Is it fair to use the current surplus for estate tax cuts when other taxes are rising

Great Debates
21

I guess where you come down on the estate tax issue depends on whether you prefer a plutocracy or a meritocracy. A hypothetical:

Citizen A is born to poverty. He is the child of a rural Appalachian family which has worked on the factory floor for generations. He has no prospect of inheriting any wealth. He is intelligent, hard-working and honest.

Citizen B is born to wealth. He is, frankly, a dim bulb. Luckily for B, he stands to inherit a fortune upon the demise of his father. He’ll keep that wealth, because in spite of his own lack of talent or intelligence, he has good investment advisors. He will never go hungry, and will never work a day in his life unless it suits his fancy.

Now, why should Citizen B get such an enormous head start in life just because he was lucky enough, by accident of birth, to inherit a fortune. Wouldn’t it be a better system if both A and B started on equal footing, and then rose as high as their own talents and drive could take them?

I would not object to a 100% estate tax. Let each generation earn their own wealth. Seems like such a system would provide a much stronger incentive for personal achievement. As it is, the children of wealth who do have talent and brains may never feel the need to use them, and thus, their potential contributions to society may be lost.

22

SouthernStyle wrote:

You are presenting a false dilemma. The Estate Tax need not drive any successful small business into bankruptcy.

Let’s imagine a successful small business that has an “on paper” value of $1,000,000. This means it has a net value of $1,000,000. If it is successful, that means it has been profitable, right?

So you’ve got a profitable business with a net worth of $1,000,000. Hmmm… Sounds like a darn good investment opportunity for a lender, doesn’t it?

Now, bear in mind that you are only paying estate tax on the Estate’s value in excess of $600,000. I.e., you are paying tax on $400,000. I don’t know what estate tax rates are off the top of my head, but let’s assume they are 60% for the sake of argument. (If I’m wrong, someone can correct me.) That means the heirs have to come up with $240,000 to pay the estate tax.

All the dead owner’s heirs need do to preserve the business is to take out a loan (using the $1,000,000 equity as collateral) to pay off the estate tax. If the company is in fact profitable, it should then be able to pay off that loan over time, and rise to even greater heights, right? Problem solved!

I get really tired of politicians raising the “death of small businesses” bugaboo to try to scare Joe Citizen into opposing the estate tax. What these politicians are really doing is trying to eliminate the estate tax to keep their wealthy constituents (read: campaign contributors) happy.

23

spoke- wrote:

If the company is Incorporated (as more and more small businesses are these days), it’s even easier. Then, the decedent doesn’t own the assets of the company, he owns stock in the corporation which owns the assets of the company. The corporation itself isn’t hit with any estate tax, the decedent’s estate tax is assessed based on the value of the corporate shares.

Now, since the cpropration isn’t publically traded, you can’t put a “fair market value” on the shares, so you have to assume that the value of all outstanding shares is equal to the net worth of the corporation ($1,000,000). So the heirs’ll still get hit with the same Estate Tax they would’ve if the company assets were owned directly by the decedent. But now, they can pay it off by selling some of the outstanding shares in the corporation to venture capitalists! They won’t have total ownership of the company anymore, but they won’t have to take out a loan, either.

The decedent could also make arrangements to give small gifts (less than $10,000) of his stock each year to his heirs before he dies, which would reduce his total estate when he does die and which are small enough not to be subject to the Gift Tax.

24

Good points, tracer.

Furthermore, if the loan option is pursued, interest paid on the loan would, I believe, be tax deductable.

25

tracer wrote

a) Even if the company isn’t incorporated, you can still sell off a piece of it. There are plenty of other vehicles, including partnerships and LLCs.

b) Venture Capitalists aren’t typically interested in the businesses we’re talking about. They’re interested in higher risk, higher growth businesses which are rarely profitable at the stage they enter at. Venture Capitalists get in with the expectation of helping the business achieve high growth. Different market. The people you would typically sell a family business to would be someone you would expect to be involved on a day-to-day business, not some silent money guy.

