Apologies for my delay in getting this posted. Thank you Stephen, for what should have been Monday’s post.
They say politics is the art of compromise. One is then left to wonder why politicians so studiously avoid politics as they never seem willing to compromise. Of course, I have written previously on the distinction between compromise and corruption, but I think I’d actually like to write about the possibility of legitimate compromise regarding one particular tax policy.
I am normally adverse to discussing actual policy, as it tends to get bogged down in the details as people want to quibble over this point or that one, and as they say, the Devil is in the details.
However, taxes exist and are necessary to fund the government, so no one aside from a smattering of Libertarians is proposing that we do away with taxation itself; further, we eschew totalitarian government, so no one aside from a smattering of Socialists is proposing that we tax 100% of everything.
As taxes are less than confiscatory yet more that nothing, it seems an appropriate arena for the possibility of compromise. While there are many various taxes at different levels of government, on of the most vexatious tax is the estate tax, or the death tax as it is oft referred by those on the political right.
First, in any such discussion, it becomes necessary to honestly articulate the arguments both for and against the estate tax presented by both sides and their reasoning regarding the ultimate purpose of the tax itself.
Those who argue for the estate tax immediately point out that although it is classified as an “estate” tax, it is really viewed as being taxed based upon the income received by the heir rather than a tax on the decedent, thus justifying the tax as merely taxing the windfall of income to the heirs.
Those who oppose the estate tax invariably claim that it is a wealth tax and not an income tax and point out that the wealth accumulated by the estate was already taxed when the decedent earned the money in the first place, not counting increases through investments of course, and that to tax the estate is to tax the same income twice, or double taxation.
Which leads to interesting conundrums: 1) as it is the estate which is taxed and not the recipient, how is it not a wealth tax which would be unconstitutional under the “takings” clause of the Constitution; 2) if it really were a tax on the income of the heir, then why is it taxed at a higher rate than other income; and 3) why would the tax code be concerned with “generation-skipping” transfers if it is the heir’s income being taxed and not the estates?
Mind you the 40% is much closer to the current top marginal income tax rate, which would be 70% or more if certain leftists had their way; and there is a much higher exemption than the income tax’s personal exemption of $5.7 million ($11.4 million with the current rules of portability of the exemption if the assets are titles as jointly owned, making estate planning much easer than before.)
Over the last twenty years, the top marginal rate has lowered from of 55% to the current 40%, while the exemption has increased nearly ten fold from $600k to $5.7mil, so the estate tax is not quite as problematic as it once was.
The estate tax is often justified by reasoning that it helps to prevent the vast accumulation of wealth over generations which would create a huge wealth disparity between the a wealth nobility and reduce the rest of the nation to poverty stricken peasants.
Generally, this is belied by the fact that it is generally estimated that only about 17% of wealth is inherited; though to be fair that 17% figure is a couple decades old.
However, as always, there are some considerations which make this argument less certain than we may like to admit. Some wealthy individuals hold their wealth in closely held corporations as opposed to publicly traded corporation with FCC auditing requirements, so it is less certain the true value of such corporations; further some of their wealth is held in the form of commodities or land which may be overlooked or undervalued in evaluating a particular estate; assets may be held in countries which do not have estate taxes; and finally, wealthy families may have taken advantage of tax sheltering trusts which are routinely grand-fathered into new tax laws and so remain sheltered from estate taxes.
In the end, we really may not know how much wealth is really inherited.
Which could make that estate tax a plutocratic weapon of old money, vested in tax shelters and hidden in undervalued assets, against the generational retention of new money with the Bill Gates, Jeff Bezoses, and Warren Buffetts of the world. Something to consider.
This brings me to my idea of a compromise, for which we have to first cement the principles upon which such tax is established and aim at the purposes for which such tax purports to support.
First, if it is to be considered properly as a tax upon the income of the heir and not the estate of the decedent, as I think the only justification Constitutionally permissible, then all generation-skipping taxes must first be eliminated, because it does not matter of what generation the recipient belongs.
The generation-skipping idea goes back to the middle-ages as families, or clans, competed to create lasting dynasties accumulating wealth, property, and status within the kingdom to hopefully one day be in a position to become nobility, or even royalty. Advancement of the family was to the feudal clan far more important than the fortunes of any individual, a perspective still shared today by many prominent families like the Bushes, the Kennedys, the Rockerfellers, et cetera.
The idea being that the more often the family estate is taxed, the less wealth the family retains, thus skipping a generation reduced the family tax burden.. However, if the tax is upon the individual and not the family, the generation becomes irrelevant.
Second, the idea of grand-fathering in tax shelters must be abandoned, for pretty much the same reason. The tax shelters, like the generation-skipping, was set to preserve the family wealth over the generations.
An important consideration is that removal of the tax effects of trusts and shelters would meet with considerable resistance because such trusts are quite lucrative for those who have them. However, if one is the beneficiary of a tax exempt trust, it must be recognized that a person cannot have a property interest in a legal exception.
No person is entitled to retain a tax exempt status, and not legal entity like a trust can be granted privilege by the government perpetually if a future Congress chooses to remove such a privilege. Grand-fathering tax exemptions is adverse to the concept of the Rule of Law were all citizens are to be treated equally, and adverse to the Constitution in that it purports to bind the actions of a future Congress by the actions of a prior Congress.
With this established, what remains is the general scheme where Conservatives wish to lower taxes and Leftists want to spread out the wealth. People foolishly imagine those two goals are incompatible. What traditionally spread wealth was that in prior centuries wealthy families often could afford to have more children, while poorer families couldn’t.
The traditional advantage for wealthy people to have more children was the assurance that at least some children would survive and carry on the dynasty, infant mortality being as high as 75% at times. With the advent of the industrial age and modern medicines, the advantage of having fewer children and increasingly marrying within one’s economic strata concentrates the wealth of the dynasty.
The traditional disadvantages to the poor of the cost having yet another mouth to feed, or dividing up the small farm to the point of an economic unsustainable size meant that if the poor had large families, those extra children would flood the cities from the farms looking for work and driving down the wages even further. (We are familiar with the American frontier farms, where were an exception to this tradition because of the availability of so much land.)
So, in place of the “estate and gift tax”, let us simply establish a “windfall tax”, which would be payed not by the estate but by the recipient. Such a windfall tax would also apply in place of the gift tax or winnings from the numbers racket. (That’s the lottery for you young folks, look it up.)
We can maintain a high “windfall deduction” just like the “estate tax exemption” so that the first $5.7 million inherited would exempted from tax just as it is now. The remainder would be taxed as regular income, which is currently a lower rate, just like any income, or even at a more graduated “windfall rate”, say perhaps the same rate as long term capital gains up to another point perhaps ten times higher than the exemption.
Thus the wealthy would be encouraged, but not forced, to distribute their estate among more heirs in order to preserve the family wealth. I recall reading that Steve Forbes was at the time worth about $400 million, but he also had five daughters, each standing to inherit about $80 million. Likewise, the Wal-Mart fortune was divided among four children.
If the left wants wealth spread out, this is the “non-violent-revolutionary” way to encourage it. If the right wants to reduce the burden of the “death tax”, this is a way to get the left to agree with such a tax reduction, by appealing to their wants.
If a permanent compromise is this simple, straightforward, and attainable, the real question is, why have they not done it? Why keep beating this dead horse of an issue? Ever get the feeling it is really to divert attention away from those tax shelters and plutocrat protectionism?
Perhaps this is something to think about, or perhaps just some rambling passing thoughts on my part.
