Death and Taxes
Last week House Speaker Newt
Gingrich proposed abolishing the estate tax. Many other Republican politicians,
and some Democrats, have done the same.
The estate tax is imposed on
assets passed on to heirs when someone dies. It is the only federal tax on
wealth --as opposed to income or consumption. Congress imposed it in
1916, mainly motivated by Progressive Era concerns about the concentration of
wealth in the coffers of a few families.
The
estate tax is progressive --that is, the tax rate is higher on larger
estates. The first $600,000 is exempt. A couple can, therefore, pass on $1.2
million tax-free to their heirs. The rate is 37 percent on amounts between
$600,000 and $750,000. The highest rate is 55 percent, and kicks in at $3
million. But any amount inherited by a spouse is exempt. Pre-death gifts
of up to $10,000 a year per recipient are also exempt. Thus, a couple with two
children can pass on $40,000 a year tax-free. (Lifetime gifts above the
exempted amount are subject to the gift tax , which more or less
parallels the estate tax.)
Creative accounting also reduces the
estate-tax burden. Deductions , which include administrative costs and
charitable gifts, are ample. The tax is based on property's "fair market
value ," which is a malleable concept and notoriously underestimated by
professional estate appraisers. Squabbles between the IRS and estates over fair
market value are routine and often protracted. Trusts and other
complicated devices are also used to reduce the tax on large estates, although
Congress has eliminated many of these opportunities and the IRS has been
scrutinizing others more closely in recent years.
The estate
tax affects few . Last year, 69,772 estates with assets of more than
$600,000 filed forms with the IRS. The combined value of these estates was
$117.7 billion. However, because of credits and deductions--mostly transfers to
spouses--only 31,918 estates paid the government any money. That's 1.2 percent
of all estates. The IRS collected $17.8 billion. According to calculations done
by the group Citizens for Tax Justice, 95 percent of the $17.8 billion came
from estates valued at more than $1 million. Last year's numbers are similar to
the data from the last several years.
Proponents offer three reasons for the
tax : 1) It reduces concentrations of wealth, however slightly. 2) Because
of the charitable-contribution deduction, it spurs giving. Estates donated $8.2
billion to charity in 1992--almost as much as the $10.1 billion they paid to
the government. 3) The tax provides revenue--though this adds up to only 1
percent or 2 percent of total federal revenues in a typical year.
Staunch
opponents of the estate tax include farmers . Family farmers often
possess highly valued land, but little cash. Consequently, they say, inheritors
of farms must sell their farms to pay the tax. However, according to the IRS,
only one in 25 farmers leaves a taxable estate. The inheritors of such estates
pay very little. In 1992, the median estate tax paid by farmers was $5,000.
Much of the value of inherited land is offset by the deduction of debt. Farmers
and owners of small businesses also enjoy special exemptions. For
instance, their heirs may pay off the estate tax over 14 years at very low
interest--an option not available to others.
Many political conservatives argue that the
government taxes an estate's assets several times over--first when the money is
earned, then when it is invested, and finally when it's transferred to heirs.
They call the estate tax an exercise in class warfare , and argue that it
drains money from private investment. Some left-of-center economists have made
similar arguments. Former Federal Reserve Board Vice Chair Alan Blinder and
former chairman of the President's Council of Economic Advisers Joseph Stiglitz
argue that: 1) the estate tax fails as a redistributive measure because rich
people have become too good at circumventing it; 2) the considerable effort put
into circumventing the tax wastes economic resources; and 3) the tax encourages
consumption, instead of savings and investment.
Death is not all bad news
taxwise. The capital-gains tax on inherited property is based on
increases in value only since the property was inherited. Thus, billions of
dollars of profits on stocks, real estate, etc., escape the capital-gains tax
every year when the owner dies. Some have suggested a trade-off: End the estate
tax but tax capital gains at death.
