Monday, June 05, 2006

Reward for the Hereditary Elite . . .

Great op-ed in the WaPo, by Sebastian Mallaby.

For most of the past century, the case for the estate tax was regarded as self-evident. People understood that government has to be paid for, and that it makes sense to raise part of the money from a tax on "fortunes swollen beyond all healthy limits," as Theodore Roosevelt put it. The United States is supposed to be a country that values individuals for their inherent worth, not for their inherited worth. The estate tax, like a cigarette tax or a carbon tax, is a tool for reducing a socially damaging phenomenon -- the emergence of a hereditary upper class -- as well as a way of raising money.

...

If the abolitionists succeed, some other tax will eventually be raised to make up for the lost revenue. So which tax does Congress favor? The income tax, which discourages work? A consumption tax, which hits the poor hardest? The payroll tax, which is both anti-work and anti-poor? Really, which other tax out there is better?

The abolitionists don't respond to this question because there is no convincing answer. Paul Volcker, the former Federal Reserve chairman, has written that "we would be hard-pressed to find evidence that, compared with the alternatives, a reasonable estate tax significantly discourages work or innovation or savings." In other words, killing the estate tax and raising some other tax instead would damage the economy. And that's before you take into account the positive distortions introduced by the estate tax, such as more social mobility and higher charitable giving. Charitable bequests will fall by at least a fifth if the estate tax is repealed permanently.

...

People often remark on the perversity of popular support for estate-tax repeal. A majority wants to abolish the tax, even though only the richest 2 percent of households have ever had to pay it. Yet this shoot-your-own-foot weirdness is easily explained: Most people just don't know that, under the law's current provisions, a couple can bequeath $4 million without paying a penny to the government.


So with ballooning deficits, millions of American men, women and children without health care, a War on Terror that's likely to continue throughout our lifetimes, and rising oil prices, what's the Republicans' answer?

That's right -- they boldly stand up for those who want to bequeath more than four million dollars to their children without being taxed on it.

35 Comments:

Blogger Classmate-Wearing-Yarmulka said...

Actually, in 2006, 2007, and 2008, only $2 million of an estate passes tax free.

6/05/2006 9:32 AM  
Blogger Ezzie said...

A few points: He's completely wrong on a consumption tax. It does not hit the poor the hardest, unless they're blowing money. Most proposals on consumption taxes involve certain minimums, but even if they didn't, it's those who buy lots of stuff that get 'punished'.

Second, the point about the estate tax is whether or not it's a fair tax, not whether it doesn't create as much disincentive.

Third, the study about charities came to the conclusion that charities *could* lose as much as about 14%, IIRC, not 20%; and that didn't take into account the economic affect nor and only mentioned in passing that the inheritors could offset that number by giving some of that new money to charity.

BTW, I think Wallaby is the same one who wrote an incredibly moronic article about a month ago which showed how poor of an understanding he had about economics. He got shredded across the board for that one - a liberal blogger who I'm in contact with asked if I'd read it; after he did as well, he told me that he's rarely seen such a poor article.

6/05/2006 10:01 AM  
Blogger Soccer Dad said...

Wallaby is a kind of animal found in Australia. Sebastian Mallaby is the author.

6/05/2006 10:09 AM  
Blogger Jewish Atheist said...

CWY:

He's referring to couples. Hence, 2 x 2 million = 4 million.


Ezzie:
He's completely wrong on a consumption tax. It does not hit the poor the hardest, unless they're blowing money.

I think it's pretty well-established that the poor have to spend a higher percentage of their income on "consumption." Therefore, it hits them disproportionately. Of course, a sufficiently high minimum would solve that.

the point about the estate tax is whether or not it's a fair tax, not whether it doesn't create as much disincentive.

He goes into both, doesn't he?

the study about charities came to the conclusion that charities *could* lose as much as about 14%, IIRC, not 20%;

Doesn't change the point.

that didn't take into account the economic affect nor and only mentioned in passing that the inheritors could offset that number by giving some of that new money to charity.

