Author's note: This is the first of a three part series focused on what the new Congress should set as its priorities.
The tax cuts passed during the Bush Administration all had sunset clauses – they expire at the end of 2010. The changes to the estate tax were the most fascinating: the amount of exempt assets increased every year and the tax rate decreased every year, until 2010 when – poof! – the entire tax went away. Unfortunately, it’s scheduled to resume again in 2011. If there’s any tax that should not be re-imposed, it is this burdensome tax triggered by the demise of a citizen.
Many well-meaning people argue that the estate tax, commonly called the “death tax” by its detractors, is necessary. Their first reason is “fairness,” which they can’t really explain because everyone has their own opinion of what is “fair.” Another reason is that it stops people from becoming the “idle rich.” On that point, they make a good argument – if it would rid us of the Kennedys, Mark Dayton and Jay Rockefeller. Even John F. Kennedy, who (unlike his relatives) actually understood coherent tax policy, never really grasped the concept of making a living or the value of a dollar.
Let me tell you a story that illustrates why the death tax makes no sense. In 1983, I returned to Los Angeles and opened my CPA practice with a friend. We sublet our office from an attorney who was quite a fascinating fellow. His philosophy was that he would rather die owing $500,000 in credit card debt than have $500,000 in the bank. That way, he would have enjoyed spending an extra $1,000,000 on his wildest dreams and his fondest desires. Damn the rest of us who would have to absorb his credit card write-off, but he was going to have a grand old time. And believe me – when I knew him, he was certainly living by that creed.
His philosophy of life made me very uncomfortable; after all, it was contrary to every one of my core values. Just think of what would happen if everyone lived the same way. Come to think of it, many of our elected officials and their union employees do indeed live this way, but that is another column for another time.
Those in favor of re-imposing the estate tax claim that there is no evidence that people alter their earnings or spending habits because of the tax. This argument was presented in the Wall Street Journal on September 20, 2010, by Professor Michael Graetz of Columbia Law School. Of course, Dr. Graetz has never earned a living in the private sector, so he obviously came to this conclusion by some hypothetical study – maybe of other Columbia professors. He writes: “What’s more, there is no evidence that wealthy people are blowing their money, or stopping work, in an effort to ’die broke’.”
The truth is that no intelligent American makes a major economic decision without considering the tax consequences of today’s economy. Estate taxes are just the most extreme case; the planning costs exceed even the taxes extracted from our estates by the federal and state governments. The cost to those people who are subject to the tax or “may be subject to the tax” is substantial, and has created a whole industry of lawyers, CPAs and insurance agents who work 40 hours a week just to minimize the tax obligations of their (often elderly) clients. People who don’t know whether they are going to be subject to the tax must create wills and trusts that enrich only their lawyers, not their beneficiaries. Even after they die they must continue paying trustees and incur other costs that should really be given to their surviving family members. These “consultants” – not the government – are the real beneficiaries of this system.
The result of this policy is that it rewards people who spend all their income and punishes people who save. Don’t think that it’s just lower-income types who spend all their money. I know plenty of people making high six-figure incomes who spend every dime they earn. I also know people who have had moderate incomes throughout their life, who have scrimped and saved and invested wisely, and will never be able to pass the fruit of their efforts to their children or grandchildren because of the death tax.
Professor Graetz is upfront about his rationale for this tax. He thinks – surprise! – it’s an issue of “fairness.” He doesn’t believe the “rich” pay enough taxes. No matter what flowery language he uses, it all gets down to basics – for him and his ilk, the successful should be punished unless they make generous contributions to a fine university.
The death tax is the most illogical, counterproductive form of taxation we have ever established. If someone works all of his life and saves money to pass on to whomever they wish – whether it be family, friends, co-workers or a charity – that should be their choice. They paid taxes on their earnings and they chose to skip the extra vacation or work a little harder, and we should respect and promote – not punish – that behavior. And we certainly should not force them to pay thousands of dollars to “consultants” just to minimize the death tax.
The new Congress has a chance to kill estate taxes for good. This should be one of their top priorities.