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Planning for Estate Tax Repeal (continued)

How Will the Repeal of Federal Estate, Gift, and Generation Skipping Taxes Affect...

Persons who pay tax?

Estate tax repeal affects the balance of who pays taxes.  There has been much emotional rhetoric on this topic, and far less reasoned argument.  Here is a sampling of some of this rhetoric, together with counter-points to it.  (Please note that the counter-points given below do not purport to argue that our present estate tax is perfect; the counter-points do, however, argue that there is a place in our system of taxation for a property tax payable only upon death or significant transfers of wealth.)

bullet"The estate tax is unfair. You are taxing wealth twice - when it is earned and then again when it is passed along to future generations."

We pay tax upon tax upon tax every day of our lives. We accept it. Why? Because it isn't the number of taxes that is objectionable, it is the amount. Nobody likes to pay tax. Paying a tax that is "unfair" infuriates us (and it always has).  It is "fairness" that should be the argument, not how many taxes. Think of a typical payday for an average American.  He receives a paycheck, with several taxes deducted already. He takes his car to the service station and fills up the tank, often with gasoline taxes and sales taxes added.  He buys some groceries, pays sales tax, perhaps some cigarettes and booze (shame on him - excise tax), and then goes home to pay his property tax.

The estate tax is a property tax - not an income tax. Unlike many property taxes, it is collected and paid only upon transfer of wealth.  Most would agree that taxes should be paid by those able to pay them.  "Wealth" is a measure of a person's ability to pay.  There are at least two elements of wealth (and the ability to pay tax); these two elements of wealth do not always coincide.  One person considered "wealthy" may have a fabulous income but may not have accumulated vast estates, while another "wealthy" individual may have a relatively small income while having a vast accumulated store of property.  When you argue that the estate tax is unfair you're implying that the latter individual - the one with vast stores of property but relatively small income - should not be taxed while the other individual - the one with high income but relatively small wealth accumulation - should bear the burden.  Is this "fair"?  Should we make it ever more difficult to obtain accumulated fortunes by over-taxing income, while making it ever easier to inherit accumulated fortunes by under-taxing the transfer of wealth?  Is that "fair"?  Who is benefiting from the repeal of the estate tax, and who is paying the difference?  Note that this is not an "all or nothing" issue, unless you make it one by repealing the estate tax in its entirety.  It's not unlike taking the putter out of your golf bag. You can still play golf, but it will be more difficult and your score is likely to suffer. Or for you cooks out there, how about throwing out the spice rack because you once poured too much salt into your dish?

bullet"It is an unfair tax imposed only for one reason, to penalize the accumulation of wealth."

The estate tax doesn't "penalize" accumulation of wealth any more than the income tax "penalizes" a person for having the gall to earn income, or a gas tax "penalizes" someone for buying gasoline. It is one of many ways of determining who should be paying taxes.  It is based upon broad notions of "fairness" - that those with more should pay more.  Ownership of property, and the policing required to maintain that ownership, increases the cost of government.  So not only is the inclusion of an estate tax as one of the many taxes we pay more fair on a "pay as you are able" basis, but also on a "pay as you need it" basis.

bullet"Anytime something is taken from one citizen and given to another it is stealing. When government takes to defend our shores or provide a good legal system so that all our civil rights are protected it is legitimate. More than that it becomes stealing."

The unstated assumption here is that estate taxes are somehow irrevocably linked to a process of taking money from the rich and giving it to the poor (also known as the "Robin Hood" theory). There is no such linkage. Estate taxes are levied for the benefit of the general fund supporting the federal government (and, through the State Death Tax Credit and the "pick up tax" imposed by most states, supporting state governments as well). This person's "beef" is with spending on social projects, not raising revenue. The estate tax is neutral on spending.

The argument also implicitly states that because I don't like this law, I don't have to obey it. It is "stealing." I didn't agree to it. Take that one step further and you can see that no law passed by congress can be enforced unless we, and each of us, has implicitly agreed to obey the laws passed by congress in accordance with the constitution. If that's not the case, something needs to be done about it.

bullet"If government has the money it will always find particularly worthy reasons to spend it; only when the money is not available will it make the hard decisions necessary to determine a level other than 'everything.'"

Eliminating the estate tax will do absolutely nothing to choke down government spending. These are completely separate issues.  You could make the same argument to reduce the income tax or any other tax.  By not paying attention to which tax you are reducing you have lost sight of what is fair and what is not.  Address spending, which is the true issue, and pay attention to the relative proportions of the taxes being reduced and how that affects those who ultimately pay them.  Is the entire tax system fair?

bullet"The Estate tax is paid only by the unwary."

The estate tax has as many (or as few) unwary taxpayers as any other tax. Anyone who hasn't heard that there is a property tax on death and that there is something that can and should be done about it must be comatose. If you're very wealthy and not leaving everything you own either to your spouse or to charity, you ARE going to pay an estate tax.  The estate tax can be made better, of course. Using an old analogy, there is "bathwater" here. But throwing the baby out with that bathwater is a very poor policy choice.