26

After reconsidering my former post, I would not be opposed to raising the threshold for estate taxes from $600,000 to $1 million or more, and/or adjusting the limit annually for inflation. I really don’t care about some contractor’s kid inheriting a small business, more power to him. It’s the billionaires that I take issue with, their kids can not claim to have earned a billion dollars in their pampered lives. It takes a special kind of genius to become a billionaire, and a certain measure of ruthless determination. I don’t like them because they use their enormous wealth to make it hard for little guys with bright ideas to compete with them. They protect their wealth with the same ruthless determination that it took to acquire it. The self-made billionaires are hard enough to share a society with (I can’t wait for another one to run for office and make a complete ass of himself), I really can’t imagine what their kids are like.

27

Actually, the threshold has already been raised to $1,000,000. The change is being phased in over time.

I sort of agree with SarumanRex. I dont have a problem with adjusting the threshold periodically to accomodate inflation. I would even agree to another increase of the threshold above $1 million, if the tax rate for those estates which do meet the threshold is raised to compensate for the lost revenue.

28

Estate tax retes are along the lines of personal income tax rates, ie they start at about 15%, and go up to 40%, or so.
Never get to 60%. And there are lots of exclusions. I think that there is one exclusion that need to be raised, ie personal residence, as median home prices out here are about 600K. Raise that exclusion to 1Million, and that is all we need to do.

29

I don’t think there’s any doubt that the estate tax is intended for the redistribution of wealth. The responses here of the people who support it bear this out.

A government must raise some revenue to conduct its legitimate operations. The income tax is the way it is because it’s the only way to raise enough revenue for the government to do what we demand of it (although I personally disagree with about 2/3 of what it does). I’d rather have a per-person fixed tax, but that couldn’t generate enough revenue to fund our government the way it is.

But the estate tax is not about raising money, it’s about redistributing wealth. Most members of congress, and before I read through this thread I would have thought the vast majority of Americans, believe that the forced redistribution of wealth by government is immoral. If I earn a dollar, then it’s acceptable that the government tax some of that for its operations. After that, the remainder should be mine to spend however I want. If I want to spend it on Cheetos, that’s my choice and you shouldn’t be able to tell me differently. Wealth redistribution is the idea that the government (other people) know better than me how to spend my money, and they forcibly take it from me for their purposes.

If I choose to accumulate a nest egg, and specify that upon my death, it should go to a university, that should be my choice and mine alone. If I specify that it be spent on a million bags of Cheetos and shipped to third world countries, that’s my choice. And if I want it to go to my son and yet-to-be-born child, that also should be my choice. I’ve already paid taxes on it, so you envious types keep your cotton-pickin’ hands off.

If anyone denies that it’s just the base emotion of envy behind wealth redistribution, look at the other posts above. Saying that it’s unfair that one person should inherit a large amount of money, while others don’t, can’t be anything but envy. It doesn’t hurt me or you for a spoiled punk to get a gob of money. He’ll just blow it anyway.

Any view that supports redistribution of wealth is anti-freedom, and I’d prefer people holding this view move away and join their own socialist utopia, without me, thank you very much.

30

I don’t know. I never have figured out how one could earn money – pay taxes on it, save it and get interest and - pay taxes on the interest, invest it, make capitol gains - and pay taxes on the gains, and then will it to someone upon one’s demise and they have to pay taxes on the money that has had taxes taken out of it since it was earned! Up to 50% here.

The same with property. You buy it and pay taxes on the sale. You develop it and pay development taxes. You keep it and pay yearly taxes. You will it to someone and they get to pay more taxes for getting property which has been taxed forever, PLUS if they keep it, they get to pay the standard taxes that were being paid on it to begin with.

Uh, 'xcuse me, I need to go bang my head against the wall for a while. It might make sense then.

