Scylla: While it is absolutely correct that the heirs don’t have to write checks to cover the estate tax, I think december was referring to what the heirs stand to collect. The estate tax does impact the beneficiaries in that it reduces the assets they stand to inherit.
Nobody’s mentioned the environment yet, which I consider to be the greatest moral issue of all. What is the Republicans’ score on that issue?
Republicans: Who says we need an environment?
Oh, by the way, biased, no doubt, but damn funny:
Do you really believe this? Do you really believe that the world is just an endless chain of the same dollars changing hands, over and over? Do you really believe that there is no such thing as value creation, that there is no such thing as economic activity that creates anything more than the opportunity for a few more Ben Franklins to change hands?
Look, say you earn some cash, which is taxed. You take your after-tax dollars and sock them away under a mattress. To tax those dollars again at death is to tax a person’s after-tax dollars. Good lord, how many bites at the apple should the government get? What is fair about the government taxing you because you up and had the gall to go and die?
George Harrison had this one dead on.**
As noted above, beneficiaries are not liable for the estate tax. The tax is paid out of the estate. The estate tax is effectively the double-taxation of the decedent.**
And the double taxation of dividends is stupid, too. It creates huge economic distortions.
A closely-held corporation, for example, will favor paying its majority shareholder/CEO a large salary instead of dividends, because the salary is deductible to the corporation while the dividends are not; this screws the minority shareholders. Since the corporation is not publicly traded, they can’t just sell out; unless they’re willing to risk litigation (which will only work in extreme situations), they just have to sit there and take it.
Larger, publicly-traded corporations will favor sitting on retained earnings to pump up the stock price rather than distributing them as dividends. Why? Because their shareholders will pay the lower capital gain rate, and then only when they sell shares, rather than having to pay ordinary-income taxes on a dividend. This is a very real problem. One of the real problems in corporate governance is an obsessive focus on stock price rather than payment of dividends. Double taxation helps exacerbate that problem.
Except, from what I can tell…the estate tax isn’t the same thing as the income tax. So if I inherit money or an estate, I still have to pay income taxes on it in addition to the estate tax. So, in effect, the estate tax is a tax on the dead person, not a component of the income tax.
Of course, I could be very much wrong and I hope that Scylla or Dewey will come and clear up this issue.
Scylla: That’s ridiculous. Your cover for raking in bucks for the heirs of multi-millionaries is stupid elderly folks?
Unless you’re attempting to prove DCU further wrong on the score of demagoguery, stick to the point: Who benefits from the repeal of the estate-tax? All cites say it’s primarily the top 1%.
So easy, peasy: the minimum estate tax is extended from 1.5 million to just under whatever the top 1 percenters have when they die (3 million?). Everyone under that restriction pays no estate tax; everyone over it pays big bucks. No loopholes, no mad money for the Rockefellers, and no bogus appeals: “Won’t somebody think of the stupid old folks!”
Boy, that was easy. You support this proposal, I assume?
Democrats: Who says we need jobs?
As has been repeatedly pointed out to you, being in the top 1% of income-earners != “rich.” $300,000 or so a year means you are living quite comfortably, but you’re not hanging with the Rockefellers, either. (I’ll further note that where you live impacts this quite heavily: $300,000 doesn’t go nearly as far in the New York area as it does in, say, South Dakota. Look up real estate prices up here to see what I’m talking about).**
There are income-rich and asset poor people, and there are income-poor and asset-rich people. You mistake a high income with a high net worth. That is not necessarily the case.
Example 1: I work in a large law firm. My colleagues and I are paid pretty well for our services. We are all, for our age and experience, income-rich. Yet many of my colleagues are asset-poor. Why? They spend an appalling percentage of their income on non-durable assets: nights on the town, dinners at the best restaurants, designer clothes, etc., etc. By the time they pay their bills, there’s nothing left over. These folks will never have large estates, and will never pay estate taxes, because they spend all they earn during their lifetimes. These folks are income-rich but asset-poor.
Example 2: Thrifty people can accumulate a large quantity of assets over their lifetimes. I recall reading about one Brooklyn couple – a pair of teachers at a local college – who lived on a modest income. When they died, it was discovered they had lived extremely frugally, had saved and invested every penny they could, and thus had an estate worth several million dollars (having had no children, they willed their estate to the college – the largest endowment the college had ever recieved). These folks are income-poor but asset-rich.
The estate tax encourages the former types of people (once your estate exceeds the exemption, why save? You get more bang for your buck living in the now) and discourages the latter type of behavior.
And if you mean the top 1% of asset owners – well, then you get into a difficult area. Since everyone files a 1040, it’s fairly easy to get a bead on an individual’s income, and thus on average income overall. Figuring out what assets a person owns is another story – it is radically different from person to person, and is subject to difficult valuation issues. I don’t have the foggiest how you’d set a threshold for the “top 1% of asset owners.”
**
It’s never that easy. You’d have to undo the way the law views the various trusts and other entities used as estate planning vehicles, vehicles that often serve other non-estate tax functions. You’d be throwing out the baby with the bathwater. Plus, there’s the income rich/asset poor issue I mentioned above.
Dammit, I knew I’d forget something in that last post.
Re: your “who benefits” question – as Scylla is pointing out to you, the estate tax falls heaviest on those too unsophisticated/cheap to plan around it. Those people certainly aren’t poor, but they aren’t among the superrich either. They are well-off, but not exorbitantly so – probably in the top 1% of income earners, but not in the top 0.01%.
**
You’re right. It is ridiculous. I knew better than to treat you with good faith and give you a fair explanation as if you were honest, and I deserve that blatant and stupid mischaracterization of my argument.
