Wednesday, July 23, 2014

Estate tax Repeal Musings

Relevant in 2011, but still funny
Every couple years when the election cycles roll around, someone brings up the estate tax again. It is usually when we are not at war, arguing about when a fetus is viable, if universal healthcare is a good idea, or if we ought to bail out the banks, so I guess this means times are relatively good.

That said, we have the highest estate tax exemption in history (minus the times of repeal). It only affects a fraction of the wealthy, and there are many things you can do to plan around it. Foundations, charities, various trusts and other vehicles allow you to minimize the tax, or just pay a little bit. Even so, there is a current bill that allegedly has majority support in the house sponsored by a proud Texan, Rep. Kevin Brady from a district north of Houston. My beloved, departing, congressman also co-signed the bill, but I can't be mad at him (full disclosure, he employed myself, my brother, and numerous friends whenever we needed internships or jobs).

H.R. 2429 would serve to repeal the estate/death tax, the generation skipping tax, but it interestingly enough keeps the gift tax intact. So, die with all the money you want but if you try to give away more than $5 million, we are going to punish you for it. Make sense? Will it pass? Likely the House, doubtful in the Senate. Let's examine the arguments for and against repeal of the tax.

Arguments Against Death Tax:

  1. Punishes Small Business without liquid assets to pay the tax, namely farms. 
  2. Double tax on income and assets that have already been taxed
  3. Doesn't produce that much income
  4. How can you be taxed for dying?
Here is a good propaganda video, decide for yourself if the information is accurate: 

Analysis:

The oldest argument against the estate tax is that it imposes an undue burden on the small farmer. They are land rich/cash poor, and upon death the family has to sell the farm/business just to pay the tax. Life insurance isn't that expensive, and a very reasonable policy can be set up to cover this. Ok, but that is still more money out of good working folks' pockets. So, let's see how many small farms/businesses this affects each year. The tax policy center tells us: 40, as of 2011, when the exemption was less than it is now. Less than one per state.

Rep. Brady is quoted as saying
 “A majority of the U.S. House stands for permanently repealing the terrible Death Tax,” Brady, who represents Walker County, said. “It continues to be the number one reason family-owned farms and businesses aren’t passed down to the next generation, and it’s time to bury it once and for all.”
While this may be an issue for the 40 families a year that bear this burden, I would argue that family wealth doesn't make it to the second or third generation because of laziness, entitlement, and apathy. Or good 'old affluenza. Else, $10 billion in revenue isn't much compared to other taxes, but its something. Tax on dying? This is a tough one to explain, but read on.

Arguments For an Estate Tax:
  1. It raises dearly needed revenue
  2. Only affects a tiny percent of households
  3. Without it, much less incentive for charitable bequests
  4. Ideally prevents dynastic/aristocratic wealth 
Analysis:
So, why would I argue against a tax cut? The only reason I'm talking about this is I read another article the other day, aptly titled "The rise of the non-working rich" by Berkeley professor Robert Reich. His general point is that rich are getting richer and that America is heading toward an aristocracy only taxes can fix.

Do I want to pay a death tax? No. However, I hope to have enough money at some point to worry about it. I think most people are of this mindset, which is why its fun to rage against the tax, even though 99% of us will never have to pay it. Reich's points are that if we don't keep the estate tax, and ADD new taxes (a tax on "wealth" he limits to stocks and bonds, similar to the property tax) then we are headed for trouble. Where he really misses the mark is suggesting that we eliminate the adjusted cost basis at death, which I have talked about here. This plan would punish the families who inherit the farm or their parents house, and crush IRA's and other investment accounts: this is not the way to go.

When the estate tax was less than $1 million (last in 2001) it affected a lot of people, and was an issue for a lot of small businesses and farms. Now its over $5 million. If you have over $5 million, you have the resources to plan for the tax hit.

If you don't argee with any of this, the biggest argument for an estate tax is that the richest guys endorse it: Warren Buffet, Bill Gates, George Soros, and so on. They get it, that if there is no penalty on dying with your money, not as many folks will give it away. Charities dry up, and the world is a generally worse place. So who, really, is spending all this time, money, and other resources fighting for an estate tax repeal?

Conclusion:

The net worth of the average Congressman is now allegedly around $1 million, but the average is skewed higher to around $7.8 million (who knew Nancy Pelosi was so loaded?).  So, these guys are worried about the estate tax, because they are going to have to pay it. I can't blame them, you need to think about #1 and vote your pocketbook. However, that is not who I want in Congress, or what I want them to be focusing on.  I have heard arguments that the estate tax only benefits estate planning attorneys: I haven't prepared a really comprehensive estate tax plan for a client in years. A few clients have had almost enough, but not many folks have that much money.

The death tax sounds scary, so people don't like it. I understand that. So raise it to $10 million per decedent, indexed for inflation. That will cover MORE of the family farms, and make the average congressman happy.  If we do get rid of it, once and for all, I'm afraid the consequences to the rest of us will dwarf any marginal benefit that those wealthy enough to complain about it will experience.



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