Here's how the estate tax should work ....

The IRS has interesting statistics on estate taxes here. The latest is back in 2004, but it shows details of estates by size, what type of assets were held, deductions taken and tax due. For example, cash and “cash management accounts” represented just 10% of taxable estate tax return assets.

And this pdf gives some summary data.

Considering that the estate tax currently only affects 0.14% of the population, I think there are far more pressing issues to be discussed.

Yes, it should stay and if anything be increased.

The very IDEA that this is even an issue on the radar (and used to hold up extension of unemployment benefits for millions, important treaties and appropriations bills, etc…) is ridiculous at a time when official unemployment is at 9%, the concentration of wealth is the greatest it’s ever been and the middle class is dying, wages for most Americans have been stagnent since the 1970s and the federal debt is setting records…:rolleyes:

Except that “farthest removed” has a pretty clear meaning legally when it comes to inheritance issues. And therefore to use it in a different way, and then claim that someone misunderstanding you is because of their “preconceived positions” is a little bit of a cheat, IMHO.

As to your overall point - I still don’t see it is any fairer. It is also, as noted, an utter freaking nightmare to administer. How is it defined whether someone was “involved” in it? What you will see (not to different from the moment I guess) is the chosen heirs named as directors. Are you going to require time cards to see how much work they did as a director? Are you going to analyze the results of their decisions to see if they were beneficial or harmful to the organization?

You should do the same thing Canada does - we don’t have an estate tax. However, when your estate is dispersed, any unrealized capital gains are taxed at normal rates. So let’s say you buy your house for $200,000. Then you bequeath it to your kids. The estate will be evaluated and fair market value for the house determined. If the house is now worth $400,000, then there is a capital gain of $200,000, and the capital gains tax will be paid on this out of the estate. The recipient pays nothing.

If you give stocks or bonds to someone upon death, then even if they keep the stocks there is still a ‘deemed sale’ for the purpose of calculating any capital gains or losses, and those taxes are paid out of the estate.

But if you give someone $1 million in cash, there is no tax payable whatsoever.

If you want to avoid a ‘deemed sale’ of all your assets and a big capital gains tax on your estate at your death, you can also set up a trust and have money withdrawn from it for your beneficiaries on a schedule to spread the tax burden and maximize annual deductions.

I believe there is also an exemption of tax for estates under $350,000, to allow parents to leave their homes to their kids or for family farms and small businesses to stay in the family without tax punishment.

The result of all this is that inheritance taxes in Canada will be much lower than the proposed taxes in the U.S. - at least for estates over $5 million dollars.

If the U.S. institutes a punitive estate tax, you’re going to see a hell of a lot of tax avoidance activity, because it’s very easy to avoid the estate tax when you have a country like Canada next door which does not have an estate tax. Maybe we’ll become a retirement haven for old American millionaires.

It’s not going to. In fact, the estate tax that’s going to take effect Jan. 1 is less onerous than the estate tax the US had prior to the one year suspension, decreasing the number of people who have to pay, and increasing the gift tax exemption.

While that is certainly true, keep in mind that this thread is for a discussion of what the tax should be, not what it’s going to be.

Sorry…didn’t realize that “farthest removed” had a specific legal meaning nor did I think that it was likely to be read in a legal context by most.

I should also have realized that most heirs are relatives of the person who died.

"Let’s just clear this up even more: there is no death tax.

None. It has never existed. Never will."

That is an interesting perspective, but from certain points of view, incorrect. “Death tax” is certainly a phrase that is often used to prejudice the listener against a practice as “taking advantage” of those who can’t defend themselves. Who, after all, could be more helpless than the deceased? However, as stated previously in this thread, the tax is not levied upon the recipients of the estate, rather it is levied on the estate itself. That estate is also valued and the tax computed based on that value at the time of death. It is not the transfer of wealth or the magnitude of that transfer that triggers or quantifies the tax liability. It is the death of the original (or current) holder of that wealth. “Death tax” may not be official terminology, but it certainly conveys an impression that is pretty accurate.

As conservatives like to remind us, if you tax something, you get less of it. So ideally, you’d want to construct your tax code to have the minimum possible drag on productive economic activity.

Now, name me a tax that produces less such drag than the estate tax does. The main thing it discourages is a talent for choosing the right parents.

Accordingly, we should get as large a percentage as we can of government revenues from estate taxes.

So if the death tax is high enough, people will stop dying!

Really? You don’t think the knowledge that 55% of what you’ve saved will go to the government might change your savings behavior? Don’t you think that if you knew that your small business was likely to be sold off to pay the tax liability upon your death that you might not work so hard to build it up in the first place? Or even take the risk of going into business at all?

I would think that in a country with a high estate tax at the very least you’d see people retiring earlier.

Also, if your estate tax is high enough to really impact the transfer of businesses and wealth from parents to siblings, you’ll do damage to what is essentially a large apprenticeship system whereby valuable local knowledge is transmitted from parents to children as they learn the family business, the unique vagaries of the local market, and then carry on where the deceased parents left off.

Sam, you do know that the estate tax doesn’t apply to estates under FIVE MILLION DOLLARS, right?

If your small business or family farm is valued at over five million dollars, it ain’t a small business or a family farm anymore.

