Estate Tax Facts
Lots of things going on these past 2 weeks (and looks like more on tap for next 2 weeks). One topic of discussion in my personal / professional life has been the Estate Tax.
The Estate Tax as we know it today originated in the early 20th Century, and was enacted at a time when Americans still had a bad taste in their mouths from the excesses of the so-called "Robber Barons." The rationale for the Estate Tax was that the passing from generation to generation of large amounts of accumulated wealth was detrimental to the best interests of the nation. The Estate Tax is, by intention and design, a confiscatory impost.
I have seen the workings of the Estate Tax firsthand in my professional life. Though I am not quite ready to unequivocally say that it should be abolished entirely, that is the direction in which I lean. The one position I can and will take regarding the Estate Tax is that it cannot remain as is without inflicting further damage upon America.
The debate between those who advocate the Estate Tax's repeal and those who advocate its reformation can be a healthy thing, provided that everyone involved stays on the factual track. Unfortunately, some groups and individuals are spinning repeal of the Estate Tax in terms of some sort of sinister benefit to the wealthy. This obfuscates the facts.
The following matters should be recognized in any debate regarding the Estate Tax:
1. Though the Estate Tax was initially crafted to target the wealthy classes, inflation and other economic factors have shifted it so that its primary victims are from the middle class. Escalating prices of real property have made many middle class individuals asset-rich but cash-poor, so when the taxable event of death occurs, it is necessary to convert nonliquid assets such as one's homestead into cash to pay the Estate Tax and other costs of dying.
2. The aforedescribed process has driven many children of farmers out of farming by forcing them off their parents' land. Much of the farmland formerly held by family farmers has been bought up by large corporate agricultural entities. [Query: Does this really fulfill the agenda of some of the idealistic wealth redistributionists who advocate soaking the rich with the Estate Tax?].
3. Similarly, many family businesses other than farming have had to be liquidated or downsized in order to pay the Estate Tax.
4. Moreover, much real estate, farmland or otherwise, has been subdivided, accelerating the process of urban sprawl development. All across America, from the Scripps Ranch in San Diego to most of Long Island, much land has been converted from agricultural to residential or commercial or industrial in order to pay the Estate Tax. And while it is true that certain Internal Revenue Code provisions were drafted to facilitate favorable payment plans to family businesses and farms, they really do not work all that well.
5. The foregoing processes have environmental and ecological ramifications. Long Island, for example, was once a self-sufficient agricultural and aquicultural entity that supplied much of the food to New York City. The proliferation of urban sprawl has expropriated so much farm land that Long Island must now import almost all of its food (via only two bridges directly to the mainland, which further adds to the already heavy truck traffic on Long Island's roads).
6. The pollutants in the water from the urbanization of Long Island have destroyed most of Long Island's fishing industry. As mentioned in my posting of 2 December 2005, the Native American communities on Long Island, no longer able to sustain themselves from working the land and the sea, have now turned to the casino business, with its concomitant corruption of not only their own culture, but of society as a whole.
7. In recent history, the Estate Tax has hovered between one percent (1%) and one and a half percent (1.5%) of the U.S. Treasury's gross tax collections. It is not an efficient source of income, particularly in view of the fact that it is such a sophisticated tax that the IRS requires an elite cadre of employees, including but not limited to Estate Tax Attorneys, to enforce it.
There is no simple or repercussionless solution to the current Estate Tax situation. Call it as you will, but in formulating your position, you cannot ignore the facts.
The Estate Tax as we know it today originated in the early 20th Century, and was enacted at a time when Americans still had a bad taste in their mouths from the excesses of the so-called "Robber Barons." The rationale for the Estate Tax was that the passing from generation to generation of large amounts of accumulated wealth was detrimental to the best interests of the nation. The Estate Tax is, by intention and design, a confiscatory impost.
I have seen the workings of the Estate Tax firsthand in my professional life. Though I am not quite ready to unequivocally say that it should be abolished entirely, that is the direction in which I lean. The one position I can and will take regarding the Estate Tax is that it cannot remain as is without inflicting further damage upon America.
