Wealthy families fighting for no taxation on wealth transfers
crossposted with Ataxingmatter
So far, at least four of the wealthiest few Americans have died in 2010, when there is no estate tax under the “reduce, repeal and spring back” law enacted as part of the Bush series of tax cut bills with gimmicking sunset provisions. They are George Steinbrenner (worth $1.5 billion), Janet Morse Cargill (worth $1.6 billion), Dan Duncan (worth $9.8 billion), and Walter Shorenstein (worth $1.1 billion). The temporary elimination of the estate tax in 2010 cost the government roughly $6.5 billion in estate tax revenues in connection with just these four deaths. That a significant amount, especially when one considers that much of the value in these estates is likely to be financial assets on which the decedents paid very little in taxes during their lifetimes and on which any tax that was due was likely at a preferential capital gains rate. See TJ Wall, Steinbrenner Fourth Billionaire in 2010 to Escape Taxes, if Not Death, MichiganEstatePlanningLawBlog, July 21, 2010.
Bernie Sanders (independent senator from Vermont) introduced a bill this year –the Responsible Estate Tax Act (S. 3533) that would return the estate tax under Code section 2001 to the 2009 exemption level and add a progressive rate structure. Id. Accordingly, there would be an exclusion amount of $3.5 million and the tax would be determined by applying a 45 percent rate for values of estates from $3.5 million up to $10 million, 50% for amounts above that up to $50 million, and 55% for amounts over $50 billion, with a 10% surtax on estates of more than $500 million (i.e., amounts in excess of $500 million would be taxed at 65%). The bill would be retroactive to the beginning of 2010. That is probably a reasonable compromise, though I have argued elsewhere for a lower exemption level, since most estates would be excluded with a $2 million exemption amount.
The bill also provides for consistent reporting for estates and recipients of property, elimination of valuation discounts for non business assets held in a entity that is not actively traded, and elimination of minority discounts for transfers of interests in an entity when the transferee and members of the family of the transferee have control of such entity. It also requires grantor retained annuity trusts to have at least a 10-year term. Those are important anti-abuse provisions that would limit the ability of wealthy estates to evade the estate tax.
Regrettably, that bill is sitting in the Senate Finance Committee, where Max Baucus is chair and favors an approach that would cut much more taxes for wealthy estates.
In the meantime, the groups that are pushing for estate tax “reform” (by which they mean cutting the amount wealthy estates have to pay) are busy putting out propaganda attuned to the worries of ordinary people who might not otherwise support repeal of a tax for the wealthy. In other words, the propaganda claims that letting the wealthy keep even more of their wealth for their heirs will result in a trickle down of jobs to us ordinary folk. Douglas Holtz-Eakin and Cameron Smith, for example, have another of their opinion pieces on the estate tax, published under the aegis of a foundation that has been fighting the estate tax with propaganda sound bites for decades (the so-called “American Family Business Foundation”). See Growth Consequences of Estate Tax Reform: Impacts on Small and Family Businesses, American Family Business Foundation, Sept. 2010. Not surprisingly, the rhetoric claims that cutting the estate tax is “an important element of pro-growth tax policy” since it affects asset accumulation (DUH) and hence “payroll and investment decisions of small and family businesses”. The implication, of course, is that if only the wealthy are allowed to pass even more of their wealth to their heirs tax free, that money will be used to create jobs in the existing business and to invest in ways that create new jobs in new businesses. So the paper concludes that an estate tax rate of 60% “will cost as much as 1.5 million jobs” while a rate of a mere 15% “could diminish hiring by over 350,000 jobs.” It claims that estate taxes reduce capital outlays, lower “the probably of new hiring by 8.3 percent” and leads to “cutting the size of payrolls by 2.5%.”
Are those conclusions reasonable or justified or are they just the predictable output from mathematical models that start with assumptions about growth and investment that lead inexorably to such conclusions?
Let’s examine the paper’s arguments that “the estate tax is an important element of pro-growth tax policy for economic growth”:
1) The paper starts with an argument against stimulus and in favor of “pro-growth policies”. This is particularly unconvincing. It talks about the need for generic “households” to repair their balance sheets, and then suggests that stimulus doesn’t contribute to this while the estate tax would, by helping business sector spending.
Of course, the estate tax puts money in the pockets of the ultra wealthy, who lost the least in the economic recession and are least likely not to do whatever is needed in their business to increase its activity. Not convincing.