31

You seem to miss a very important point, money is power. In this country, with enough money you can buy a congressman, or control an entire industry, or scheme with other rich people to keep the rest of America down (its called the Republican party). Money is not just the power to buy a million bags of Cheetos. Do you want to live in a country that has a hereditary aristocracy of people who inherited their position at the top rung of society? If so then I suggest you move to such a country and leave us alone. With extreme wealth comes extreme fear (not security, only poor people see wealth as a source of security). The fear is of what will happen if all that money goes away. A rich kid who inherits a billion dollar company will know that there is no way in hell he could accumulate that kind of money on his own. He knows he doesn’t have the sort of brilliant and ruthless money making ability that his father had. Thus, to remain at the top of the food chain he will have to find ways to fend off competition for the wealth his father accumulated in the form of a profitable business. Power corrupts and absolute power corrupts absolutely. Money is power, having money you didn’t earn corrupts the soul and makes one weak. Why do you think the 3rd world is as messed up and poor as it is? One reason is that many of the richest and most powerful people in those countries did not have to earn their place in society the way most Americans do. They either inherited their status and wealth or got it through war and violence. Our only protection against inherited wealth ruining our democracy is the inheritance tax.

32

**

Is this really a big problem in the states? I believe a lot of the wealthy have figured out loopholes to prevent the government from getting a large amount of estate taxes. The Du Ponts still have a ton of money even if they’re no longer running the company.

What moral justification do you have for taking money that has already been taxed? You say it is wrong for someone to have all that money when they haven’t earned it. The government didn’t earn that money either.

**

I"m a fairly middle class kind of guy and I see wealth as a form of security. So I guess it isn’t only the poor that see it as security.

**

I think we can all agree that the reason third world nations aren’t doing well is far more complex then estate taxes. I think you’re just building yourself quite a straw man here.

33

[QUOTE]
*Originally posted by MGibson *

It will be if we eliminate the estate tax the way the Republicans are suggesting. Up until the late 1890’s there was little if any estate taxes (I may be wrong on my dates). There was an aristocracy in America ( Mark Twain called it the Gilded Age) and a few people were filthy rich while the average American was dirt poor. The rich did everything in their power to stay rich (i.e. union busting, trust building, monopolies…). The estate tax was enacted not only to raise funds but to put the Vanderbuilts and other super-rich families back in line. It was tax laws, anti-trust laws, free education, and pro-union laws that made the middle class as rich as they are today, not just a good economy.

Money isn’t taxed, transactions are taxed (property like real estate is also taxed but that is a different matter). Every time money changes hands some kind of tax is incurred whether it be a sales tax, an estate tax, an income tax, a capital gains tax (which isn’t incurred until you sell an asset i.e. money changes hands). All money changes hands many times and is taxed every time. The question is not why the transfer of an estate should be taxed but why shouldn’t it be taxed. If I make over $1200 in the state lottery I owe an income tax, if you inherit $2 million why shouldn’t you be taxed. It isn’t the dead guy that is being forced to pay this tax it is you the inheritor. Taxes are not a moral issue they are an issue of law, every time someone comes into a significant amount of money some kind of tax is owed. The issue being discussed here is whether or not to exempt inheritors from the kind of taxes working people pay on money they earned the hard way and I say NO WAY.

Security comes from within not from your situation (although certain situations, like being held hostage, can make you insecure). If you were very wealthy you would live every day in fear of what would happen if, for example, you were sued and lost all your wealth to lawyers and claimants. You would fear competition from new companies with new ideas and you would try to destroy them as a matter of self preservation. If you inherited all your vast wealth then you would be even more insecure since you know you could never earn it back.

Estate taxes are only one requirement of a strong democracy and a healthy middle class, there are many others.

34

**

Now I’m convinced. All estates should be taxed not just the wealthy.

**

For some reason I seriously doubt that all wealthy people live in fear oflosing it. In fact if I’m ever incapacitated or lose my assets due to disaster I’m in a worse position then the wealthy to pick up the pieces.

**

I’m not convinced an estate tax would make a big difference here or not. I’ll go along with the estate tax so long as it is set at a reasonable level. But it should apply to any estate over 10,000 dollars in value.

