Kill the Death Tax Rumor
So there’s this nasty rumor going around that the government taxes the life out of you even after you’re dead. There are all kinds of jokes here (the only two certain things, death and taxes, at least they could be separated? etc…).
The Federal Estate Tax (aka “DEATH TAX”), for some reason, has become a huge Republican rallying cry over the past few years. Why? Well, I think it is because the vast majority of the people who rally have no idea what the estate tax really is. I was talking to somebody earlier tonight about it. When I tried to explain that a huge amount of the estate passes to the heirs without being taxed at all by the Federal Estate Tax, he said that was “a blatant lie.” Faced with such a strong response, I have to admit I second-guessed myself. Could I have been wrong? I guess it’s happened before…
So I went to the IRS website and read what they had to say. Then, just to make sure I hadn’t misread the complicated forms and instructions, I checked wikipedia. Finally, I came across a really good factcheck.org article about it. These sites pointed out, among other things:
- The Estate Tax only applies to about 3% of all deceased adults (2002).
- Estates under 2 million dollars do not even need to file for the Estate Tax.
- Only about 440 small businesses and family farms were subject to the estate tax (2004).
- Of those 440, most paid a very small amount in taxes.
Who would really get that fired up about cutting taxes for the top 3% of our country? Probably not the masses that currently get fired up about it. Manipulative, deceptive ads help a lot, though. Perhaps someday I will post about why I think the Estate Tax is a good idea, but for now let’s just leave it as a myth buster post: The Death Tax is not killing the family farm, nor is it trashing the family business; it isn’t leaving heirs out in the cold (2 million tax-free should be enough to keep the lights on for a while) and it probably isn’t going to affect anyone who reads this blog or anyone you know. Not much, anyway.
Good presentation, David.
I believe that I read recently that never in our history has a family farm been foreclosed to pay any estate taxes.
Did your factcheck.org article mention that?
People in this country make too big a deal out of taxes. We are possibly the least taxed industrialized state, and that prevents us from having the benefits that most other European states have, like the fact that we are the shortest industrialized country on average.
Ha, the shortest? Really? I know we have a crazy high infant mortality rate and crazy high every-other-disease rate, but short? That’s kind of embarrassing…
Republican dishonesty regarding taxes? Surely not…
Average American man- 5′10″
Average Dutch man- 6′1″
Average Danish man- 6′0″
And these are averages!
Man, that sucks (the shortness).
The worst thing about it (the Republican dishonesty) is that they aren’t telling blatent lies, per se. Instead, they use emotionally-loaded appeals and deceptive techniques. Most people are too misinformed/lazy/stupid to go to a legitimate source and fact check for themselves. They just swallow the BS they see on the television commercials.
I’m just waiting for that shortness statistic to be used as a rallying cry against illegal immigration. Quick, we need to import some more Northern Europeans.
Oh come on…you cannot tell me that both sides of the aisle do not use emotionally loaded appeals and deceptive techniques to mislead their lazy and uninformed base. I am sorry, but it is obvious the political leanings of many on this blog when they do not give a fair view of the entire picture. To be unbiased here, you must attack the weakpoints of all sides, even your most beloved liberals. I am sorry, but it is sad to see the blatant bias here.
“To be unbiased here…”
Who said anything about that, CJ? I am merely one player in this ideological political game. I am certainly biased. I don’t claim to be an independant and I also don’t claim to be simply reporting news and events. I assume that people have other outlets for those things. I further assume that people come to this blog to hear commentary and to have discussion.
That being said, everything that I said was true. You can hold me to a standard of truthfulness. And if there are inconsistencies, please point them out. Feel free to use specifics, also, instead of just saying “well both sides do this…”
Being the “somebody” in question, I want to clarify the statement you thought you heard…
You stated that only a small percentage of estates are ever taxed.
My statement was that your statement was blatantly wrong.
Estate taxes include more than just the federal estate tax. They also include the state estate taxes.
In Pennsylvania (current home of said future son-in-law) these rates are absolutely not zero and vary by who is inheriting the estate (I believe the estate threshold is around $3500 not in the millions) thus proving my point.
In fact, at the time, you stated you were not sure about PA state inheritance taxes.
Estates are money and property that people worked their lives for and have already paid taxes on.
