From: Zhang, Yangkun (Yangkun.Zhang@FMR.COM)
Date: Wed Oct 18 2000 - 11:24:45 PDT
I must disagree with the analysis of the estate tax. I certainly understand
the arguments for the death tax, as I myself used to believe that everyone
should start life equally, and hence inheritance is bad. But as I learned
more and more about economics, the death tax seems to be a down-right
terrible idea. Take a look at the paper
The Economics of the Estate Tax
by the Joint Economics Committee (I used the JEC a lot because they're a
TRULY bipartisian economics research group. My favourite Cato Institute is
Libertarian, and tends to lean towards the right on economic issues.)
I'll give you a quick summary:
· The existence of the estate tax this century has reduced the stock of
capital in the economy by approximately $497 billion, or 3.2 percent.
· The distortionary incentives in the estate tax result in the inefficient
allocation of resources, discouraging saving and investment and lowering the
after-tax return on investments.
· The estate tax is extremely punitive, with marginal tax rates ranging from
37 percent to nearly 80 percent in some instances.
· The estate tax is a leading cause of dissolution for thousands of
family-run businesses. Estate tax planning further diverts resources
available for investment and employment.
· The estate tax obstructs environmental conservation. The need to pay large
estate tax bills often forces families to develop environmentally sensitive
· The estate tax violates the basic principles of a good tax system: it is
complicated, unfair and inefficient.
· The estate tax is a "virtue tax" in the sense that it penalizes work,
saving and thrift in favor of large-scale consumption.
· Empirical and theoretical research indicates that the estate tax is
ineffective at reducing inequality, and may actually increase inequality of
· The enormous compliance costs associated with the estate tax are of the
same general magnitude as the tax's revenue yield, or about $23 billion in
· The deduction for charitable bequests stimulates little or no additional
· The estate tax raises very little, if any, net revenue for the federal
government. The distortionary effects of the estate tax result in losses
under the income tax that are roughly the same size as estate tax revenue.
Consider "the conclusion drawn by Henry Aaron and Alicia Munnell, two
prominent liberal economists, in their study of the estate tax: In short,
the estate and gift taxes in the United States have failed to achieve their
intended purposes. They raise little revenue. They impose large excess
burdens. They are unfair."
Here's "another critical analysis of the estate tax was prepared by Joseph
Stiglitz, who served as Chairman of President Clinton's Council of Economic
Advisers. In a 1978 article in the Journal of Political Economy, Stiglitz
argued that it was wrong to look at the distributional aspects of estate
taxation without considering the long-term impact on capital accumulation.
Using such an approach, Stiglitz found that the estate tax may ultimately
cause an increase in income inequality."
I won't go into too much detail on the pros and cons of the death tax, as it
is covered in great detail in the JEC report. However, here's another site
by the Newspaper Association of America,
Some key points:
· Over 70 percent of the American public believe the estate tax is unfair
and should be repealed.
· The estate tax raises less than 1.5 percent of the federal budget.
· The estate tax is the most inefficient tax on the books. The government
spends 65 cents of every $1 raised on enforcement and collection, and
businesses spend millions on accountants and lawyers to prepare for the tax.
· HR 8 represents a compromise, as it includes the elimination of the
stepped-up basis in capital gains proposed by Senate Democrats. As a result,
capital gains that are not currently taxed will be taxed under the bill if
and when heirs sell a business or other assets.
· Family business "carve-outs" do not solve the problem. Expanding these
carve-outs would only benefit lawyers and accountants, not family
businesses. Congress should end-not mend-the death tax.
* In 1910, there were 2,100 independently owned daily newspapers in the
United States. This number dropped to 700 in 1980 and today stands at
approximately 300. The burden of estate taxes is one of the largest
challenges facing family-owned newspapers. Recently, the Chicago Defender,
America's oldest and largest circulated African American-owned daily
newspaper was recently forced into financial distress due to the death of
the principal newspaper owner and the pending tax on his estate. Financial
resources may not be available to keep the 93-year old newspaper in the
hands of African American owners.
* Repealing the estate tax is not only important to the newspaper industry
it is a priority of our customers - newspaper advertisers - from the car
dealership to the travel agency to the local real estate company.
* The estate tax brings in less than 1.4 percent of total federal
revenues, and it is estimated that enforcement of the tax costs the federal
government 65 cents for every dollar it raises.
* According to the Joint Economic Committee, in this century the estate
tax has reduced the stock of capital in the economy by $497 billion, a 3.9
percent reduction (The Economics of the Estate Tax, December 19, 1998).
* Family businesses could better use their resources to modernize
equipment, expand operations and create new jobs, rather then spend hundreds
of thousands of dollars for lawyers, accountants and insurance to deal with
the estate tax.
* A person who works hard, pays taxes along the way - both corporate and
income taxes - and invests and saves money should not be penalized with a
punitive tax at his or her death. Through this onerous tax the federal
government is sustaining a public policy that undermines the fundamental
principles that our nation supports - hard work, savings and fairness.
As for the left's oft used argument that the death tax does not harm famrs
et all, read this legal advise column from the San Antonio Express:
Dear Mr. Premack: I'm confused about something I read in the Express on
Sunday, June 4. The article stated that Congress has acted to ease the
estate tax burden by giving family-owned businesses and farms an exemption
of up to $2.6 million per family this year, compared with $1.3 million for
other estates. My mother is an 80 year old widow with net worth of about
$650,000.00. A big part of her estate is 165 acres of farm & ranch land she
leases to a neighbor. It has been in the family since the 1900's. Would her
land come under the law referred to in the article? I think the estate tax
is the most unfair tax there is. Thanks. - B.W. via Email
The family-owned business exemption was created in 1997. It allows
"qualified" family-owned businesses to deduct up to $675,000 from the gross
estate. The law only applies if her farm makes up more than half her estate,
only if she leaves it to family members or legally "qualified heirs," and
only if she is a U.S. citizen or resident.
Further, she must have worked at or managed the farm for five of eight years
prior to her death, and after her death a family member must work at or
manage the farm for five of eight years. Since she has leased out the farm,
she probably does not qualify for the additional estate tax exemption.
As you say, the federal estate tax seems to be very unfair. It taxes the
savings and wealth that hard-working people accumulate during their
lifetimes, after they have paid income taxes, sales taxes, excise taxes,
etc. on that money already.
*snipped stuff about step up basis et all*
Have you noticed how complex all the rules are with respect to estate
handling? Do you really think someone with a farm and little fungible assets
can afford the expensive attorneys and accountants to ensure that her estate
is left to legally "qualified heirs" and that ensuring that she is indeed a
"qualified" family-owned business (what the hell does that mean anyway?).
And do they REALLY expect a 80 year old widow to have contributed materially
to the operation of the farm or business in the "five of eight years prior
to her death"?
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