2) The article argues that small and family businesses and entrepreneurs are important to the economy.
Yes, I’ll go along with that.
3) the article then asserts that since these businesses are important , the “dramatic impact” of the estate tax on their owners (and hence on their owners’ enterprises) has a “disproportionate impact” on the overall economy.
Small businesses–most owners of which aren’t at all affected by the estate tax because their value is well under the exemption limit–are vitally important to the economy. Family businesses–many of which are truly megalithic industries (WalMart, Koch Industries, and many other huge corporations are “family businesses” in some sense of the word) are important to the economy, but in most cases either also small businesses and so not affected by the estate tax or such large businesses that the fact that the heirs to the family wealth may receive a little bit less is not going to distort business decisions or hinder business expansion when business expansion will make more money for the business.
The article claims that the effort to do estate planning results in less asset accumulation, thus affecting the amount the wealthy heirs can get and invest, thus affecting the economy and job creation. Oh, please. Yes, there is a cost to estate planning, and that cost may affect the savings rate of the wealthiest family by some small amount. There are several responses to that. One–make the rules harder to get around by typical estate planning techniques. The Sanders bill offers a good start–by eliminating valuation discounts and minority discounts in many cases, by setting up harder requirements for GRATs, and by requiring certain consistent reporting of basis. There should be more such provisions, and then the wealthy would spend less of their assets planning for how to avoid the estate tax. Two–estate planning would take place whether or not there was an estate tax, since much of it is to provide a way for a wealthy old curmudgeon to control his heirs, etc. Three–increased savings by the wealthy is not necessarily a benefit to the US economy in general, though it may be beneficial to the wealthy and their heirs. Savings may be reflected in offshore investment, etc. (see a number of earlier postings).
Now, the article relies on the fact that the estate tax is negatively correlated with the reported net worth of the top estates (quoting much of their own prior work and admitting that their “results are far from conclusive”). We’re supposed to pity the wealthy because the estate tax “reduces the lifetime marginal rewards for work, risk-taking and investment when compared to leisure or consumption.” Again, there are a number of responses to that observation. One–this is standard Chicago school economics, but we actually don’t know that the wealthy reduce their work because their estate may be subject to tax. They may increase their work instead. Economics can’t really say. Two, taking risks is of value when it is associated with entrepreneurship, but risk-taking is not per se valuable. IN fact, much of the risk-taking associated with concentrated accumulation of assets is likely to be of the kind that led to the financial crash–too much interrelationships among parties, too much throwing money after engineered transactions, etc. And as for “investment” versus “consumption/leisure”, again, we cannot truly predict what effect estate tax rates have on that decision or how that decision affects the economy–more investment may well be bad for the US economy if it is in offshore entities, while more consumption may be good for the economy if it is in US goods. So the “entrepreneur facing the estate tax” who “decides to buy an around the world cruise” to reduce the tax is not to be pitied. It’s unlikely that this person with such wealth is really an active entrepreneur in the first place–he may once have been an entrepreneur, but is likely at this point merely a preserver of wealth or even a monopolist (think Bill Gates and Microsoft). The cruise may well employ more people than if the wealthy person invested it in a hedge fund that made its money by engaging in financial transactions with other banks or shadow banks.
And to the extent that asset accumulation is limited, that is a good result–consolidation of wealth in few estates leads to oligarchy, and that may work ok for economic growth of the few estates at the top, but it isn’t good for the majority of ordinary citizens. Spreading the wealth more likely spreads job creation, the potential for entrepreneurship, and the ability of most of us to manage a decent life, contributing to the commerce of the community.
The article of course reiterates the tired argument that increasing the effective tax rate on capital income “affect[s] business growth and success.” Again quoting an earlier piece by Holtz-Eakin with others, they claim that “small businesses likely to face the estate tax experienced slower growth than otherwise situated competitors.” Even if this were true, the number is so small as to be de minimis–only 2-3% of small business owners will pay an estate tax.
The article then goes on to set the libertarian arguments–that the estate tax is a “tax on your right to transfer property at your death.” (of course, isn’t it really a tax on the ability of heirs to receive property from a decedent rather than having that property escheat to the state.)