Being the basic “young and idealistic” folk the majority of contributors here seem to be, not to mention the “N-word” (That’s “Naive” before anyone blows a gasket…) I can understand the “Gee we are only taxed a fraction of what other countries are” type comments.
I believe people should work for what they get and be able to keep what they earn, and if I live long enough, I expect the socialist economies in the EU to implode, but that’s quite another subject…
I didn’t mean to argue that night or in my post that most estates are completely free from all taxes. In fact, you are right. Many states to employ additional estate or inheritance taxes that would appear to be the same thing for heirs who are looking to inherit from the deceased. The difference, though, and the thing that angers me, is the national right wing’s attempt to mobilize voters against the federal estate tax. Everything I posted about the federal estate tax (the one that President Bush and leading Republicans cut temporarily and constantly fight to permanently repeal) is completely true. It only affects the top 3% of all estates processed yearly. Yet millions of Americans will be influenced by this issue. It is their naivete that is troubling.
By the way, I haven’t been able to find Republicans in the PA legislature who are pushing for the PA inheritance tax to be repealed. Maybe they are, but that isn’t the rallying issue the right wing is using.
Another clarification. In Pennsylvania, there is an inheritance tax that applies to many estates. Here is a helpful paragraph I found on the PA Department of Revenue site:
“Inheritance tax is calculated at a percentage of the value of the assets transferred which is determined by the relationship of the heir to the decedent and the decedent’s date of death. For dates of death on or after July 1, 2000, the tax rate for Pennsylvania Inheritance Tax is 4.5 percent for transfers to direct descendants (lineal heirs), 12 percent for transfers to siblings, and 15 percent for transfers to other heirs (except charitable organizations, exempt institutions, and government entities). Property owned jointly between husband and wife is exempt from Inheritance Tax, while property inherited from a spouse, or from a child twenty-one or younger by a parent is taxed at a rate of 0 percent.”
4.5% can be a lot of money for direct heirs to pay, but proportionally, it isn’t really that high. In fact, 4.5% is almost exactly the net tax percentage that I end up paying every April, and I don’t feel all that burdened by it, even though I am a poor college student.
Nobody likes to pay taxes, but we get a good amount of services for the money that we pay.
On the issue of double taxation, that argument could be made to any tax. The fact is that money is taxed just about any time it changes hands. It’s taxed when I make it as income, it’s taxed when I buy a Big Mac, and it’s taxed when I sell my stock for profit. There is not necessarily this idea of “money that has already been taxed” and therefore should never be taxed again.
Ah, but when you work or engage in trade of goods or services there is an exchange of value which is the basis of the tax.
Your time as a resource for pay, your cash for merchandise creating in income / outgo stream.
The same even goes for invested wealth – the loan and use of of a good (existing wealth) in return for renumeration – income which is rightly taxed.
Not the principal – but the income earned.
Inheritance is strictly a one way transfer of existing wealth. No two-way transfer of goods or services takes place.
Hence I view such double taxation as an unfair and burdensome thing to be eliminated.
Your argument about only the additional wealth being taxed (as opposed to the principal) is interesting, even if it is not necessarily correct.
The property tax is an easy counter-example to your standard that any principal should only be taxed once. Is this a double-tax since your property is assessed tax every year whether it goes up, down, or remains the same in value?
The gift tax is a counter-example to your standard of two-way transfers of goods. A gift, by definition, is a one way transfer of wealth. The property tax is another – where is the transfer in this tax, which is our nation’s oldest?
But these are just the most direct and obvious counters. In a more abstract way, all the money that everyone makes is taxed multiple times. Consider this hypothetical: PPG makes $1 billion profit more than usual (they pay corporate taxes) and decide to issue a dividend to their stockholders, including “Jim” (who pays a dividend tax). Jim uses his whopping check to buy some property (on which he pays sales tax) and then holds that property for a while (and pays property tax) until he eventually sells it for a profit (and pays capital gains tax). It’s the same money being circulated and taxed every time it changes hands (not, as you assert, whenever two-way transfers of goods and services occurs).
