Property/estate taxes: Evil or just plain stupid?

Great Debates
21

Actually, the tax is $1,290,800 on the first $3M, and 55% on everything over that, so $1,150,000. Add that to $1,290,800 and you get $2,440,800. The unified credit is $220,550 (which is equivalent to passing $675,000 free of tax), leaving a tax of $2,220,250, for a blended rate of 44.405%.

This assumes that nothing is left to a spouse, to charity, and no additional deductions are taken. This leaves $2,779,750 available for the family of the deceased - not chicken feed by anyone’s standards.

arl, rates are not that high historically. Before the 1976 amendments to the IRC, the top margnial rate was 77%. And in the example above the family still gets to inherit over $2.5 million, a tidy sum. The parents made the money, and although they should be able to pass some of it on, I see no reason they should be able to pass it all to their offspring at the expense of the rest of us. (I thought it was that fighting spirit and sticktoitiveness that made this country great, aynrandlover, not inheritance. :slight_smile: )

As for it being a matter of “private property”, that’s just not the case. Most, if not all, states have forced share laws for disinherited spouses, and some have them for disinherited children. (See, e.g., New York EPTL 5-1.1-A.) The property is not “up for grabs” - the decedent can leave it to anyone subject to (1) requirements that the decedent take care of the surviving spouse and children so that they don’t become public charges (no matter how much money is at stake) and (2) taxation. I assume that you’re against the former as well as the latter - if not, I’d like to know how you reconcile the positions.

22

The floor for federal taxation of estates has changed amazingly rapidly over the past 25 years. In 1976, estates over $60K were subject to tax; the 1976 Tax Reform Act upped that to $175K in steps from 1977 to 1981. Then the Reagan tax cut of 1981 piled a series of steps on top of that, that took the floor up to $600K by 1986, IIRC. And now it’s going to $1M by 2006.

That isn’t to say that it should, or shouldn’t, keep going up. But in terms of reducing the applicability of the estate tax to average Americans, we’ve clearly come a long way.

23

I think I can demonstrate that the FET doesn’t force people to liquidate their businesses, or sell off the family farm.

In freido’s example, Cantrip just about got the tax right, except that 55% of $2M is 1.1M, not 1.15M. So that gives us a FET of $2,170,250.

The business is producing $500K in annual profits. The estate doesn’t have to pay any of this tax on this for 5 years and 9 months, and can even then elect to spread out payment of the tax over 10 years. The estate can reinvest over $120K of those annual profits for the next 5.75 years, and still have enough income to pay the tax bill in full when it begins to come due. Or it can reinvest over $350K of the profits each year over the next 14.75 years, and still have enough left over to pay the installments.

So the estate tax laws don’t force liquidation of this business - far from it, as you can see. And it would be hard to come up with a scenario where the FET laws did force liquidation, since the valuation of a closely-held business would be based on the income stream it stood to generate. (What I mean is that the for-instance, ‘suppose the business was worth $5M, but only produced $100K in annual net profits?’ If its profits were that low, that would reduce the estate tax valuation comparably.)

Same idea for farms, which can be valuated in terms of how much you’d net by renting them to someone else to farm the land, after taking out property taxes. Since you should hypothetically be earning more by farming the land than by renting it to someone else to farm - if that’s not true, then how is the renter getting by? - that’s a nice break in valuation, right up front. And then you can pay the tax in installments, as with the closely-held business.

While there are other grounds for debating the estate tax, I would have to argue that the ‘it forces people to kill the family farm/business’ allegation is hogwash.

24

With apologies to all for the small hijack…

DITWD, what are you thinking? I’ve been in the business world (publishing and other media) for years, I know a great many small business owners (including both parents, one set of grandparents, and two uncles) and let me just say this…

If I had a business that would annually generate a 10% margin of profit each year that I could rely upon I think my local chamber of commerce would erect statues to me in the town square. A steady 10% ROI would be a wonderful thing for most businesses (small, medium or monstrous) to be able to count on.

Sorry about that. Carry on.

25

The problem with property tax can be clearly seen in Buffalo, New York. About half the city’s land is owned by non-taxable entities, including the Roman Catholic Church (supposedly owns a quarter of the city’s land, but I don’t have a cite), various colleges or universities, and city-owned vacant land. Meanwhile, the city still has a good sized middle and upper class, but the majority of the city’s residents are working and lower class, living in modest houses. Residential real estate values in the city have fallen in value over the past 10 years – you can pick up a 3,000 square foot Queen Anne in the upscale Delaware District for about $150K, and a large “Buffalo bungalow” or four-square in solidly middle/upper middle class North Buffalo for $80K. There’s a shrinking tax base, and a growing need for services.

