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Income Is Income
It had occurred to me to propose that rather than having some kind of special estate tax, we should just tax money you inherit the way we would treat any other income. My assumption was kind of that there was some massive, lurking flaw in this plan that I couldn't see. But if it's good enough for Jane Galt (via Mark Kleiman) it's good enough for me.
UPDATE: Sawicky says there's no difference, but I don't really understand why.
April 20, 2005 | Permalink
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» I JUST SHAKE MY HEAD from MaxSpeak, You Listen!
Why do people think converting the estate tax into an inheritance tax somehow does away with all the things that are objectionable about the former? Any preference on the donor side can be translated into an equivalent for the donnee... [Read More]
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» Tax inheritances as income? from Mark A. R. Kleiman
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Tracked on Apr 20, 2005 9:43:46 PM
Comments
This is what I said last week and Al yelled at me.
Posted by: Adrock | Apr 20, 2005 2:07:12 PM
It's hard to understand why the estate tax rate should be HIGHER then the regular income tax rate.
But most of it represents capital gains, and these days the regular capital gains tax rate is only 15%.
Posted by: Half Sigma | Apr 20, 2005 2:07:22 PM
Treating the various types of income differently is nothing more than a full employment program for accountants and lawyers.
Posted by: Tom DC/VA | Apr 20, 2005 2:10:19 PM
I have a question... when one inherits securities in an estate, does the basis reset the current market price or what? IE is there ANY tax due on the sale of the inherited securities with the new & improved estate tax elimination???
Posted by: Troy | Apr 20, 2005 2:10:31 PM
Half Sigma makes a good point, if we keep the estate tax, a good fix/compromise would be to bring the rate down (it used to be 55% and now is something like 49% or 47%) to the top marginal rate on income.
Posted by: Ugh | Apr 20, 2005 2:11:02 PM
"My assumption was kind of that there was some massive, lurking flaw in this plan that I couldn't see."
The massive, lurking flaws are two:
- It would shift the tax burden away from the super-rich toward the upper middle-class.
- It would produce far less revenue.
Posted by: Petey | Apr 20, 2005 2:11:42 PM
It's hard to understand why the estate tax rate should be HIGHER then the regular income tax rate.
Something about engineering a meritocratic society. But I tend to think this is misplaced effort. We need to go after ground rents, not capital.
Posted by: Troy | Apr 20, 2005 2:12:28 PM
It would shift the tax burden away from the super-rich toward the upper middle-class.
How so?
Posted by: abb1 | Apr 20, 2005 2:14:58 PM
Troy:
ground rents: In a word property tax. Some propose to only tax the land value and not the building in some places making it perfect. But on any property tax bill you will get one assessment for the land and one for the building so the tax on the land part satisfies your 'ground rent' condition.
The old estate tax let you write up the basis for the investments at time of death so if the inheritee sold said assets (after paying estate tax) he only paid a capital gain on the the appreciation after he inherited. Some want to eliminate the estate tax and leave this in rather than leaving the basis alone. If you want to complain about injustice concerning the estate tax, this might be a place to look where soemthing that's actually bad is happening.
Posted by: j mct | Apr 20, 2005 2:21:11 PM
The Estate and Gift Tax is not just a tax on inheritance. It is actually a complex and comprehensive set of laws that address all gifts, trusts, and everything related to the way one gives away ones wealth both during one's life and after.
It is complex and complicated enough to have been the subject of an entire course that I took in law school (and it was far from comprehensive). The Estate and Gift Tax really is too complex to get into in this comment here, but I do feel that it is far to simplistic to simply treat all transfers of wealth with the income tax.
We should also remember that the Estate Tax really does not affect very many people at all. You need to be very wealthy and have some pretty poor estate planning to even be affected by it.
Posted by: eric | Apr 20, 2005 2:28:15 PM
"How so?"
Assuming the estate is comprised of capital gains, as most estates will be:
Estate Tax:
$50 million estate = $22 million in tax
$300,000 estate = $0 in tax
Jane Galt alternative tax:
$50 million estate = $7.5 million in tax
$300,000 estate = $45,000 in tax
The Jane Galt proposal is essentially a mirror of what the Mars heirs are fighting to achieve in the Senate - a 15% estate tax. Is she a shill or dupe?
Posted by: Petey | Apr 20, 2005 2:32:17 PM
My favorite idea from Jane ever. My comments under her post.
Posted by: pgl | Apr 20, 2005 2:33:15 PM
Matt - I think what Max is saying is what I said under Jane's post. But that does not change my mind that hers is a very good middleground position.
Posted by: pgl | Apr 20, 2005 2:35:44 PM
"You need to be very wealthy and have some pretty poor estate planning to even be affected by it."
Ah, the endlessly repeated lie that good estate planning allows the rich to avoid the estate tax.
The rich can avoid the estate tax by giving their money away to charity. If they pass money along to their heirs in any structure, they pay a rather high tax rate on that estate.