And finally, I fail to see how the low-percentage state inheritance taxes of about 4.5% qualify as “burdensome” and “unfair.” Are they really burdensome? All of the income from the estate of a deceased person is theoretically incremental to the heir’s own wealth, so why should such a small tax be “burdensome?” Is it really unfair? Unfair taxes are those that disproportionally tax the poor. The Pennsylvania sales tax and the Arkansas grocery tax are perfect examples of truly “unfair” taxes. I don’t see how the taxes we are talking about qualify as “unfair.”
I was going to let this drop, but I just can’t… To deal with some of your points:
Property tax – Yes, it is an odious tax. Have you not noticed the strife, anger and vitriolic that goes with any discussion and the lawsuits of the Allegheny County property tax assessment situation? Or the constant drumbeat for cutting or eliminating the property tax? Why did PA allow casinos? Ostensibly to be able to use the revenue to help cut property taxes.
Why was property so easy to tax in the dawn of our representative republic? Because in general (California and river valleys aside) it doesn’t decide to get up and move away. Just because I am “the Geezer” doesn’t mean I cleave to all that is old. Originally, only property owners could vote. Hence the tax of property.
Gift tax – Again, something I think is inherently wrong. But I will concede that there may be a rationale behind it. How can you differentiate a “gift” vs a “payment for services” when someone claims it to be a gift to get around income tax? You don’t, you just tax gifts…
The dividend issue is slightly more convoluted. A corporation is a legal construct to create a “conceptual person” that enables it to earn income and own property, things that normally require being a non-Pinocchio type (i.e “real boy”) to do. So yes, a corporation’s income is taxed because it is in fact a conceptual legal “person” so its “time” is in fact a service and its products in fact are goods. Because of this legal fiction, the real flesh & blood “owners” (the stock holders) have their dividends taxed as income when they are distributed. Were they not a corporation, but in fact a big honking “sole proprietorship”, this income would still be taxed as income to the owner of the company directly. The double taxation is part of the price you pay for the “privilege” of having the legal fictitious entity. Again, “not right” in my view, but corporations themselves (lacking legs, arms and often hearts) can’t walk into a polling place…
When “Jim” sells that stock (his investment of wealth in an ownership stake) he also pays a tax on the capital gain of the increase of the stock price above his original purchase basis, not on the entire amount of the stock price.
Again, an investment of capital (a good or service depending on how you want to look at it) earning a return.
Now when “Jim” buys that property, there is indeed a transfer of goods, hence the right to tax. He holds the property as an investment – it gains value (in this case) just by existing and becoming a more desirable and valuable good over time.
When he sells it, the increase in value is then realized as income (capital gain) and thus taxed. If he held the property the gain is not taxed, much like the deposit in your 401k account. As long as you don’t take the distribution of it, it just keeps on growing tax free for that time period. You pay the taxes on what you take in distributions as income – deferred earnings.
So in these cases (apart from the double tax in the corporate income/dividend situation) there is an exchange of goods (property).
“Unfair” – Your good liberal socialist heart throbs within you. Unfair is very much in the eye of the beholder. This is where those of the “leftward” bent go off the rails. They charge headlong down the “feelings” road vs remaining analytical.
ANY tax that does not tax transfer of goods or services is inherently “burdensome” and “unfair”.
What is more “fair” than every individual paying the same exact percentage – a flat tax? Big or small, color-blind and unwavering, everyone is treated equally. Perfect? No, but it is “fair”.
Why should someone be taxed at a higher percentage because they are smarter, work harder or have a better idea and make more money?
Sales tax isn’t “unfair” – it is the same no matter your range of income. That guy buying the BMW pays the same percentage of tax as the poor college student buying that cheap Chevy Cobalt, but he does end up paying much more in total real dollars. That’s fair.
Ever heard of the “Earned Income Credit”? That is essentially a rebate on taxes the “poor” never paid in the first place, kind of a “1040 welfare”…
Go check out how much of the total gross income tax burden percentage is actually paid by only the top 10% of income tax payers…
As far as “fair” goes, a graduated income tax itself in inherently “unfair” and regressive.
An economy is based on the transfer of wealth for goods and services.
Our tax code itself is the real problem with the Congress and lobbyists. If there were no special credits and tax loopholes and everyone paid the same rate with no tax benefits to be gained, lobbying as we know it would disappear overnight. I don’t plan to discuss the problems inherent in a flat tax (I know there are), so don’t go there…
But now my rant has taken a turn down another path so I will rein myself in and stop…