd feel much better paying tax if I could control the way it was spent, or I knew the government would not ridiculously piss it away.

Sep 25, 2010

i think it's a bit misleading to focus on the high tax rate (55%) and also the fact that many people with relatively small estates ($1-2 million) will be affected. let's take edmundo's dad, for example: if his estate was 1.2mil, he'd be paying about 110,000 in estate tax. that works out to an effective tax rate of 9%. the vast majority of people affected by this won't be paying that much in taxes at all.

Sep 25, 2010

Why is it that no one has considered that many of the assets that are being passed along are actually illiquid assets that have not been taxed.

Take a situation where a man has $1000 and chooses two options. In the first, he choose to consumption and pays a sale tax on the money each and every time he consumes from the $1000. In the second scenario, he choose to buy (or start) a company or investment. If he fails, he can write the loss on income earned each year, but if he succeeds, the original $1000 stays in the company (investment) and grows. The dividends earned may be taxed, but if he never sell the asset, he is never taxed in the $1000 initial investment. When he dies, the government hopes to recoup the lost taxes by collecting an estate tax.

Yes, the vast majority of wealth that would count under the estate tax is not liquid income that was already taxed but rather illiquid assets that gained in value over time yet were never taxed. The Steinbrenner and Yankees situation is an excellent illustration of such fact. You cannot possibly argue that the gains in the value of the Yankees was ever taxed during Steinbrenner's life.

And so there you have it. The real issue in the debate, and the one that should probably matter is whether we can incentivize people to still take risk and still expect them to help contribute to the national treasury. One can argue whether we are overburdened with taxes, or whether the size of the national government (and its spending) needs to be contracted, but arguing that one class of income (wealth) has already been overtaxed, or even whether we should foster income equality are really straw man arguments in the debate.

(PS. I wrote this pretty quickly and I was too lazy to go back and reread it for consistency and grammatical accuracy. Take it for what it is worth)

Sep 27, 2010
MaturationOfShane:

Why is it that no one has considered that many of the assets that are being passed along are actually illiquid assets that have not been taxed.

Take a situation where a man has $1000 and chooses two options. In the first, he choose to consumption and pays a sale tax on the money each and every time he consumes from the $1000. In the second scenario, he choose to buy (or start) a company or investment. If he fails, he can write the loss on income earned each year, but if he succeeds, the original $1000 stays in the company (investment) and grows. The dividends earned may be taxed, but if he never sell the asset, he is never taxed in the $1000 initial investment. When he dies, the government hopes to recoup the lost taxes by collecting an estate tax.

Yes, the vast majority of wealth that would count under the estate tax is not liquid income that was already taxed but rather illiquid assets that gained in value over time yet were never taxed. The Steinbrenner and Yankees situation is an excellent illustration of such fact. You cannot possibly argue that the gains in the value of the Yankees was ever taxed during Steinbrenner's life.

And so there you have it. The real issue in the debate, and the one that should probably matter is whether we can incentivize people to still take risk and still expect them to help contribute to the national treasury. One can argue whether we are overburdened with taxes, or whether the size of the national government (and its spending) needs to be contracted, but arguing that one class of income (wealth) has already been overtaxed, or even whether we should foster income equality are really straw man arguments in the debate.

(PS. I wrote this pretty quickly and I was too lazy to go back and reread it for consistency and grammatical accuracy. Take it for what it is worth)

while there are some good points here...you are ignoring something. Illiquid assets get taxed when they are sold...it shouldn't matter when they get sold or which generation...the estate tax would force people to sell something just so it can get paid. Let's say for example you own a family business worth $10mm. Not ridiculously unreasonable...you want your kids to take over and they do too. You don't have many liquid assets because most of your networth is in the business. Then you have a heart attack and your kids get to sell the company for a fraction of it's value because the IRS is ready to bankrupt them for their (55% of 9 mm ~ 5 mil).

Sep 26, 2010

1) we need to control our spending

2) ideally there should be no tax, but this is impossible,

3) if we must tax, it is better to tax the rich than to tax the poor

4) high Estate Tax is better than high income tax

5) 1million mark is a bit low, needs to be raised

6) Estate Tax does have its place as a society equalizer, it increases the social mobility which is one of the key reasons why the US is better than Europe

Sep 26, 2010

I am totally against estate tax unless it is set at some ridiculous level (like 10% above the first billion). Estate tax set at a low level of say a million dollars effectively prohibits class mobility from the middle class to the wealthy with the exception of entrepreneurs who can build a sufficient fortune in a lifetime.

My grandparents suffered terribly as tenant farmers and day labourers to provide a slight leg up to their kids, who took it and became middle-middle class. My parents did the same and gave me a sufficient leg up (in terms of paying for college, good schools etc) that has let me get a step up to the upper-middle / lower-upper class. Hopefully, I can provide that for my kids - I /want/ them to have a better life than I've had and leave a meaningful legacy for my successors to build on. Otherwise, why bother working so hard? To consume? Fuck that.

Upshot for me is that Australia abolished the estate tax in 1979, so I'll be able to pass everything on tax free.

Sep 26, 2010
Wage Slave Number 9:

Upshot for me is that Australia abolished the estate tax in 1979, so I'll be able to pass everything on tax free.

Sounds good to me. Now I know where to send my parents when they become old and senile. Also, now I know where to go and die when my time comes.

(Kidding of course.)

"If you can count your money, you don't have a billion dollars." - J. Paul Getty

Sep 26, 2010
San Franciscan:
Wage Slave Number 9:

Upshot for me is that Australia abolished the estate tax in 1979, so I'll be able to pass everything on tax free.

Sounds good to me. Now I know where to send my parents when they become old and senile. Also, now I know where to go and die when my time comes.

(Kidding of course.)

It's as good a place to die as any. Nice tropical climate if you move up north...

Sep 26, 2010

we should tax 10% on everything above 1m and 20% on everything above 10m and 30% on everything about 100m

That would be fair to me.

Sep 26, 2010
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