There's no reason to think that they would, if the removal of economic incentive kept their parents from doing the same.

BTW, I think Wallaby is the same one who wrote an incredibly moronic article about a month ago which showed how poor of an understanding he had about economics.

Ad hominem. I don't know him at all, but his points are pretty simple and he quotes respected economists.


Soccer Dad:

Lol. That's a damn good point. I'll edit it.

6/05/2006 10:23 AM  
Blogger Jewish Atheist said...

CWY:

He's referring to couples. Hence, 2 x 2 million = 4 million.


Ezzie:
He's completely wrong on a consumption tax. It does not hit the poor the hardest, unless they're blowing money.

I think it's pretty well-established that the poor have to spend a higher percentage of their income on "consumption." Therefore, it hits them disproportionately. Of course, a sufficiently high minimum would solve that.

the point about the estate tax is whether or not it's a fair tax, not whether it doesn't create as much disincentive.

He goes into both, doesn't he?

the study about charities came to the conclusion that charities *could* lose as much as about 14%, IIRC, not 20%;

Doesn't change the point.

that didn't take into account the economic affect nor and only mentioned in passing that the inheritors could offset that number by giving some of that new money to charity.

There's no reason to think that they would, if the removal of economic incentive kept their parents from doing the same.

BTW, I think Wallaby is the same one who wrote an incredibly moronic article about a month ago which showed how poor of an understanding he had about economics.

Ad hominem. I don't know him at all, but his points are pretty simple and he quotes respected economists.


Soccer Dad:

Lol. That's a damn good point. I'll edit it.

6/05/2006 10:41 AM  
Blogger Ezzie said...

It's incredibly rare for a couple to bequeath an estate; unless there's a car accident or the like, one or the other will die first, likely leaving their estate to their spouse (though the wise will give a nice chunk to their kids for planning purposes). Therefore, the $4 million is a large misrepresentation.

I think it's pretty well-established that the poor have to spend a higher percentage of their income on "consumption." Therefore, it hits them disproportionately.

That is not a logical follow. Of course, they pay a higher percentage of their income; but as they don't earn OR spend nearly the same amount as the rich, there's no way to claim that it's disproportionate.

A consumption tax also encourages saving among the poor, as an aside...

He goes into both, doesn't he?

I don't see that he did.

Doesn't change the point.

Greatly minimizes it, though. And furthermore, I'm not sure that should be a factor if it's an unfair tax. We shouldn't be forcing people to give charity.

There's no reason to think that they would, if the removal of economic incentive kept their parents from doing the same.

Of course there is. Let's say a rich person just inherited another $5 million in a year they're earning $400K in salary and $1 million in investments. By giving enough charity, they can reduce the capital gains on that $1 million to 5% from 15% AND look good in the process.

Then of course there are those that are simply generous, and would give a nice chunk of a large inheritance. If YOU got $5 million, would you give any to charity? I know I would.

Finally, the estate often is the home and land of the parents. They wouldn't give that to charity while they were there... but their kids will sell the estate to split the proceeds. That is much easier to give to charity.

6/05/2006 11:10 AM  
Blogger Jewish Atheist said...

Therefore, the $4 million is a large misrepresentation.

I don't think the argument is substantively changed whether the figure is 2 or 4 million.

That is not a logical follow. Of course, they pay a higher percentage of their income... there's no way to claim that it's disproportionate.

That's all I meant by "disproportionate," that they pay a higher percentage.

A consumption tax also encourages saving among the poor, as an aside...

Assuming they have the luxury of being able to save.

He goes into both, doesn't he?
I don't see that he did.


He talks about fairness with (e.g.) the TR quote and dicincentive with (e.g.) the Volcker quote.

We shouldn't be forcing people to give charity.

