The Fairness of the Estate Tax
September 29, 2010 Blog by: Stephen C. Hartnett, J.D., LL.M., Associate Director of Education, American Academy of Estate Planning Attorneys+
Tagged with: Capital Gains • Fairness of the Estate Tax • Family Farm • Federal Estate Tax
The last couple of years have brought the topic of the federal estate tax to the forefront like never before. Not only has there been debate over what Congress should do. The polarizing subject of the fundamental fairness of the tax itself has also taken center stage. Here are some reasons in support of the fairness of the estate tax:
- The estate tax is the fairest method for reducing the deficit. Why? Not necessarily because it taxes those most able to pay, but because it taxes those least deserving of their wealth, i.e. those who inherit rather than working and investing wisely to accumulate wealth.
- The estate tax is our nation’s only tax on accumulated wealth. Often, intergenerational transfers among the wealthiest Americans take the form of unrealized capital gains. So, without the estate tax, those gains would continue to grow and remain untaxed, potentially forever. The playing field is leveled by taxing this accumulated wealth. Most of which, contrary to popular belief, is not being “double taxed,” because the estate tax is the only tax applicable to these assets.
- What about the family farm argument? In theory, at least, one of the stronger arguments against the estate tax is the specter of family farms valued at more than the exemption amount needing to be broken up and sold off, in order to pay the tax bill. In reality, this just isn’t the case. In order to prevent this scenario, family farms get extra breaks. The result is that there are few, if any, examples of an American family farm being dismantled to pay an estate tax bill.
- The estate tax incentivizes work while an unearned windfall is a disincentive to lead a useful, productive, and financially responsible life. According to Warren Buffet, not having an estate tax would be like “choosing the 2020 Olympic team by picking the eldest sons of the gold-medal winners in the 2000 Olympics.” The estate tax reduces the size of unearned windfalls – this, in turn, encourages inheritors toward self-sufficiency.
Where do you stand on the subject of the estate tax?
Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
6050 Santo Rd., Ste. 240
San Diego, CA 92124
858-453-2128
www.aaepa.com
Tags: Capital Gains, Fairness of the Estate Tax, Family Farm, Federal Estate Tax
September 29th, 2010 at 6:52 am
I disagree with the idea that the beneficiaries of a decedent’s estate are the least deserving of the wealth earned by the decedent. The government is far less deserving. And talk about “unearned windfalls”! What has Congress ever done to earn the use of estate tax revenues? The Federal government was never intended to be a massive charity for the poor. If children and grandchildren will be spoiled by large inheritances, then parents and grandparents should plan their estates accordingly. If giving to the greater good is important, then they should benefit a charity of their choice. But the government, in no situation, deserves anything.
October 22nd, 2010 at 4:17 pm
I am merely suggesting that taxing money that would otherwise go to beneficiaries is better than taxing money that would go to the wealth creator. Taxing money that would otherwise go to the benefit of the wealth creator / wage earner is a disincentive to labor. I agree, the federal government is one of limited powers. However, it does have legitimate expenses, such as facilitating interstate commerce through funding the interstate highway system or providing a national defense. Taxes must be raised to pay for those expenses. My assertion is that a transfer tax is less burdensome (and less distorting to the economy) than an income tax raising an equivalent amount of money.
October 26th, 2010 at 9:41 am
While transfer taxes may be less burdensome than an income tax, that’s kind of like saying a cold is less burdensome than the flu. One may be worse than the other, but neither are good.
Yes, government needs revenue to fund essential services. And the people aren’t likely to ever adequately fund them with private contributions. So taxes to raise revenue are necessary for the government to operate. But not because the government deserves it more than the people, whether earned or not.
October 26th, 2010 at 11:15 am
I believe “fairness” and the notion of “reducing the deficit” are largely ideological arguments. The estate tax in 2005 raised $25B, and the Congressional Budget Office says that under current law (that is, a return to the $1M exemption starting next year, which amost no one is advocating)would generate a total of $420B over the next decade. Meanwhile, we have a DAILY budget deficit of $4.9B. The estate tax is simply not going to have any meaningful impact on reducing the deficit. Insufficient taxation is not the problem here. Secondly, I would disagree that an estate tax “incentivizes work.” Sure, it might incentivize work with the beneficiaries, but what about the wealth accumulators? Are they going to work at the same level to generate a taxable estate, or are they going to change their behavior and leave a smaller estate? Taxes always influence behavior to some degree, and I do not believe you can in good faith assert that an estate tax will influence the behavior of beneficiaries, but not also influence the behavior of wealth accumulators.
October 28th, 2010 at 3:32 pm
Mark and Jim, Thanks so much for the very interesting conversation in response to my blog.
Jim, a billion here and a billion there adds up and would increase the deficit significantly. I am not saying that wealth accumulators are not aware of or sensitive to the estate tax. I am simply asserting that an estate tax is less painful to the wealth accumulator than an income tax raising the same revenue.
The fairness of the estate tax aside, the estate tax is a significant encouragement for philanthropy. It is estimated that a repeal of the estate tax would result in a reduction of billions of dollars in charitable giving. Here’s a CBO study of the issue form a few years ago: http://www.cbo.gov/ftpdocs/56xx/doc5650/07-15-CharitableGiving.pdf
Steve