Why do Americans hate the estate tax?

The “estate tax” is a tax on money and property transferred from the estate of a dead individual. It’s getting a lot of press recently because it’s set to expire in 2010 (and return in 2011). As it currently stands, 2009’s rate is up to 45% on estates over $3.5 million, and 2011’s will be 55%. As a bit of a side note, I’d like to see the death rate (and suicide rate and gift-giving rate) among wealthy elites in late 2010 compared to the same periods in other years.

As a NYTimes editorial describes, the qualifying threshold right now is so high–$7 million for couples and $3.5 million for individuals–that 99% of estates in America will never qualify for it. Yet according to a Harris Interactive poll cited by Forbes, “two-thirds of those surveyed in 2005, 2006, 2007 and 2009 said they favored “completely eliminating the estate tax, that is, the tax on property left by people who die.” This is despite only 17% of individuals believing they would personally benefit from a repeal of the estate tax.

It’s interesting that only 1% of estates qualify for an estate tax as it’s currently written (though with the expiration of the current estate tax law in 2010, the rate will increase from current levels 10% in 2011 the number, and the number affected could increase due to a triggering of new capital gains provisions), and yet 17% of Americans think they’ll benefit. For one, it indicates that a large number of Americans (the gap between 17% and two-thirds) are not thinking about personal benefit but the fairness of the tax itself. The estate tax is consistently ranked as one of the most unfair taxes the government imposes, compared to income tax, Social Security, excise taxes, etc. After paying taxes on my income once before I could use it to purchase an item, and a second time through sales tax in buying it, why should I have to pay it a third time when I die? If I don’t have any liquidity, why should my transfer of say, an heirloom diamond ring or a family beach house, be restricted because my poor nieces and nephews can’t pay the tax on the expensive property?

Personally, I admit that I’m not unmoved by these arguments, but there’s also a lot to like about the other side as well. First, I should say I hate it when people say “this tax will never affect you”. A tax, or any law, should be good on its merits, not because its unfortunate impacts are limited to a small minority. The first reason is of course, like any disproportionate tax on the rich, that it’s a good way to raise a lot of money, and assuming we’re spending the same amount of money, that will help reduce the amount of taxes collected by the poor(er)–it’s a great progressive taxation scheme. This is just another way we tax the rich more because they benefited so much from the system, and the poor on whose backs their wealth was built could use a little break. Another reason to have an estate tax is that it helps break-up oligarchies of the uber-rich, which might otherwise uncatchably grow generation to generation and come to dominate society. It’s not only about the concentration of power here, but the gradual inability of those without inheritances to penetrate the exclusive sphere, and importantly, stagnation of ability and creativity in that sphere of power.

But what about the gap between 1% and 17%, the number of estates actually affected and the number of people who think they’ll be affected? Surely some have drunk the Republican kool-aid about a “death tax” and how this will be the end of small businesses. I think there’s another group that simply think that they’ll work so hard and make so much money that they’ll end up in that 1%, a sort of nobler and more American version of the classic fool who thinks he’ll be the one to win the lottery. I think a number of the 17% know it’s a good/fair tax to have, but don’t want it just in case they want to be evil in the future–that just in case they get to be in that top echelon of wealth, there will be no estate tax when that happens. It’s like recognizing that there’s a huge tax loophole existing, and wanting to keep it open just in case you’ll want, or be in a position to, use it in the future. Just in case we decide, when we’re rich, that we want to be greedy, we’d like the ability to do so. Perhaps there’s even a group of people who think, “just in case I want to commit a crime one day, I’d like government surveillance to be slightly weaker and defendants’ rights to be slightly stronger.”

Here a good example of this “just in case we want to be evil” phenomenon. Senate Democrats, despite controlling a majority and supermajority of the chamber and complaining about the unfairness of the filibuster refuse to do away with it because each of them harbors some hope of being in a position to hamstring important legislation from the majority when the shoe is on the other foot, even though it would be just as unfair. From Balkinization:

That being said, I think the odds of modifying the Senate rules are close to 0%, unless the Democrats are really willing to confront the oldest continuing myth of the Senate, which is that it is a continuing body whose rules can be amended only in accordance with pre-existing rules, which, as my previous post indicated, requires a 2/3 vote. It is literally inconceivable that Republicans would acquiesce in such a move while the Democrats hold power or, frankly, that Democrats would acquiesce if the situation were reversed. Now perhaps Joe Biden will rule that rules can be changed by a straight majority vote. I still would be extremely doubtful if 50 Democrats would vote for that, simply because they can envision being back in the minority when they will want to torpedo Republican legislation. (After all, the Senate can’t even cure the absolutely pernicious custom of “holds,” which allow single senatorial tyrants to tie up nominations, presumably because each senator envisions the possibility that he/she will want to exercise that bit of petty tyranny him/herself.)

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10 thoughts on “Why do Americans hate the estate tax?

  1. I’m not sure where I stand on the Estate Tax. I like the impulse to tax the hell out of the rich (coupled, in my dream world, with much more fiscal responsibility), and I like the spirit of the Tax that works against creating a pseudo aristocracy of millionaires and billionaires who subsist simply on the passed down fortunes of their forebears. I also won’t shed too many tears for a tax that smart accountants can run circles around, or for the people who receive ‘fewer millions’ because the government dips its fingers into the accounts of the recently deceased.