It was a point made in response to claims about the effect on the economy and society. In that context, it's relevant. Furthermore, nobody is forced to give charity (directly, anyway), they're just given an incentive to. Just as there are incentives to get married or buy a house.

Let's say a rich person just inherited another $5 million in a year they're earning $400K in salary and $1 million in investments. By giving enough charity, they can reduce the capital gains on that $1 million to 5% from 15% AND look good in the process.

Hmm. Could be.

Then of course there are those that are simply generous, and would give a nice chunk of a large inheritance. If YOU got $5 million, would you give any to charity? I know I would.

I sure would. But it's simply a fact that tax incentives cause people to give more to charity. And large estates, under the current system, give a lot to charity.

6/05/2006 11:41 AM  
Blogger Ezzie said...

He talks about fairness with (e.g.) the TR quote

No, he doesn't. That doesn't address the core question of whether people should be forced to pay taxes on money they've already paid taxes on.

Furthermore, nobody is forced to give charity (directly, anyway), they're just given an incentive to.

Touche.

That's all I meant by "disproportionate," that they pay a higher percentage.

Fine, but that's meaningless. They are paying minimal taxes, while those who earn more are certainly going to pay far more in taxes even if it's a smaller percentage.

SoccerDad pointed out a great rejoinder to this Mallaby article by James Joyner.

6/05/2006 12:00 PM  
Blogger Jewish Atheist said...

No, he doesn't. That doesn't address the core question of whether people should be forced to pay taxes on money they've already paid taxes on.

This whole business of double-taxation is a silly argument. Let's say I pay my 25% (random figure) income tax in two installments, 15% and 10%. Look, I've been taxed on the same money twice! It's the same thing with the estate tax. Your income was taxed, and now that you are dead and no longer need it, your remaining money above $2 million dollars is taxed. Think of it as a higher income tax for the super-wealthy, but they get to defer it until they die! Moreoever, they get a huge tax break on everything they spend before they die! It's a bargain if you look at it that way.

They are paying minimal taxes, while those who earn more are certainly going to pay far more in taxes even if it's a smaller percentage.

For the poor, it's the difference between being able to buy medicine or fix the transmission and going without. For the very rich, it's the difference between inviting 10 or 20 people onto your yacht one weekend. The percentage matters a great deal. If you have less, a higher percentage of your money goes to basic necessities.

SoccerDad pointed out a great rejoinder to this Mallaby article by James Joyner.

I'll try to read it soon.

6/05/2006 1:22 PM  
Blogger Ezzie said...

I figured you'd argue against double taxation like that, but it's very weak: One could then argue that income taxes should be adjusted to take that into account.

There are also much larger problems with the estate tax, most important of them the Q of how it's paid. For someone whose assets are primarily in their business, you're ruining or damaging many businesses... and that only hurts the poor.

For the poor, it's the difference between being able to buy medicine or fix the transmission and going without. For the very rich, it's the difference between inviting 10 or 20 people onto your yacht one weekend. The percentage matters a great deal. If you have less, a higher percentage of your money goes to basic necessities.

Of course, but again that misses the point. We don't punish people for being successful. By that logic we should tax everyone until they're equal in what they can/can't afford, but we're not communists here.

6/05/2006 3:50 PM  
Blogger Ezzie said...

To add to that last point... a consumption tax is excellent because it taxes people on what they consume. It's a fair measure of what share people have in the economy.

6/05/2006 3:55 PM  
Blogger Shlomo said...

Those who have received the greatest rewards this system offers should stop whining and just pay their fare share. They still have more left over after all the taxes than most Americans will ever see in a lifetime.

It is interesting to see the uber-wealthy and their little lap dogs at the WSJ complain about taxes. These people don't even work real jobs, and the earning from their investments come from the hard labor of others. The fact that the Hilton family would have to pay an estate tax doesn't bother me one bit. How can they justify complaining about taxes on passive income?

