Thursday, January 07, 2010

Jason Lewis lies on a stepped up basis II

Since writing last about the estate tax and noting Jason Lewis’ Commentary in the Strib about it, Spot has read some interesting and illuminating things about the machinations over the estate tax and wants to share them with the boys and girls.

First is a better elucidation of how we go to the current mess with Jason’s “death tax.” From an editorial in the New York Times on December 27th last year:

For much of the last eight years, the majority Republicans pushed through tax break after tax break that mostly benefited the wealthy. Now in the majority, Democratic lawmakers have failed to stop yet another tax benefit for the richest of the rich from taking effect in 2010.

The tax in question is the estate tax, which President George W. Bush and Republicans and some Democrats in Congress were determined to cut from the day Mr. Bush took office in 2001. Even then, the tax hit only a tiny portion of Americans, but estate-tax foes sold Americans a myth about a “death tax” that prevented average people from passing on hard-earned money.

The result was a measure that made big reductions in the federal estate tax, phased in through 2009, and then repealed the tax, for one year only, in 2010. After that, the tax is to be reinstated at pre-2001 levels. Writing the law in that convoluted way helped to mask the true costs. It also created an untenable situation in which a one-year repeal is followed by reinstatement.

There was a giant catch, as well. In 2010, the one-year repeal of the estate tax is coupled with a new tax that will hit smaller estates. That tax could affect up to an estimated 70,000 estates next year, compared with the current estate tax law, which applies to about 5,500 estates annually. If that sounds wacky, it is. It would also be harmful to many small family businesses, precisely the group that estate-tax cutters say they want to help.

Today, the estate tax applies to estates that are worth more than $7 million (for couples), or $3.5 million (for individuals). More than 99 percent of all estates are exempt, so there is no reason to reduce or repeal the tax.

Remember, this was written just prior to the end of last year. Some of you may also recall the earlier question raised by Spot about the effect of a stepped-up basis in figuring out the real cost of transferring assets to the next generation? Well, the editorial continues:

Today, the estate tax applies to estates that are worth more than $7 million (for couples), or $3.5 million (for individuals). More than 99 percent of all estates are exempt, so there is no reason to reduce or repeal the tax.

In addition, under today's law [meaning 2009], when heirs sell inherited property, no capital gains tax is due on the increase in value that occurred during the lifetime of the original owner. (If your parents pass on stock worth $2 million that they bought for $200,000, and you sell it for $2 million, you owe no tax on the $1.8 million gain.)

But when the estate tax is repealed in 2010, the capital gains tax will kick in once the gains in an estate exceed $1.3 million. There's an extra $3 million exemption for assets left to a spouse.

The bottom line is this: there will be many more losers than winners under estate-tax repeal, and the losers will be among Americans who are farther down the wealth ladder.

Funny how that works. But this is the result of the inaction by the Congress that Lewis seemed to be urging. A lot of people, perhaps including a lot of people in Lewis’ audience, and maybe even Lewis himself, have no idea of the value of the cleansing bath of a basis step up on death.

This is all a consequence of the changes to the estate tax set in motion by the Bush administration. Don’t blame this on Obama or the Democrats. It is likely to affect, as the editorial indicates, many more of the “mom and pops” and “hard-working folks” decedents than the old estate tax did. The very people who Lewis pretends to champion. What a complete, poisonous gasbag he is. But guys like Bill Gates and Warren Buffett will make out like bandits, or the heirs will.

They must really think this is a good idea, huh, Spot?

Well, actually no, grasshopper. They’re both more, well, visionary than Jason Lewis and understand the role that society played in helping them get so rich. In fact, here’s a couple of recent letters in the Strib:

In his estate tax tirade ("The estate tax: Unequal, ineffective," Dec. 21), Jason Lewis writes, "Clinton's consternation over letting folks keep what they've earned over a lifetime betrays the cavalier attitude Democrats take toward property."

Let folks keep what they've earned? Yo, Jason, the people who actually earned it are dead!

The father of Libertarians, Thomas Paine, as well as Alexis de Toqueville, Theodore Roosevelt, Andrew Carnegie, Warren Buffett and William Gates, Sr. all have written or spoken extensively in favor of estate taxes. Then there's Jason and the $3.5-million-isn't-really-a-lot-of-money crowd.



I'm sorry I have to explain this to Jason Lewis, but it's an estate tax, not a death tax; the government doesn't tax you for dying. If that were the case, poor people would live forever because they couldn't afford to die.

What it does do is tax people who never worked for the money they receive. Perhaps Lewis can explain why it all right to tax roofers, cement finishers and carpenters for doing hard, skilled, often dangerous, work that provides tangible benefits for our society but exempt from taxation people whose great-great-grandfathers were robber barons or stock swindlers. In short, he should tell me why he believes that my firefighter son should pay taxes while Paris Hilton shouldn't.


Both Nick and John capture the upside down world where Jason Lewis lives.

There will probably be one more post in this series; this one exceeds the magic 1,000 word mark.

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