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Tuesday, June 15, 2004

What Good is the Estate Tax?

Via Matt, Jane Galt states:

I attended a demographically similar institution somewhat to the north, and while my girlhood memories include recollections of some really repulsive conspicuous consumption, I'm afraid that my classmates offer one of the best cases I've seen for repealing the estate tax. To wit: none of their families seem to have paid any. Since the parents of children in New York City private schools are, without a doubt, the group upon which such a tax should fall, if it falls on anyone, this rather begs the question of which less tax-worthy groups are actually shouldering the burden.
There's also the fact that the estate tax may actually cost the treasury money, by giving parents such a strong incentive to transfer assets to children (who often get taxed at lower rates); and quite certainly costs the economy a great deal of money by a) spawning an entire tax-planning industry, full of people who would otherwise be productively employed b) causing people to shift resources to less valuable (but tax-preferred) uses and c) reducing the incentive of older, experienced workers to work beyond the point where they have accumulated enough assets to live out the remainder of their lives comfortably. (No, I'm sure Warren Buffet wouldn't stop working even if they took it all away. But what about the guy who owns your local convenience store?)

But really, the best argument is the rich, because they don't pay the damn thing. Only half the estate tax revenues come from that 1/10th of 1% who are really fabulously wealthy. The rest comes from schmoes who were careful--and too stupid to pay a planner, or keep their wealth in liquid assets. Is that really the sort of thing we want to tax at 55%?

A major hole in Jane Galt's claims here is that she is failing to acknowledge the ability of the estate tax to achieve public goals without raising much government revenue. Specifically, the primary legal method for the rich to avoid estate tax liability is through the formation of charitable trusts.

Many on the Right claim that welfare spending is not needed so much because America's rich are the most generous in the world in terms of charitable donations. This may be true, I do not have figures, but it does not acknowledge that much, if not most , of this generosity is coerced through the tax code.

An example my Estates and Gift Taxation professor shared with us in a lecture was how Jackie O passed about 100 million to her kids using an upside-down charitable remainder trust. The trust was designed so that the trustees (John Jr. and Caroline) would designate each year which 501(c)3 charities received the income of the trust for 30 years. After that, the principle was to be returned to the kids. The tax the estate owed was for the present value of 100 million in 30 years, which was determined to be about 3 million. So Jackie O passed 100 million to her heirs by only paying about 1.5 million in taxes.

But if the estate tax were repealed, is 1.5 million all that the public would lose? No. More important, with no estate tax, the public would lose the income on 100 million for 30 years going to public charities. Public charities in the U.S. do a LOT of work for the poor that is taken care of in other rich countries by the government. When those funds dry up, the need for government spending will increase dramatically.

Now, yes, I want to close the loopholes and collect virtually a 100% estate tax. But that is because I think that public spending should be directed by living voters, not dead rich people. Still, I acknowledge that charitable foundations do a lot of good work, and to suggest that the only thing the public loses by repealing the estate is the few funds the government receives under the current system is wrong.

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