Monday, August 01, 2005

Caution: Wonk alert . . .

Spot's feeling lazy in the heat, so he'll pick of an easy one from the letters in the August 1st StarTribune:
Estate tax and slavery

According to the Star Tribune, the estate tax is needed because of the revenue the government receives. It claims this is good fiscal policy.

However, you neglect to state that the estate tax is an additional tax on money that has already been taxed. The government just wants to double dip on a pool of money.

The editorial also denounces the conservative activists for making a moral argument against the tax. So sound fiscal policy should trump morality? By that logic, then slavery should have been acceptable, because it was sound fiscal policy.

Stephen Lose, Coto de Caza, Calif.
It is the highlighted language that Spot wants to well, highlight. It is such a stupid argument that it could only be made worse by some idiotic reference to slavery. Never mind.

A lot of accumulated wealth, particularly in the hands of those people wealthy enough to have an estate tax burden, is actually untaxed capital gains on wealth appreciation. One of the things that happens when someone dies is that the basis of their property is adjusted - usually up, sometimes way up - to the fair market value in the hands of the heirs.

So, let's pretend that Daddy bought some shares of say, Google. He paid $100,000 for the shares, but when Daddy died, they were worth ten times that, a million dollars. Wow, pretty good investment! If Daddy sold the shares the day before he died, his estate would owe capital gains (income) tax on $900,000. If, however, Daddy died with the shares in his safe deposit box, there would be no income tax and the heirs would get their basis "bumped" up to $1 million. (Don't sell, Daddy, please don't sell!) Then, it would only be any gain above the $1 million on which the heirs would have to pay income tax. Neat!

You know what your tax basis is if you can't prove it? Zero. That 's one of the reasons for adjusting basis to fair market value when a person dies. Sometimes the heirs would have a devil of a time proving Daddy's basis, as in the case of real property where capital improvements made over the years add to basis but are hard to establish.

So, Stephen, would it be better to get rid of the estate tax but carry forward the basis in the assets to the heirs? Then, if they couldn't establish basis, they would get to pay capital gains on 100% of the proceeds of any eventual sale.

It doesn't always work this way, of course, but it does a pretty fair amount of the time. The only fair (and you want to be fair right, Stephen?) way to abolish the estate tax is to give their heirs a carry over basis from Daddy.

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