    With that said, the government taxes so many aspects of income, capital gains, property, and sales, that it seems a little absurd to really stick the knife in one last time just because someone happened to croak. I think the general notion of the government profiting off death is probably one of the biggest reasons why Americans balk at a Tax that will almost certainly not affect them.

    P.S. the filibuster is bullshit. Even if the Senate insists on keeping it, I would absolutely call the bluff and make Republicans stand up their endlessly defending their groundless positions. Let the news story be about the bullshit Republicans are spewing in their ridiculous attempts to hold up all major legislative initiatives. Perhaps it’s just my instinct to not kowtow to someone because they are threatening to “continue debate”. Step up to the plate, and argue right back!

  2. Something to consider: I used to work on a farm in New Jersey. It isn’t a huge farm by any means, but it’s still a couple dozen acres spanning two very high-income townships. The farm has been around since before most people can remember, which is why it’s a farm instead of high-income houses like those that fill the neighborhoods around it. The family that owns the farm also owns a very profitable little store where they sell the produce they grow there, among other things, at premium prices.

    The farm and its property are currently owned a long-married couple who had it passed down to them from the husband’s parents. They are getting older and would like to continue the family tradition and pass the farm down to their son and his wife. There’s just one problem: the land is worth an ungodly fortune. If developers got a hold of it, they could make millions off this rare, undeveloped property in the middle of an upper-middle- to upper-class neighborhood. There is no money changing hands, just land; but the land is so valuable that the estate taxes would number an enormous amount of money, more than any of the parties involved could possibly produce without selling off a substantial portion of the land. What are these people to do? Isn’t this an example of prosperous, hard-working Americans being forced, through no fault of their own, to surrender their property to rich developers and other such sharks because they’d otherwise be forced to pay a pointless tax that wasn’t meant for them at all?

    Obviously this is a more extreme and emotional situation than most people might encounter, but the fact still remains that while it’s easy to think of the estate tax of something that affects old-money billionaires, it has just as much of an effect on hardworking Americans and, even worse, people who possess property that is valuable but not the cash to pay an exorbitant estate tax. Oftentimes this means that the children of people who have worked very long and very hard for a fortune will no longer be entitled to any of that fortune because there is simply no way they can pay the tax without sacrificing some or all of that fortune. It may sound odd to say, but who’s to say that the children of those with $3 million fortunes deserve all the inheritance but the children of those with $10 million fortunes don’t? As David said in his original post, the issue is fairness to all citizens, not whether it will affect large quantities of them. How is it fair to dismantle family businesses, farms, and other estates simply because one family worked harder and made more money than another family? It’s easy to pick on the rich, but it’s a lot more difficult to convince people to recognize that they’re citizens just like any others.

  3. Perhaps one way around the ‘family memento’ scenario is to charge the estate tax only on items if and when they are exchanged for money, i.e. a capital gains tax. Alternatively, for profit-generating inheritances like farms or small businesses, you could charge a high (say, 95%) tax on net profit from that asset each year until the accumulated amount paid matched the sum of the estate tax + interest.

  4. I think much of the aversion to the estate tax is the activity that is being taxed. I’m not talking about death, but rather about providing for your children. This is something we’re supposed to consider a virtue, right? Many people, even the very wealthy, save their money for their children rather than squander it on themselves.

    I don’t buy the argument that we need the estate tax to prevent us from being overrun by a tiny oligarchy that has accumulated all the wealth. First, we’re still a country where it is entirely possible for the poor or middle class to become wealthy. Second, many of the wealthy (Bill Gates, Warren Buffet) donate huge amounts of their money to charity. And most importantly, when the super wealthy die, their estates already get split up. Warren Buffet has three children, Bill Gates has three, Donald Trump has five, Lawrence Ellison has five, and Sam Walton’s wealth has been divided six ways.

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  8. The estate tax is wildly inappropriate. The rich should not be penalized for being rich. They did not benefit from “the system” which regulates, taxes, and punishes them more than anything; they benefited from their own hard work. And the “poor” on whose backs they allegedly built wealth a) did not have to work for them and b) got their wage. The government has no entitlement whatsoever to wealth because someone dies. Oligarchies be darned. We have anti-trust laws for that. What belongs to a man belongs to a man and the government has no right to take it because they want it.

    • I don’t understand the appropriateness argument…. Why is taxing an estate less appropriate than taxing income, property, or anything else? It seems to me that there are two reasons why an estate tax is, on the margin, a good way to raise revenue; one is efficiency and the other is utilitarian. The efficiency argument is based on the fact that any tax has the potential to reduce incentives to work and invest by reducing the marginal product to the person bearing the tax for engaging in socially or privately useful activity. I don’t know empirical literature on this question, but it seems to me tha given how short sighted most people are, it would be better to tax a dead person than someone who is actually alive…. Second, given how high the exemption level is, the marginal benefit in terms of “happiness” for the recipient of the bequest is in my opinion far less valuable than an marginal dollar for someone at the bottom of the income distribution.

      Anyway, for those two reasons, I think taxing bequests, within reason, is the best way for the government to raise revenue. I think it has negligible impact on incentives to work and the only really bad side effect are the socially useless efforts some wealthy families engage in to avoid the tax, which simply means we should be more vigilant about shutting off loopholes …..

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