The debate between those who advocate the Estate Tax's repeal and those who advocate its reformation can be a healthy thing, provided that everyone involved stays on the factual track. Unfortunately, some groups and individuals are spinning repeal of the Estate Tax in terms of some sort of sinister benefit to the wealthy. This obfuscates the facts.
The following matters should be recognized in any debate regarding the Estate Tax:
1. Though the Estate Tax was initially crafted to target the wealthy classes, inflation and other economic factors have shifted it so that its primary victims are from the middle class. Escalating prices of real property have made many middle class individuals asset-rich but cash-poor, so when the taxable event of death occurs, it is necessary to convert nonliquid assets such as one's homestead into cash to pay the Estate Tax and other costs of dying.
2. The aforedescribed process has driven many children of farmers out of farming by forcing them off their parents' land. Much of the farmland formerly held by family farmers has been bought up by large corporate agricultural entities. [Query: Does this really fulfill the agenda of some of the idealistic wealth redistributionists who advocate soaking the rich with the Estate Tax?].
3. Similarly, many family businesses other than farming have had to be liquidated or downsized in order to pay the Estate Tax.
4. Moreover, much real estate, farmland or otherwise, has been subdivided, accelerating the process of urban sprawl development. All across America, from the Scripps Ranch in San Diego to most of Long Island, much land has been converted from agricultural to residential or commercial or industrial in order to pay the Estate Tax. And while it is true that certain Internal Revenue Code provisions were drafted to facilitate favorable payment plans to family businesses and farms, they really do not work all that well.
5. The foregoing processes have environmental and ecological ramifications. Long Island, for example, was once a self-sufficient agricultural and aquicultural entity that supplied much of the food to New York City. The proliferation of urban sprawl has expropriated so much farm land that Long Island must now import almost all of its food (via only two bridges directly to the mainland, which further adds to the already heavy truck traffic on Long Island's roads).
6. The pollutants in the water from the urbanization of Long Island have destroyed most of Long Island's fishing industry. As mentioned in my posting of 2 December 2005, the Native American communities on Long Island, no longer able to sustain themselves from working the land and the sea, have now turned to the casino business, with its concomitant corruption of not only their own culture, but of society as a whole.
7. In recent history, the Estate Tax has hovered between one percent (1%) and one and a half percent (1.5%) of the U.S. Treasury's gross tax collections. It is not an efficient source of income, particularly in view of the fact that it is such a sophisticated tax that the IRS requires an elite cadre of employees, including but not limited to Estate Tax Attorneys, to enforce it.
There is no simple or repercussionless solution to the current Estate Tax situation. Call it as you will, but in formulating your position, you cannot ignore the facts.
posted by Expatriate Owl @ 5:25 AM
3 Comments:
At 11 June, 2006 16:33,
Fishfrog said…
"Inflation and other economic factors have shifted it so that its primary victims are from the middle class."
Really? Even if the estate tax happens to effect a small number of people who happen to own highly appreciated real property, I'm not sure that anyone with a $2m estate can be considered "middle class." These people are more than compensated by the step-up basis at death of 1014.
"The aforedescribed process has driven many children of farmers out of farming by forcing them off their parents' land."
This is a pretty common claim by those opposed to the estate tax. It seems more reasonable to attribute the decline in family owned farms to the globalization of farming and cheaper labor in Africa, Asia, and central America. Also, these American family farms could not turn a profit if not for overly generous and misguided subsidies. The sooner America is able to modernize its economy, sadly by abandoning unprofitable family farming, the better off everyone will be.
"Moreover, much real estate, farmland or otherwise, has been subdivided, accelerating the process of urban sprawl development."
As easy as it is to hate urban sprawl, the fact is that there is a huge demand for suburban housing. Crappy tract housing is built because people will buy it. The capital lock-in effect of IRC1014 coupled with the fact that there is no inflationary adjustment for long-held capital assets, leads to individuals holding on to property which could be better used by others. With no estate tax, this problem would be exacerbated.