Marc

35

Bill H. - Backpedal, amazement, and apologies, sir. I never intended my comment as a personal attack on you or anyone else, nor did I expect my remarks to be misconstrued as personal attacks. My most humble apology.

My “name calling” was directed to the mindset (not the individual) that believes that the only things that should be free are those that are “gifts” from the government.
And I’ll go back to my example of the construction business. Usually, the value of such companies are in hard assets necessary to run the company. Land, buildings, equipment, vehicles, inventory, etc. It’s not unusual for businesses of this size to occasionally have to execute short-term loans just to make payroll. (The value of the business notwithstanding, if your creditors/customers don’t pay you on time, you can’t pay your creditors.)

In this case, as well as most small businesses, the value of the company is meaningless. It is an arbitrary number that describes the value of the property if a suitable buyer could be found. The owner isn’t living off the value of the business, he’s living off the profits that the business can generate.

Let’s take another example. Entrepreneur “B” has a telemarketing business. He leases a building where he’s installed a dozen desks and phones, and has put cubicle dividers between the desks. Everything in the shop is leased. He owns nothing but the incorporation paperwork that says that he’s authorized to do business. At this man’s death, he can pass to his heirs (assuming that he has heirs) the nearly worthless piece of paper that proclaims him to be a business. No assets except for cash-on-hand, liabilities in the form of leases for everything associated with the company, and a cool $250,000/year income.

Though I don’t agree with it, I can understand people wanting death taxes on the super rich to keep people like Ted Kennedy and the Kennedy autocracy from enduring forever. But by head count, it’s the middle class that is hurt far worse by death taxes than is the super rich.

So I still want to know why anyone supports taxing the construction company into oblivion for the owner’s making $100,000/year while letting the telemarketer pass the torch that garners him $250,000/year.

36

there is no reason to have a death tax at all except for teh greed, jealousy and avarice of some Leftists. Why teh government or teh poor have more of a right to someones whealth than that person’s own family is way beyond me.

37

Well, let,s take your example. Now, Individual taxes are my field, not estate taxes, but there are certain exclusions, and the max rate is nearly 40%, not 55%. So, 1st of all, half of the shindig belongs to his wife, so now we have a value of $750,000. Some of these items are excludable, so let us say 700K, with a gross exclusion of 600K (which is going up), so the bill is 40K, not nearly 500K, ie 10% of your figure. So they walk over to the bank, and get a real estate loan on the 490K of equity they have in the land, and write the check, and have no problems at all, of making the payments of some $400/mo. Now, if the guy had some estate planning, for the last 10 years he was 'gifting" 10K each to each of 2 kids who were going to take over the business. Thus, no estate tax at all. Oh, and if there WAS no “equity”?, then the “estate” would be 490K less, thus again, no tax.

Note: “straw men” usually “don’t hold water”.

38

Two questions:

First, is debt taken into account by the government? A few here have said in order to pay off the taxes, to just take out a loan. What if the business is already loaded down when debt?

Second, someone said that a 100% tax would be the ideal. Wouldn’t that just make matters worse? It’s really not that hard for the super-rich to side-step an inheritance tax. But what about for the small business? A family has to give up 100% of their parent’s assest, the business is liquidated and the money given to the government. Doesn’t that leave communitys that much more vulnerable to large coporated businesses taking over the local market?

For example, the locally owned hardware store is taken by the government as part of a 100% inheritance tax. In order to actually get a tax from the store, the government must liqidate the store and property. So who is left to compete against the Ace or Eagle hardware stores?

Or perhaps, the government keeps the business. Do we really want state-run businesses? Also wouldn’t that allow the government to gradually gobble up property?

It seems like a 100% inheritance tax would weaken the middle class and make it easier for the super-rich to become even richer.

39

Why don’t we just treat all inheritances and gifts as ordinary income of the recipient, and apply the normal income tax?

40

Tracer: the idea is, with the 600K exclusion, that things like a small nest egg, and the family home will be excluded. I have no problem with a 1M exclusion for a family home.

And you all do know that life insurance is completely excluded for all taxes, eight?