This is why the Mars heirs have spent upwards of $100 million over the past decade in influencing Washington and the national debate toward doing away with the estate tax.
Posted by: Petey | Apr 20, 2005 2:40:13 PM
We should also remember that the Estate Tax really does not affect very many people at all. You need to be very wealthy and have some pretty poor estate planning to even be affected by it.
Which is part of the reason why it's a bad tax.
Posted by: Ugh | Apr 20, 2005 2:42:41 PM
Hey petey, look in the Forbes 400 and you'll 5 people names Walton with about the same amount of money all in a row in there, with the sum of said net worth's being extremely large. When Walton died he was the 2nd richest I think, and he didn't pay anything.
Posted by: j mct | Apr 20, 2005 2:44:03 PM
"Which is part of the reason why it's a bad tax."
If you base your argument on lies...
Posted by: Petey | Apr 20, 2005 2:44:38 PM
"Hey petey, look in the Forbes 400 and you'll 5 people names Walton with about the same amount of money all in a row in there, with the sum of said net worth's being extremely large."
Under the estate tax, you can pass on huge amounts of wealth to your heirs. But for every dollar that your heirs receive, the government receives about a dollar.
"When Walton died he was the 2nd richest I think, and he didn't pay anything."
Dead people obviously don't pay anything. If the heirs receive large amounts, the government also receives an equivalent amount.
Posted by: Petey | Apr 20, 2005 2:47:43 PM
If you base your argument on lies...
I meant the part about it affecting only a small number of people, I should have excised the latter sentence from my quote.
Posted by: Ugh | Apr 20, 2005 2:48:24 PM
"I meant the part about it affecting only a small number of people"
OK. But why does the fact that the estate tax only affects a very small number of families with greater than $3 million estates make it a bad tax?
Posted by: Petey | Apr 20, 2005 2:55:24 PM
But for every dollar that your heirs receive, the government receives about a dollar.
Just to clarify this a bit, remember that we are talking about a marginal tax rate here. For every dollar that your heirs receive after the first million dollars, the government receives about a dollar. One of the Senate compromises increases the cutoff to three million dollars. On a three-and-a-half million dollar estate, the tax would be about a quarter million, or about 7%. Now, once someone is up to the $50 million estate level, or the billions, the cutoff becomes negligible. I pity them, I really do.
Oh, and if one's heir is one's spouse, the tax is avoided. If the money is not simply handed over to the heirs, but put into the proper trust, the holdings are not subject to the estate tax. Income tax is owed as usual on the trust's income, of course. But if the heirs get their hands on the principal to blow it on monocles and gold-plated helicopters, the estate tax kicks in.
Posted by: mds | Apr 20, 2005 3:08:53 PM
Dead people obviously don't pay anything.
Wrong. The Estate is taxed. And the amount the estate pays is a complex issue, one that needs to take into account the gifts that were made before the decedant died, the degree to which the money had been placed into trusts, who controlled the trusts, to mention a few very complex issues.
Seriously. This is not so simple that a lay person can really understand it.
Take a look at how wealthy you need to be to even be *effected* by this tax. The Estate Tax exemption is now $1,500,000, and will be $3,500,000 in 2009. Now, most of us can only dream of dying with this kind of money. And if you do have a lot of money, there are literally dozens of ways one can divert one's money - into trusts for example - to avoid or minimize the tax.
Posted by: eric | Apr 20, 2005 3:11:41 PM
Petey, I agree that Jane Galt proposal is nonsense. Of course the whole inheritance should be taxed and at a high rate. I'm just saying that if you tax it on the receiving end you'll probably have the same result for the revenues, but, perhaps, give them less opportunity to demagogue.
Posted by: abb1 | Apr 20, 2005 3:12:01 PM
It's hard to understand why the estate tax rate should be HIGHER then the regular income tax rate.
It isn't that much higher. You're looking at marginal rates instead of average rates. As Petey alluded to earlier, the estate tax has a huge exemption - I believe it was something like $700,000 even before Bush took office (not sure what it is now). So an estate of $1.5 million would have paid an estate tax of about 25%.
In the original tax cut debate in '01, the Democrats reportedly offered to cut a deal with the Republicans where they would raise the exemption to a million-five and cut the top marginal rate below 50%. (No cite, sorry - it was four years ago.) The Republicans refused because they preferred to have the campaign issue, and so they went for straight abolition, which is probably one of the most perverse economic policy positions taken in any of our lifetimes.
Posted by: JP | Apr 20, 2005 3:20:06 PM
"Just to clarify this a bit, remember that we are talking about a marginal tax rate here."
Yup. The whole point of the estate tax is to hit inter-generational transfers of the very wealthy only.
"If the money is not simply handed over to the heirs, but put into the proper trust, the holdings are not subject to the estate tax."
I am not a tax attorney, but I believe your understanding of the trust issue is seriously flawed. Bill Gates cannot put $10 billion in a trust with the income going to his kid and have that principal not subject to the estate tax.
Posted by: Petey | Apr 20, 2005 3:21:12 PM
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