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In other words, there is a lot of hot air and not much substance in this further “report” from Holtz-Eakin shilling for the groups that want to eliminate the estate tax. They are the same arguments that have been put forward for years. See, e.g., Helmuth Cremer and PIerre Pestieau, The Economics of Wealth Transfer Tax, June 2010, an article which summarizes the critique of the estate tax as follows:
“Critics contend the tax distorts investment and other choices of the rich, and also affects owners of small family businesses. It raises very little revenue at a heavy cost to the economy. It generates complex tax avoidance schemes. The hardest hit by the tax are farmers and small business people who work hard to pass on an enterprise of value to their children. From a number of recent publications, we have listed a number of charges addressed to estate taxation in a sample of writings that are often more partial and polemical than balanced and rigorous.” Id.
The authors then provide responses to some typical anti-estate-tax points. They note that while the estate tax does not raise “considerable sums” it does makes up a non-negligible 2% of total federal tax proceeds. They agree that the estate tax doesn’t eliminate wealth inequality, but note that it does have some impact. They admit that people with the same size estate pay different taxes depending on many factors (asset structure, fiscal engineering, suddenness of death, etc.) but note “that calls for reforming the tax and not necessarily killing it.” While heirs can be asset rich and cash poor, valuations often reflect the current use of the property rather than its market value. The estate tax does have a positive effect on charitable contributions (which after all isn’t a primary reason for the tax). The estate tax theoretically violates the tenet of “no double taxation” but in fact the realization and other rules mean that much of the gain in value of assets has never been subject to capital gains tax or any other tax. As far as the concern that the estate tax results in over development and thus harm to the environment, the authors suggest that an arrangement between heirs and the State can solve that problem. As for estate tax critiques that argue that repeal would create millions of jobs, increase business capital, increase probability of hiring, increase payrolls, expand investment and slash the jobless rate, the authors scoff that “these forecasts are too rosy to be credible.”
The estate tax is an unpopular tax in the US, perhaps largely true to the constant stream of anti-estate tax literature or, as the article notes, to the particular framing of questions about the estate tax. Fewer than 2% of decedents’ estates are subject to the tax.
Too much hot air on both sides. Most Americans agree that we should not tax gains that have already been taxed. It seems most Americans are also unaware of the “basis reset” provision that allows a portion of an estate to pass to heirs without EVER paying ANY tax.
Here is a reasonable high level proposal:
1) Calculate all of the taxes that would be due if the estates assets were sold. Make this calculation based on the situation of the heirs.
2) Allow heirs to pay any amount of that tax by any means they wish, including selling some inherited assets.
3) Establish a IRS entity to retain an interest in the untaxed inherited assets equal to the unpaid tax with interest accruing at a statutory rate. This retained interest would restrict the sale and some activities of the assets including the payment of dividends proportional to the unpaid balance. This would be a super senior claim. There are lots of details to iron out.
Note that this plan also eliminate the “basis reset”. The basis of all assets would indeed be reset to the value at time of transfer, but this is now fair, since that new basis was used to calculate tax owed already. Perhaps a portion of the estate should be “deferred” in that no tax would be due on it, but at the same time the heir would take on the old basis rather than stepping it up so that this would amount to a partial deferral.
Note: Basis should be indexed for inflation for EVERYONE.
Steinbrenner Fourth Billionaire in 2010 to Escape
Taxes, if Not Death
I’m more than a little worried that they all may fake it before the end of the year.
Has anyone thought of that???
Or we could just do what somebody else on here suggested and call it what it is: Income.
I doubt I’ll ever understand why the IRS gives a tax break based on which vagina one pops out of.
What a great argument: “attempting to evade Law X takes effort, so we should get rid of Law X”. The AFBA may want to loan this to the US Chamber of Commerce – it could be equally applied to practically *all* regulation…
If we called it “income” then we wouldn’t propose tax rates different from the income tax rate.
I think we should all be free to give whatever we want to whomever we want without being taxed on that. If I’ve got $10,000 in the bank then why should I or the recipient have to pay tax on that if it’s money I already paid tax on? Now if I have $10,000 in stock that I bought for $6,000 and I give it to someone, one of us should incur an immediate tax liability for the $4,000 gain. That’s only fair. In fact I’d say that the total tax liability should equal the higher of the amount calculated for either the giver or receiver. But the current system allows this to be evaded via the basis step up.