I've never seen so many people so well off, so wealthy, and yet they do nothing but cry because they are asked to contribute a small portion of what I earned for them with my labor back into the society that made it possible for them to reap such riches in the first place. Assholes.

A consumption tax will ALWAYS hit the lower to middle income earners harder, since a larger percentage of their paycheck goes toward necessities and less into savings or investment. The wealthy love the idea of the consumption tax because it doesn't tax savings or investment where, as luck would have it, the uber-rich have most of their assets.

Until the amount you put in savings becomes larger than your spending, the consumption tax is not a good idea. I also question the notion that wealthy people buy so much more than the middle classes that it would somehow have the same net result as our current tax code.

6/05/2006 5:28 PM  
Blogger Ezzie said...

Those who have received the greatest rewards this system offers should stop whining and just pay their fare share.

They pay far more than their "fair" share already.

These people don't even work real jobs, and the earning from their investments come from the hard labor of others.

That's simply an outrageous, disgusting claim. The percentage of the "uber-rich" who don't work is far LOWER than the percentage of the poor who don't.

The fact that the Hilton family would have to pay an estate tax doesn't bother me one bit. How can they justify complaining about taxes on passive income?

Huh? You know all those hotels...? Even Paris Hilton works, being a star on a crappy TV show. You can complain all you want about it, but she works for her money.

6/05/2006 6:00 PM  
Blogger Charlie Hall said...

'Finally, the estate often is the home and land of the parents.'

That is a good reason to increase the exemption above 2 million, not a reason to eliminate the tax completely (which even the Republicans seem strangely reluctant to do today).

'whether people should be forced to pay taxes on money they've already paid taxes on.'

A lot of estates have not been taxed during peoples lives. The home mentioned above is one example; in general capital assets are not taxed until they are sold. And they get passed on tax free at death.

Also, I pay taxes on the income I use to pay my state and local sales and income tax. I'll be very happy if you lead the campaign to eliminate that double taxation (which affects a lot more people than the federal estate tax).

'For someone whose assets are primarily in their business'

Only for sole proprietorships. Nowadays almost all businesses are corporations and it is the shares in the stock that get passed on -- free of income tax -- at death. So eliminating the estate tax eliminates the only tax on such capital assets. It isn't double taxation.

6/05/2006 11:09 PM  
Blogger Shlomo said...

It was no mistake that I used the word FARE (instead of fair). The responsibility to society should be based on how much one benefits from it. Society costs money to manage and they who take the most from it, should be happy to contribute more toward the upkeep of that system. They still have plenty left over in their off shore trust funds and tax sheltered accounts.

Few of them earned their wealth through their own labor. They manipulated the capital derived from the labor of OTHERS. It is well known that one does not become rich through one's own labor ,rather through passive income. they can ACT as if they earned it, but they really didn't. The SYSTEM allowed them to manipulate capital and the labor of others for profit.

One would think that the current system would satisfy the uber-rich aristocracy, but alas, the current level of exploitation just isn't good enough for them. They need MORE! Poor bastards.

As to the claim that "The percentage of the "uber-rich" who don't work is far LOWER than the percentage of the poor who don't." is another unsubstantiated claim that, even if true, has nothing to do with the subject at hand.

Calling your broker or accountant twice a week is NOT work.

6/06/2006 10:07 AM  
Blogger Shlomo said...

From ThinkProgress.Org (I agree with much of this.)

The estate tax, or death tax as republicans lamely call it, is in actuality a wealth transfer tax. Right now it taxes the full amount of the transferred wealth, which I feel is wrong. What it should be doing is taxing the appreciation of that transferred wealth. Once this tax goes away, depending upon how it is done away with, it will have a negative affect on the economy. Stocks and appreciated wealth can be transferred without taking any of the appreciation into income. In effect income-less stock sales will take place.