The fact is that the estate tax effects less than 20,000 households a year. And when the exemption amount increases to $3.5m in 2009, less than 7000 households will be effected every year. Despite the small number of people effect, the tax still raises $80-$90b a year. And while that may only be 1-1.5% of revenue, 1% of the US's yearly revenue is a massive amount of money which can pay for a great many things (body armor for soldiers, better and more federal prisons, more money for public education, etc.).
The last thing I'll say about the estate tax is that it furthers a very fundamental goal, supported by Thomas Jefferson, which is to prevent the establishment of a monied aristocracy. If you watch the OC, Laguna Beach, or E! News Live, and see the young socialites partying and living it up, it becomes a pretty compelling argument.
At 12 June, 2006 03:50,
Expatriate Owl said…
First of all, it is noted that the IRC Section 1014 step-up basis will largely be going out the window starting in 2010, when IRC Section 1022 kicks in.
Second of all, I do not watch the OC, Laguna Beach, or E! News Live because I rarely watch television. With ambivalent feelings, we brought one into our household to humor our kid's nanny, but now it is watched infrequently, mainly for tracking hurricanes and watching the Olympics. Nevertheless, I have actually seen live instances of young socialites partying, and I hear what you are saying in that regard.
Thirdly, much as I admire Jefferson, his admonition against the establishment of a monied aristocracy has all of the credibility and seriousness of Ted Kennedy (or, for that matter, Patrick)lecturing us on the evils of drunken driving. The Kennedys, by the way, are America's version of a monied aristocracy.
As for your comment on farm subsidies, howcum it's okay for the government to subsidize the airlines and the automobile manufacturers and the banks, but not the family farms?
Okay, enough of this nitpicking on your commentary! I can't really fault you personally for espousing the viewpoint you have espoused, because that essentially was my own attitude when I started to audit the Estate Tax Returns for the IRS almost 19 years ago. But seeing the effects of that tax firsthand, I have begun to lean towards advocating its total repeal.
As Adam Smith observed, "The tax which each individual is bound to pay ought to be certain and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought to be clear and plain to the contributor, and to every other person. Where it is otherwise every person subject to the tax is put more or less in the power of the tax-gatherer, who can either aggravate the tax upon any obnoxious contributor, or extort, by the terror of such aggravation, some present or perquisite to himself. The uncertainty of taxation encourages the insolence and favors the corruption of an order of men who are naturally unpopular, even where they are neither insolent nor corrupt. The certainty of what each individual ought to pay is, in taxation, a matter of so great importance, that a very considerable degree of inequality, it appears, I believe, from the experience of all nations, is not near so great an evil as a very small degree of uncertainty."
I have seen the evils of this complex and uncertain tax. I was the guy who assessed it! And I think that Adam Smith underestimated the harm that can come of an uncertain and complex taxation scheme.
The Estate Tax (and, for that matter, the Income Tax) as we know them today just don't pass Adam Smith's "clear and plain to the contributor, and to every other person" test.
[Speaking of IRC 1022, Section 1022(d)(1)(C)(ii) is a provision in the Internal Revenue Code that contains an Exception to an Exception to an Exception to an Exception.].
Having these young socialites wallow in their parents' and grandparents' wealth is not such a bad thing. Either they put their money to productive use, or they blow it, which, in either event, creates jobs and stimulates the economy. Many of the pampered and indolent of the socialites actually hire assistants to pay their bills and balance their checkbooks every month. This is money out of the government's hands, and therefore, at work in the economy.
You can call me opinionated, but, based upon my experiences, this is my opinion.
At 12 June, 2006 22:46,
Fishfrog said…
Good rebuttal.
Couple of things I'll respond to before conceding to your personal experience (which, sadly, trumps my gut feelings).
First, I would bet my first-born that 1022 will never take effect. Congress will not let that happen.
Second, I don't think it's ok for the government to subsidize failing businesses. If a company or whole industry can't hack it, then those companies should be relegated to the trash bin and replaced by companies or industries that can stand on their own two feet.
Lastly, I was hoping you would be the kind of guy who would cave in if I mentioned in passing a founding father, but I was wrong.
The Adam Smith quote is quite good.
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