I don’t understand why someone’s death is a taxable event with its own special tax system. Our taxes should be related to our commercial activities and asset transactions.
It is pretty simple. All you need to do is get a legal name change to Sun Ra, build yourself a McPyramid, dress a bit differently when going out on the town, and under existing tax law you can take all your toys, hard currency and pets with you.
For instance, Donald Trump is making a bid on that vacant land in NYC…..
And I’m not. Income is income whether you rent your body and mind to get it or whether it’s lotto winnings or birthright. Give money to whomever you want – it’s income to them and should be taxed accordingly. Don’t want to pay more taxes on it? Give it to charity.
Income from an inheritance can and should be taxed one of two ways. Money’s received after taxes on inherittance paid should be taxed as dividends to the next generation. If the estate is passed tax free to heirs all income generated should be taxed as ordinary income. Heirs should not get a free ride in perpetuity. They should also being paying medicare tax on the income generated. It is difficult to accumulate wealth when you are paying taxes on every dollar earned through wages. Multigenerational heris should not have such a free ride when they contibute nothing to the perpetuation of the familys wealth.
The temporary elimination of the estate tax in 2010 cost the government roughly $6.5 billion in estate tax revenues in connection with just these four deaths.
Do you have knowledge to their estate plans prior to death that would indicate/demonstrate that they didn’t have legal tax avoidance mechanisms (e.g., irrevocable trusts) that would support your calculation?
the ultra wealthy, who lost the least in the economic recession
I thought the narrative was that wealth was overly concentrated among the wealthy, in which case, this isn’t true. Has the narrative changed?
If this is truly about paying a fair share of your “income”, then why isn’t the tax set closer to the capital gains tax, rather than 45-65%?
Yeah, too bad your worldview requires infringing upon the economic freedom of everyone else.
Only four billionaires dead in 2010? Too bad it wasn’t a particular several others. Shall we open the discussion to those billionaires we’d most like to see doing their families a great favor before the end of 2010?
You say freedom, I say fairness (aka justice). Is it fair that Steinbrenner’s heirs will pay nothing on their inherited millions because the old man was nice enough to die before the inheritance tax holiday (aka the “Throw Momma From the Train before 2011 Act”) ended? Is this economic freedom you cite more important than making sure everybody is taxed fairly on their actual income?
Right now we are collecting significantly less in taxes than we are spending. Indeed, the Federal government collected a record LOW percentage of GDP last year. Drastic reductions in spending to bring it in line with current tax collections is not going to be politically acceptable to to any but the most ardent small government libertarians. Accordingly, some taxes are going to have to go up.
The right question to ask is which form of tax collections will be the most damaging to economic growth and political stability? Is it better to have a lower Estate tax and higher income taxes? Lower estate taxes and a VAT? When looked at in this light, an Estate tax is far preferable to any alternatives short of Pigouvian taxes on energy, also a political non-starter.
I don’t really care if he dies or not but I’m hard pressed to think of a greater waste of a father’s legacy than one Steve Forbes. Whether championing pathetic political campaigns for president or wrecking Fortune’s legacy he’s no credit to Malcolm.
The old man should have made him get a job and learn how money is really made.
meant Fortune’s reputation, not legacy.
I thought that John Kluge recently died, Forbes had his wealth at around $6.5 billion.
m.jed–the 6.5 billion figure is from the article cited. I don’t have independent knowledge of the amount.
As to the “lost the least”–I view the middle-class loss of home, livelihood and future a greater loss than loss of some percentage of stock value. Of course, the ultra wealthy also generally could take advantage of hedges and other protections against market volatility not available to ordinary Americans.
some good points, Ohwillike, about the “rough justice” nature of taxation and thus the appropriateness of the rates in the Sanders bill as a substitute, so to speak, for taxation of income.
I think there may be some confusion about the amount lost to the repeal of the estate tax. Prior to the Bush regime, the estate tax brought revenues of around $20-30 billion a year. The increased exemption and lowered rate means that the 2009 estate tax brought in less than that, though as you note the largest estates are the ones that have the least motivation to avoid the tax (but might end up giving it to charity instead). I’ve read a number of empirical studies that have shown that the impact of taxation on charitable giving is not as strong as ordinarily assumed–of course, this is a difficult issue to prove and the many variants of the estate tax in the last few years have made it even harder to draw sound conclusions.
Ohwilike.
Well said.