Yeah. Tax cuts benefit people with money. They benefit people with more money more. Nobody’s saying different.
I don’t know let me ask some questions. You say no loopholes.
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Have you removed the unlimited spousal exemption?
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Are all gifts now taxable, no matter to whom or what amount?
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Are you now taxing life insurance proceeds?
Actually, no. If you inherit money or other assets, you do not owe income taxes on your inheritance. Same rule for gifts. Gifts and inheritances are not considered income for tax purposes.
N.B.: Gifts over $10,000 in any particular year to someone other than your spouse will reduce your estate tax exemption by the amount of the overage. So if you give little Johnny an asset worth $685,000 (assuming for the moment that $675k is the amount of the available exemption), then your estate will owe estate taxes from the first dollar.
N.B., part 2: The estate tax is really an “estate and gift tax,” so if you gave little Johnny an asset worth $1 million, you would also owe a gift tax on $315k (1M - 10k annual gift allowance - 675k exemption = 315k). And again, when you die, your estate will owe estate taxes from the first dollar.
The reason for this is obvious: if it didn’t work this way, you could just give your estate away on your death bed and avoid taxation. Note that part of any estate plan usually includes maxing out the $10k annual gift allowance, since it doesn’t hit the exemption amount. Your rich uncle Scrooge, when he starts to get up there in years, will be advised to start giving away $10k chunks of his estate to his nieces and nephews each year so they can take those sums tax-free.
My last sentence was unclear: I meant that they would take those sums without the giver having to pay estate/gift tax (though the recipients also would owe no income tax on the given asset).
According to the 2001 Ibbotson data, 200k places you in the top 1% for income, 150k-199k in the top 2%, 100k-149k in the top 5%, 50k-99k in the top 25%, and 67% fall into the 49k or under.
This is not individual income, but household income.
OK, I think I get it now. Now I’m just confused about what the debate is.
By repealing the estate tax, does that mean they left the gift tax on, or is that part of what was repealed?
And why not charge income taxes on gifts/inheritence over a certain amount, instead of the estate tax?
[QUOTE]
*Originally posted by Neurotik *
**OK, I think I get it now. Now I’m just confused about what the debate is.
By repealing the estate tax, does that mean they left the gift tax on, or is that part of what was repealed?**
[quote]
The gft tax is part and parcel of the estate tax, so yes, it would be repealed as well.**
The income tax is premised in part on ability to pay. That’s why you don’t owe taxes on, say, stock appreciation until you actually sell your shares.
Estate tax repeal would deal with this little incongruity by also repealing the step-up in basis rules (which I described in an earlier post). As it stands now, the decedent’s estate pays estate taxes on inherited assets, but the heirs get those assets at a stepped-up basis. Thus, they only pay income tax when they sell the asset, and they only pay on that part of the appreciation over and above the value of the asset at the time of the decedent’s death.
Since most estates are liquidated as soon as possible, the effect is that while the estate pays estate taxes, the recipient owes no income taxes.
Estate tax repeal would also do away with the step-up in basis. Thus, when the asset is sold (again, in most cases shortly after the death of the decedent), the recipient will owe income taxes on the capital gains over the value at which the decedent purchased the property.
As for liquid assets (e.g., cash), it makes little sense to treat them differently – to avoid taxation, you’d just have to buy an illiquid asset and transfer that instead of transfering the cash.
FTR, gifts and inheritances are specifically excluded from the definition of gross income (which is the starting point for computing taxable income). 26 USC 102.
Dammit. Neurotik, I answered your first question as well but screwed up the quotation code.
You asked: “By repealing the estate tax, does that mean they left the gift tax on, or is that part of what was repealed?”
I answered: “The gift tax is part and parcel of the estate tax, so yes, it would be repealed as well.”
This is a reasonable answer, but it’s not so – if I recall correctly what I learned at the Tax Cut seminar I attended last year. I believe gift tax is not eliminated. I’m a bit foggy on whether it’s reduced less than estate tax.
Under the Tax Reform act, the estate tax is gradually somewhat reduced through 2009 IIRC. Then it is eliminated for one year only year only. After that estate tax reverts to the pre-reform schedule. Most people assume that some compromise will be reached to apply subsequent to 2011 and subsequent.
Eliminating estate tax for one year only will affect only those rich people who die that year, so it won’t cost the government too much tax revenue. However, if gift tax were temporarily eliminated, all rich people could take advantage of it to transfer wealth to their designated benificiaries tax-free. So, the cost could not be calculated, and it might be quite large.
Well, DCU, rather by definition, if you’re in the top 1% of households, you’re rich, ok? Maybe not by your definition, and I’m sure there are endless anecdotes that you could supply me regarding your regatta buddies unable to come up with the scratch for the second yacht, but you need to stop the spin, we’re all getting dizzy.
If you’re in the richest country in the world, and you’re in the top 1%; that is to say 99 out of 100 people are poorer than you, news flash! You’re goddam rich.
To say otherwise is offensive, dishonest, and begs the question; do the rich not consider being “merely rich” adequate? What a sorry state our nation must be in.
And you make a good argument … for me! Yes, once you hit the exemption you should spend like mad. Oh, boo-hoo, they’d have a higher standard of living, we’d have a higher GNP, and there’d be more jobs created. Hey, weren’t you for job creation in this thread?
Special to: economics majors, what would happen if everyone who capped out had to spend every cent they went over for fear of the government grabbing it from their coffin?
Special to: sociology majors, how would this affect our current plutocracy?
Oh dear. It appears I have to switch parties. 
Why? You could always knock yourself down a peg or two – why not invest in the stock market? 