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June 19, 2006
Another reason to hate the death tax
UPDATE AND BUMP
Exceedingly well-informed comments by CPT AP -- clearly an expert in the field -- explaining why I'm out to lunch on this issue, merit a perusal by those of us who have supported the repeal of the Death Tax. What do you think? Is CPT AP right?
Aside from the essential unfairness of the government taxing income while you earn it, then taking another bite before your kids get it, there's another reason why most Americans hate the death tax: they instinctively know that it's bad for business. Family businesses.
My theory -- add it to all the others -- is based on many decades' personal involvement in a family business.
The theory is simple. Once we lived in an America with a bewlildering array of corner lunch counters, interesting bookstores, individualistic neighborhood clothiers, tailors, dressmakers, appliance shops each with its own unique spin on what the owner thought you wanted -- lots of small individualistic enterprises that, like family farms, got passed down through the family from one generation to the next.
The estate tax replaced all these with McDonalds, Borders, The Gap, the ubiquitous extended warrantee, and ADM.
So the theory is simple: the basic method of passing business expertise from one generation to the next -- the family business enterprise -- has been replaced by the franchise operation, all thanks to your friendly neighborhood death tax.
And the next time some smart social reformer demands you watch his heart bleed for all the small local businesses Wal-Mart is killing, just ask him -- "so what do you think the inheritance tax is doing?"
Via Joe Sherlock.
Posted by Mike Lief at June 19, 2006 03:50 PM
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Comments
EconoPundit says it like it is.
Posted by: Vermont Neighbor at June 14, 2006 09:00 AM
Amen, and amen.
Posted by: Anwyn at June 16, 2006 06:06 PM
While I am no fan of the current structure of the estate tax (the "death tax" exists only as a sound bite for those who buy into political marketing), the hypothesis of this article seems somewhat unrealistic.
The estate tax has been around since World War I. The estate tax exemption has never been higher and the tax rate lower than it is today. During the entire time the tax has been on the books, there have been generous exemptions to protect family-owned businesses.
Given the age of the tax, it is very unlikely that it has contributed to the decline of family business over the last couple of decades. The decline of family businesses is probably more attributable to the fact that people who inherit such businesses are incapable of running them.
Politicians have used family-owned businesses and farms as an emotional tool to support the repeal of the estate tax. The real power behind the repeal are the exteremly wealthy ($100 Million plus).
What astonishes me is how very intelligent conservatives have bought the political argument hook, line, and sinker, without understanding the true impact of the repeal. Under current law, a simple estate plan can shelter $4 Million of a husband and wife's assets and give their heirs a new tax basis, which will allow them to avoid capital gains tax when the inherited property is sold.
Under the repeal law, the heirs of that same $4 Million couple will not receive a new tax basis, so they may have to pay capital gains tax when the property is sold.
The media never covers the roll-back in the step-up in tax basis at death that will accompany the repeal of the estate tax. What is clear, however, is that anybody with a net worth of $10,000,000 or below is better off with the current estate tax law (including exemptions and step-up in basis) than they would be if the tax were repealed (as the step-up rolled back).
An increase in the exemption to $3.5 or 5 Million a person and a retention of the step-up in basis at death would be much better than an outright repeal for the overwhelming majority of wealthy American families (including family businesses).
Posted by: CPT AP at June 19, 2006 01:44 PM
CPT AP --
While I bow and scrape on bended knee in acknowledgement of your expertise in this area, I'm unmoved in my opposition to the Death Tax, which is based on my gut-level, common-sense belief that it's just wrong to tax your Father's estate, when he presumably paid taxes all his life while earning said estate.
The government reminds me of nothing so much as a Mob enforcer making his rounds in the neighborhood, collecting protection money from business owners for the privilege of being "allowed" to do business on their turf.
Income tax (state and federal) paid for decades on your salary; property tax paid year in and out; sales tax on the money you pump back into the economy; and on and on.
And when you die, the State gets more because . . . well, because they needed it to fund the First World War.
If we could repeal the telephone tax this year -- first imposed to pay for the Spanish American War -- then we can wean Papa Gummint' off the Death Tax Teat, too.
Posted by: Mike Lief at June 19, 2006 02:17 PM
Ah. A philosophical opposition to the tax.
I long ago realized that Uncle is going to get his hands in your pocket one way or another. The best we can do is try to keep him from going too deep.
Most regular and affluent people will pay less overall tax if the "death" tax is not repealed but modified. That is the nasty truth that politicians do not want the public to understand.
By the way, did you know that even if the estate tax is repealed, the gift tax and generation-skipping transfer tax (both are basically mirror images of the estate tax) will continue in full effect and that most states are likely to reinstitute their inheritance taxes? (which they could not do if the federal estate tax remained)
Like I said, Uncle's going to get his share.
Posted by: CPT AP at June 19, 2006 03:36 PM
How the tax would be modified would have to be explained to outsiders like me. Although if CPT AP does this for a living, and adjusting the rate would allow more manageable taxation now, why not.
The real fat trimming could happen in one area: what the politicos get in their sunset years. Those retirement perks.
Posted by: Vermont Neighbor at June 23, 2006 10:25 PM