Also, in addition to the fact that the first $5 million is exempt, it’s not a flat 55% above that. It’s graduated and marginal, and with the current deal, 35% is the highest rate, not 55%. So it’s not 55% of what you saved will go to the government. It’s significantly less than that.

You know, we’ve debated this issue often enough over the years that you’d think you’d have retained some basic facts about it.

But just to refresh your recollection, the answer to “Don’t you think that if you knew that your small business was likely to be sold off to pay the tax liability upon your death that you might not work so hard to build it up in the first place?” is, “under current law, if you have a farm or small business subject to the Federal estate tax, you have fifteen years to pay off your estate tax liability. Which means that unless your business is fantastically overvalued relative to its income stream, paying off the tax should be no problem.”

Not to mention, what’s wrong with selling off the business anyway? People buy and sell businesses all the time. Lots of people sell businesses late in life that they’ve built up over the years and realize they can no longer run as well as they once did. What’s the big deal? It’s a business, not a piece of the True Cross.

In short, we’re talking about a pretty esoteric problem here, and just the degree of esotericness reinforces my point: not much drag to be had - even in the abstract, let alone by comparison with other sources of government revenue, which was my point.

Because that’s what all people starting businesses are worried about - not whether they can make a go of it over the next few years, but if they’re lucky enough to create a business worth millions, the fraction that their heirs will get.

I’m sure you could do some research on that. I’m sure there are post-industrial nations with higher estate tax rates than the U.S. has. Please tell us what you find out.

Seems that even in the event of a truly confiscatory estate tax, if this apprenticeship system is so effective, the kids could start their own business, or be extremely valuable executives or consultants for the new owners of the family business, or for a competitor. This would demonstrate just what the true value added was of this apprenticeship in the kids’ lives, in a good old-fashioned free-market sort of way, rather than just handing the next generation a pot of money.

At any rate, you’ve failed to even attempt my challenge: of finding a tax that creates less drag on economically productive activities, while producing similar revenues. I say no such tax exists. What say you?

No, it should be expanded to cover all income. You bitch about “dippy hippy redistribution of wealth”; well, what’s wrong with that? America is supposed to be the Land of Opportunity, the ultimate meritocracy, and large inheritances are the single biggest obstacle to social mobility in the US.

The death tax implies that it is levied on death. Its not, its levied on estates. My grandmother died 10 years ago and there was no death tax. My grandafather, same thing. My other grandmother, same thing. My other grandfather, same thing.

If you wanted to create a term that included the word death that conveyed a relatively accurate impression of the estate tax you would have to call it the “really rich people’s death tax” because implying that it is levied on death is more than inaccurate, it is misleading.

My sister is an executive at an insurance company and her husband is a doctor, they work in NY and live in NJ. I spent part of an afternoon explaining to them why the estate tax does affect any of our parents. Then I spent the rest of the afternoon explaining why the AMT means that repealing the Bush tax cuts will have no effect on them, except for the capital gains portion. These are two fairly well educated people who have a distorted view of what is going on because they hang out with too many Republicans and listen to too much Fox News and the use of terms like death tax is part of the reason for their ignorance.

The reason its called an estate tax is because that is the most accurate description of the tax.

The first $3.5 million ($7 million for a couple) is exempt from estate taxes if we went back to the Bush version of estate taxes, how many of these small businesses are worth $7 million. I believe here is a deferral provision in the estate tax so that you don’t have to sell off your small business or farm unless your kids decide they don’t want to be small businessmen or farmers.

There once was a time (during the Clinton years) when the estate tax exemption was only $500,000 and the top marginal rate was 55% and it didn’t prevent small business growth and it didn’t prevent the dot com boom, it didn’t interrupt the flow of generational knowledge or any of that stuff.

The $500,000 exemption was low but thats not the case anymore and almost all the arguments against the estate you might have had in the past simply don’t apply.

BTW, you don’t pay any estate tax on money you give to charity (or your alma mater or the Heritage Foundation for that matter).

Care to expand on that (in another thread if you think it would be a hijack)? Given that very few people get large inheritances and that the great majority of wealthy people did not inherit their wealth - only 14% of the Forbes 400, if memory serves. And from The Millionaire Next Door:

  • Fewer than 20% inherited 10% or more of their wealth
  • More than half never received so much as $1 from an inheritance

So why do you think large inheritances are the biggest obstacle? Bigger than urban poverty? Bigger than lousy education available to the poor?

Large inheritances have not stopped my social mobility, and in fact have helped. It was thanks to some trust fund founders that I was able to gain employment in a startup or two once they closed their first rounds.

Please tell me how large inheritances are an obstacle to social mobility. We can even use an example like Paris Hilton if we like. Paris Hilton has not kept anyone out of Harvard, she has not shut down anyone’s entreprenurial activities, and she has not led to the downfall of the Hilton hotel chain and assorted operations.

The estate tax serves as a jobs program for attorneys and accountants (it cost me many thousands to ensure that my grandparent’s and parent’s eventual deaths would not trigger a dime to Uncle Sam), and serves as a stupidity tax on those not smart enough to avoid it.

Seems like the best solution to that would be a tax on personal net worth – a tax designed to put an effective cap on same.