Lewis had another piece in the Strib today lambasting the estate tax, or the death tax as he so creatively calls it. Gosh, we’ve never heard it called that before. Jason, you are so clever!
According to Lewis:
Clinton's consternation [in his comments supporting the estate tax] over letting folks keep what they've earned over a lifetime betrays the cavalier attitude Democrats take toward property.
“Death tax” and “Clinton,” eh? One more and you’ve got a hat trick, Jason!
“Letting folks keep what they’ve earned over a lifetime” is part of the great dissembling over the estate tax.
Let’s say somebody accumulates a sizeable estate over a lifetime, and there are sizable unrecognized capital gains. (You don’t recognize a capital gain or loss until you have tax recognition event.) For example, s/he built and owns a closely-held business, or has a large securities portfolio. We will consider two scenarios: in one scenario, the individual sells everything the day before s/he dies. In the other scenario, the individual dies holding all the property with the unrecognized gain.
In the first scenario, the executor files an income tax return for the decedent for the capital gain. The balance goes into the decedent’s estate.
In the second scenario, there is no income tax on the capital gain.
First question: do we want to treat these two people more or less the same? Hold that thought.
While you’re thinking of that, let’s just get some of Lewis’ other gibberish out of the way:
One can obviously point out the failed economics of the estate tax. When a corporate CEO dies, for instance, no such taxable event occurs as it does with many mom-and-pop shops who may be asset-rich but cash-poor. Or the fact that so many other nations don't have an estate tax precisely because it raises so little money (in the United States, it amounts to just more than 1 percent of federal revenue).
Jason, Jason, Jason. Death is a tax recognition event. (There are others, of course: voluntary sale and some involuntary dispositions like divorce.) Even for corporate CEOs. (We will lay aside the marital exemption, which has the effect of a deferral of the recognition, for purposes of this discussion.) The question is what assets are in your hands at the time of death?
What Lewis may be trying to say, and Spot is giving him the benefit of the doubt here, is that an estate, skillfully planned, may take substantial assets out of the hands of the decedent before death, avoiding or minimizing estate taxes. And that is true. Irrevocable trusts and gifts are common ways to do that: so-called inter vivos transfers.
But the thing is, you see, these tax avoidance (distinct from something called tax evasion) techniques aren’t available only to the wealthy; owners of small businesses routinely engage in what is called succession planning. That is, how to transfer the business to the next generation with a minimum of management upset and at a minimum tax cost. Life insurance can also be used to fund what estate taxes are expected to accrue on the death of an owner.
Although Lewis sets up the mom-and-pop at a straw man; it is really Warren Buffet and Bill Gates who’ve got the problem trying to transfer their wealth, not the small business owner. And interestingly, Warren Buffet and Bill Gates aren’t the ones calling for a repeal of the estate tax. We’ll explore that more later.
The notion that small business owners and farmers’ estates are commonly lost to estate taxes is just rubbish. Lewis’ piece is remarkable statistic free on this point, and for a reason. It just doesn’t happen in any statistically significant way.
Lewis says that many others countries don’t have an estate tax. (Spot has to interject here that he finds it wildly funny that Jason Lewis would quote other countries’ experience for what we should do in the United States.) But Jason’s right. Spot’s pretty sure there isn’t any estate tax in Saudi Arabia, or the Emirates, or Haiti, even. Spot’s not sure about Gabon. But the UK has one (although the Queen probably doesn’t pay it); France, too; Canada as well, as the Canucks might say.
Finally, Lewis says, “Piffle,” in his best George Will accent, “it hardly raises any money, anyway.” Indeed, Jason, if it’s so little, why all the fuss? Part of the reason it raises so little at the present time is that the rates have been continuing to decline in what conservatives hoped would be a phase out of the estate tax entirely in 2010; Jason refers to it, in fact. In order that the act of repeal of the estate tax would not appear to rip such a gaping hole in the budget, the law was set to “sunset” in 2010. Some commentators, including Paul Krugman, Spot thinks, called it the "Throw Mama off the Train” Estate Tax Repeal Act, because the effect of Mama living after sunset would be a greater estate tax burden.
It is rather disingenuous, but then that’s Jason Lewis’ middle name, to say that the tax doesn’t raise much because that is the way the Republicans engineered it.
The other reason that the tax does not raise as much as it might is the effectiveness of off-shore hiding of assets by the wealthy. But, that is coming to an end, too.
Well, that’s enough, perhaps too much, for tonight. Next time, we’ll discuss the question posted at the beginning of the post, and why the concept of a “stepped up basis” is important. We’ll come back to Warren Buffet and Bill Gates, too.