The estate tax is a unified estate and gift tax. Now it might be possible for someone to build up a business, which is great, then sell it which is also great, they should be compensated for their hard work. However they should also pay income tax on those earnings. But it may soon be possible for an individual to gift his business to a seller, who will then gift cash or stock back. Or probably more common they gift the company to an heir who will gain the appreciated basis then sell the company at market value for little or no gain.

This is a disaster in waiting. The actual unified estate and gift tax affects so few Americans that it is not funny, while the repeal could have huge ripple effects in the economy that are either not foreseen by the wise ones in the white house, or more likely they don’t care.

(I think the first part of this comment covers the issue of double taxation and I would agree that this part should be dropped.)

6/06/2006 2:40 PM  
Anonymous Anonymous said...

Let's assume a recent college graduate age 22 gets a job paying $50,000. Let's also assume that keeps getting average 5% raises every year and takes advantage of his 401K plan by contributing 15% of his pay to it. Without even accounting for employer contributions, by the time he reaches 67, his 401K will be worth a bit over $6 million. This isn't even counting value of his house or any other savings. If he lives modestly, he will be able to pass most of that to his heirs. Is that what you are calling uber-rich?

6/08/2006 11:51 AM  
Blogger Jewish Atheist said...

Let's assume a recent college graduate age 22 gets a job paying $50,000.

Spoken like a true rich kid. What percent of 22-year-olds make $50,000 their first year?

Is that what you are calling uber-rich?

So let's say he dies with $5 million. He would in fact be extremely wealthy, considering the median wealth of today's retirees is less than $600 thousand. He's the one Congress should go to fight for, to let him give all $5 million to his heirs instead of 3 or 4?

6/08/2006 10:47 PM  
Anonymous Anonymous said...

What percent of 22-year-olds make $50,000 their first year?

Inasmuch the median starting pay for college graduates this year is $45,000, I'd say pretty high.

He's the one Congress should go to fight for, to let him give all $5 million to his heirs instead of 3 or 4?

He didn't still that money. He earned it. He paid taxes on it. He is entitled to decide what happens to it.

6/09/2006 5:58 AM  
Blogger Jewish Atheist said...

Inasmuch the median starting pay for college graduates this year is $45,000, I'd say pretty high.

The national college graduation rate is around 26%. Assuming most of those without degrees, at 22, do not make $45,000, we can figure that only 13% of 22 year olds make more than $45,000. Nice for them (and I was one of them, as were most of my friends from similar priveleged backgrounds) but what about the other 87% of Americans?

He didn't still that money. He earned it. He paid taxes on it. He is entitled to decide what happens to it.

He didn't earn it in a vacuum, he earned in a country supported by taxes and supported by tens of millions of people doing harder work for much less money.

6/09/2006 8:49 AM  
Anonymous Half Sigma said...

The 60% tax rate for estates is ridiculously high, but I agree that it's equally ridiculous to make it zero.

I think I need to write a post at my own blog explaining why inherited money should be taxed at the same rate as regular income.

6/09/2006 9:51 AM  
Anonymous Anonymous said...

He didn't earn it in a vacuum, he earned in a country supported by taxes

Which he also paid.

and supported by tens of millions of people doing harder work for much less money.

So what? He also didn't spend all the money he earned overpriced consumer goods and supersized meals at McD. Should he be penalized for this. And If you think his income was to high, tax it.

6/09/2006 2:29 PM  
Anonymous Anonymous said...

Nice for them (and I was one of them, as were most of my friends from similar priveleged backgrounds) but what about the other 87% of Americans?

Nice indeed. Last I checked, median income for 4 person families is a tad over $65K. In NJ it's $87K. That means that many families are able (had they chosen to) save enough to exceed the inheritance tax threshold. I deliberately used a very modest example.

6/09/2006 2:54 PM  
Blogger Jewish Atheist said...

See my new post. Less than 2% of American estates are taxed under the current estate tax law.

6/09/2006 4:11 PM  
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