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Friday, June 29, 2012

TFD Opinions: The Estate Tax is the Best Tax

Of all the debates about taxes, the estate tax is the most depressing. This is mostly because a lot of people don't realize that it has no effect on them whatsoever. It's a tax that literally only concerns millionaires and their beneficiaries. In fact, the battle is between three camps. Those who are never affected by the estate tax but benefit from increased government revenue, those who are rich enough to just cross the estate tax threshold, and the extremely wealthy. This is because there are two elements to the estate tax: the rate and the threshold. Those who are just standard millionaires want the threshold to be as high as possible so their inheritance will pass on tax-free. Those who are billionaires are much more concerned with the rate, as a 10% difference results in millions if not billions of saved taxes. Not surprisingly, rich people have a lot of money to give to politicians and thus have the ability to exert a lot of pressure to push the threshold higher and the rate lower. The current combination is $5 million threshold and a 35% rate. The threshold has been as low as $1 million and the rate has high as 55% in the not too distant past.

Opponents of the estate tax have been done an excellent job of rebranding it as the death tax in an attempt to make it sound like a tax that affects everyone and taxes someone for dying. In fact, it's an inheritance tax. Given the lack of sympathy for wealthy people handing over tons of cash to their children tax-free, this campaign has been pretty important. I think almost everyone believes that people who do well in life should be allowed to pass some of their success down to their children to provide for them but it's excessive to claim that that money should pass down tax free for the rest of time. People claim that the estate tax is a double tax and that's why it's a bad thing but that's a weak argument. When you get paid a salary, that salary is taxed. When you go to the store and spend the money, the store gets taxed again on that income. Is that unfair? Every dollar gets taxed over and over again as it changes hands. What makes it so different when it's a gift? If anything, not taxing it actually discourages economic activity because it's pulling capital out of commerce and encourages inheritance over economic activity as a means of making money.

Think of this scenario. Person A works really hard their entire life and gets into good schools, gets a great job, works tirelessly, and invents a pill that treats cancer. For his efforts, his company pays him a $5 million salary. For all of his hard work and usefulness to society, he pays a 35% tax on his earnings. Person B is born into a rich family, never does any work, and does nothing productive his entire life. His father dies and leaves him $5 million. He pays no tax on it and then just lives off the interest. Does Person B deserve a better tax fate based on the luck of his birth? That's not to say he shouldn't get any money but would it be so bad if he got let's say $1 million tax free and was taxed at 50% on the rest for a result of $3 million in inheritance? Taxation is a zero sum game so by taxing Person B, that's that much revenue that doesn't have to be collected from other sources and thus could allow a lower tax rate on labor. The choice seems pretty clear to me; if something has to be taxed, it's pretty hard to beat unearned inheritance for the beneficiaries of wealthy people who will still receive a very large amount of money after taxes while everyone else in the country is made slightly better off.

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