May 16, 2006
THE ESTATE TAX: Q & A
Caption: Speckled chickens deliberate fair taxation.
There was a good comment from yesterday’s Goat Rope post on the estate tax with questions I’d like to take a respectful stab at answering.
I don’t want to be repetitive and some of the basic background about the tax was covered in an April post titled “No Millionaire Left Behind” in the Goat Rope archives.
Here are some basic questions:
*Is the estate tax constitutional?
I’m no lawyer, but it hasn’t faced a serious legal challenge since it was enacted in 1916. In other postings, I've quoted Supreme Court Justice Louis Brandeis, who said "We can have democracy in this country or we can have great wealth concentrated in the hands of a few but we can't have both."
*Why should the government penalize the estates of the deceased?
It doesn’t. The estate tax does not apply to the majority of the estates of the deceased. It only affects those who inherit large amounts of wealth. Surviving spouses are exempt from the tax, as are contributions to charity. Estate planning can further reduce the tax.
Today, only about one out of every 200 people who die leave estates large enough to be taxed. The first $2 million of an estate is exempt from the tax. For a couple, the figure is $4 million. By 2009, the level at which the tax is applied is scheduled to rise to $3.5 million or $7 million for a couple, which would only impact about 1 out of 1000 estates.
For a good summary of facts about the estate tax, see The Estate Tax: Myths and Realities from the Center on Budget and Policy Priorities.
*Does the estate tax confiscate the assets of the wealthy so that their children cannot enjoy their prosperity?
Hardly. Of the few estates covered by the tax, most pay less than 20% of the value of the inherited wealth, which hardly amounts to confiscation.
On the other hand, people are only able to amass and keep large amounts of wealth long enough to bestow them on others due to public investments, such as the legal and court system; regulations regarding banks, commerce, and the stock exchange; public education; infrastructure; law enforcement, the fire service and other forms of protection; legal protection of patents, copyrights, and intellectual property; publicly supported scientific and technological research; etc. The list could go on and on.
It’s for reasons like these that Republican President Theodore Roosevelt said in 1906 "The man of great wealth owes a particular obligation to the State because he derives special advantages from the mere existence of government."
For similar reasons, a number of wealthy Americans have formed a group called Responsible Wealth which opposes estate tax repeal. The title of one of their publications is “I Didn’t Do It Alone: Society’s Contribution to Individual Wealth and Success.”
Warren Buffet, who is no slouch in the wealth department, has said “I personally think that society is responsible for a very significant percentage of what I’ve earned.”
The other side of the coin is that many hard working Americans literally have their estates confiscated (usually a house) when they die if they’ve had to turn to the Medicaid system for long term care. Likewise, many hard working Americans have lost promised pension and retiree health care benefits. For many, the last years of life mean the exhaustion of all material reserves.
*Is it fair to tax people who inherit wealth?
It’s arguably fairer to tax wealth that is inherited than wages for which people work (which is why some people have called estate tax repeal “the Paris Hilton tax cut”). In El Cabrero's beloved state of West Virginia, working people begin paying state taxes at incomes of $10,000. A six percent sales tax on consumer goods and a five percent food tax is collected. Working people generally pay more in property taxes for their homes and vehicles than do many corporate owners of mineral wealth.
Working people have to keep paying these taxes even if they are financially responsible for a death in the family, including sales tax on the price of a coffin. What makes millionaires who inherit without working merit better treatment?
*What do you want your children to inherit?
As a parent of two (legally) grown children and a grandparent of a toddler, I mostly want them to inherit a functional democracy with a decent social contract where workers earn a living wage, health care is accessible and affordable, and there are protections for children, the aged, people with disabilities, and others who are unable to work.
From me, I hope they inherit some values, shared experiences, stories, laughs, memories, and an education which will enable them to work and support themselves to the extent that they can live a full life. They can help themselves to any money or material items that are left, but they are going to have to follow the biblical injunction and earn their bread with the sweat of their brows, which is as it should be as long as they do so under decent conditions.
GOAT ROPE ADVISORY LEVEL: ABOVE THE FOLD
by El Cabrero