Property taxes in Western New York are perhaps the highest in the country. I pay $800 a year in property tax on a $200,000 house in Denver. My parents pay $5,000 a year in taxes on a $140,000 house in suburban Buffalo. Believe it or not, the City of Denver offers more (and better quality) services than the town my parents call home. I don’t pay a city income tax, and sales tax is less here (7% to 8%) than in Erie County (8%). Folks Upstate are pretty livid – their taxes are outrageously high, but except for fantastic plowing and world-class public schools, there’s little physical evidence of where the money goes.

26

WEll I’m pretty aggrivated by property taxes. My house is assesed at $6200 due in April. Thanks for penalizing me for buying a house instead of renting one for the rest of my life. Thanks for penalizing me for stimulating the economy. It’s a good thing there is such a thing as homestead exemptions or I would be up a certain creek without a paddle. And estate taxes aren’t much better. I am not getting anything when my father dies so that isn’t what annoys me about it. I am annoyed by the fact that my child will get only half of what I set aside for them. I work hard for my money, I get taxed on it. When I die my money will be taxed again for no reason.

27

So you’re saying that if you rented that house, the property taxes would magically vanish, instead of being passed through as part of the rent? Pardon my skepticism.

Bitch, bitch, moan, moan.

Assuming you live another five years (reasonable, since your father is still alive), you’d have to leave a $7M estate for the Feds to take 45% of it, and $14M for them to take half.

Whatever legitimate argument there may be against the estate tax, please don’t ask me to sympathize with that sort of problem. Enjoy your money, spend it, leave your kid a mere $1,000,000 which the government will take exactly none of. That’s still enough dough that one can live quite comfortably off the interest without ever touching the principal.

28

Whatever level of goods and services the Federal government provides, the money has to come from somewhere: tariffs, taxes, user fees, and so forth. At some point, if one is going to talk intelligibly about taxation, one has to have some sort of means of comparing different taxing schemes to arrive at conclusions about which ones are less harmful, and which ones are more harmful.

Mine are that taxes that have less impact on the lives of the individuals being taxed are to be preferred to those having greater impact; taxes that create weak disincentives to productivity, earning, and saving are to be preferred to those that create strong disincentives; and taxes that have lower adverse effects on the economy of the city, state, or nation as a whole are to be preferred to those which have greater adverse effects.

Yeah, I know, those seem pretty obvious. But you’ve got to start somewhere.

By those standards, it’s hard, IMO, to stack the estate tax up against the income tax, the payroll tax, the property tax, the sales tax, the corporate income tax, or any of the other taxes by which we finance government at its various levels, and say that the estate tax is worse. It appears to me - feel free to show me where I’m wrong - that the Federal estate tax, as currently constituted, treads about as lightly on the body politic/economic as a tax can possibly do and still raise significant money.

The individuals being taxed are, in this instance, dead. So it’s hard to imagine a tax with any less impact on their lives.

If people whose wealth has gotten into the seven-figure range are balking at earning more money on account of the estate tax, it’s hard to tell. We seem to have more millionaires every time you turn around, and millionaires turn into multimillionaires, and from thence to bilionaires all the time. If fortunes aren’t being made or expanded due to the estate tax, evidence of it is mighty thin.

And similarly, whatever the effect of the estate tax is on the economy as a whole, I suspect it’s down in the white noise. If people are moving abroad to avoid the FET, they aren’t doing it in numbers that are making much difference.

The people most adversely affected by the FET are the heirs of the people who pay it - the children of millionaires. But the effect on them is probably salutary: they’ve got a marginally higher incentive to earn money of their own. None of us can choose the family we’re born into, and those born into more affluent families are, on the whole, healthier and better educated than those who are born to less affluent families. And then, estate tax or no, the children from more affluent families will receive a greater windfall on the deaths of their parents than will the children of less affluent families; the estate tax reduces but does not eliminate that differential. On the whole, it’s still a better deal to be born to greater affluence than to lesser.

So I’d have to argue that, if you’re going to be cutting taxes, the FET should be among the last, rather than the first, to cut.

29

There is no argument against the estate tax that does not apply equally “well” to all other taxes. When I ponder which taxes have the most significant impact upon the lives of Americans, the estate tax is quite low on the list.

Barring anarchy, the government must collect funds which would otherwise remain in private hands. Given that, I see little fairness in taking more from those who are actively participating in the economy so that we can reward the heirs of those who have ceased to do so.