Estate and Gift tax

Great Debates
#1

Inspired by the thread on Capital Gains taxes, where some argued that capital gains should be treated as ordinary gross income for tax purposes (and not taxed at the lower rate they are today), I wanna take the next logical step:

Eliminate the “estate” and “gift” taxes, and treat any money received through an estate distribution or a gift as ordinary income for tax purposes.

Under the current system, if I sell a $16000 car to my daughter for $4000, I have to pay gift tax on the $12000 difference. But if I sell a $16000 car to an employee of mine for $4000, HE has to pay INCOME tax on the $12000 difference. I think we’d all be better off if both transactions were treated the same way.

I’m not flying fast, just orbiting low.

#2

I don’t know too much behind the gift tax, but the estate tax seems like a reasonable idea with a few minor revisions. The estate tax is a tax on estates over $625,000, and I’m paraphrasing that number from what I’ve heard through media, but I know it’s around that amount. The idea behind it seems to be a penalty on generational aristocracy. A U.S. citizen has the opportunity to accumulate plenty of wealth over their lifetime. Unfortunately transfer of wealth over generations produces problems for maintaining this ability for future generations of lower classes. It would seem that Aristocracy doesn’t work well with Democracy. Many immigrants to the New World at the time of colonization left the constraints of

de Tocqueville in Democracy in America explains that prior to the civil war it was universal for a citizen’s estate to be broken up equally among his sons. Wealth at the time could generally be considered land ownership. Thus we have a tradition against Aristocracy and for wealth redistribution. Unfortunately this type of wealth distribution doesn’t work well after 1865 or so. At the time of this ‘tax’ it was very common for a family to have over 10 descendants, and wealth distribution worked well. As time progressed family size decreased, and this meant that many times one or two children would inherit all wealth. Anyway, I can see inheritance taxes coming from this idea.

There are several things wrong with the estate tax in its current form. First of all it hurts business and farm owners because even a modestly sized business or farm can exceed the $625,000 limit. Specifically, a modern farm now requires several hundred thousand dollars in equipment alone not including land. Another thing that the estate tax doesn’t consider is inflation or property valuation. In today’s economy $650,000 isn’t really a lot of money. A million dollars of equity over 70 years is a very attainable amount for even a lower-middle class citizen. Likewise, costs associated with death have sky-rocketed.

#3

tracer,

Ignoring the merits/problems of gift and estate taxes for a moment, your example is incorrect (in the US). Any individual can give to any other individual or individuals up to $10,000 per year per recipient free of all taxes. So, at worst, you would be subject to gift taxes on $2000, in your example. If you and someone else (like a spouse) jointly own the car, you are completely in the clear–each gives $6000 and there is no tax. You can do the same thing for your employee (assuming you own the car personally and not through the corporation–I don’t think corporations can do this). In addition, any excesses that are subject to gift tax can be deducted from your estate exemption (up to the limit of the exemption), so you don’t have to pay them at all (until you’re dead, at which point you presumably are beyond caring).

As has been pointed out, estate tax is probably intended to reduce the progressive concentration of wealth in families. What with family corporations and trusts, it’s not all that clear that it really hits anyone except those in the well-off-but-not-that-rich category, but the intent is clear. Whether this is a reasonable intent in the first place is certainly open to debate. The Gift Tax is merely a way to close the Estate Tax loophole of giving everything away before you die, which is why it can be deferred by reducing the Estate Tax exemption.

Don’t forget also that all capital assets (stocks, mutual funds, real estate, etc.) get a stepped up cost basis at death, which is a huge benefit (no capital gains on those assets if sold on the date of death).

Rick

#4

RickG wrote, re Gift tax:

Not normally. If you give a bonus to an employee for exemplary performance, even if it’s out of your own pocket, it’s classed as compensation (wages) rather than a gift. You’d be hard-pressed to convince the IRS that an employee who wasn’t also a family member was receiving a GIFT from his/her employer.

It’s a benefit as far as capital gains taxes go, but a burden if the estate is large. The stepped-up basis is used to determine the value of the capital assets for purposes of estate taxes, and it is possible to end up paying MORE in estate taxes than you would’ve paid in capital gains taxes had the basis not been stepped up.

I’m not flying fast, just orbiting low.

#5

aaronp wrote:

In which case, my original point still stands. Insead of taxing the estate, why not tax the estate’s recipients for the value of their share as ordinary gross income? This would also encourage the estate to be divided up among more recipients, to keep each share in the lowest possible income tax bracket.

I’m not flying fast, just orbiting low.