Taxes are an incredible controversial issue in moral, philosophical and economic terms. However, no tax is as controversial or as passionately argued as the estate tax. The estate tax, also know as the inheritance tax or the death tax is elaborated on by the I.R.A. The IRA writes,
“The Estate Tax is a tax on your right to transfer property at your death. It consists of an accounting of everything you own or have certain interests in at the date of death (Refer to Form 706 (PDF)). The fair market value of these items is used, not necessarily what you paid for them or what their values were when you acquired them. The total of all of these items is your "Gross Estate." The includible property may consist of cash and securities, real estate, insurance, trusts, annuities, business interests and other assets.” Historically the tax rate has been 55% on all inheritance over 1 million dollars. The debate about estate taxes was a major political talking point in the early 2000’s. Former President Bush passed a bill that created a one-year experimental repeal of the estate tax. That year happened to be 2010. Since January 1st Congress has not made any political move to repeal the act, which is surprising in a House and Senate with a Democrat majority. In 2011 the estate tax will be reenacted and will probably remain at its prior level of taxation of 55%.
The moral debates concerning the inheritance tax are a philosophical battle between freedom and equity. Ultimately estate taxes are arguably better for both the individual and society in objective economic terms, whereas the morality of the tax is up for dispute.
Moral Arguments
The estate tax is a fundamental values debate. Those who are in favor of it usually stress the equity it brings to the system. Mike Lapham a multi-millionaire and a proponent of the Estate Tax elaborates in CommonDreams.
“ I am organizing wealthy members of Responsible Wealth to oppose the repeal of the estate tax. As multi-millionaires, we have benefited handsomely from all that our country provides: public education, roads, clean water, legal protection, research funding and public safety, just for starters.” Lapham’s argument is essentially that people should give back to the system that gave them so much.
However many people’s principal concern is that the estate tax undermines the right for people to give what they want to their children. It is understandable that this tax can be seen as an erosion of fundamental liberty.
Tracy C. Tarum a candidate for House from Tenessee’s 5th congressional district writes,
“I believe we need a Constitutional Amendment that when an individual dies, the power of the Federal or State government to tax that person dies with them. Or better yet, an enactment of the Fair Tax and repeal of the 16th Amendment (the Income Tax). Obviously any back taxes due any government body would be extracted from the estate, the same as any other personal debt. However, the government would not be entitled to any further taking of monies from the estate.”
His point of view is by no means out of the ordinary and many people who identify themselves as member of the tea party or own small business agree. At the same time a majority of Americans are against repealing the Estate tax. The Foundation Center finds that, “ A majority (57 percent) of respondents in the national poll said they prefer reforming or keeping the tax as is, while only 23 percent said they favor full repeal.”
Economic Arguments:
There are a couple of economic arguments that are against the state tax but I will emphasize why the benefits of the estate tax outweigh the costs. One of the largest arguments against the estate tax is that it encourages wealthy individuals to spend or invest all their money rather than save or invest. Jim Saxton Chairman of the Joint Economic Committee Study writes in 1998,
“McCaffery argues that estate taxation penalizes work and saving and encourages large-scale consumption by the very rich. If individuals know that they will be unable to pass on their wealth, then they may choose to simply produce less wealth or to consume their wealth. The accumulation of savings does not occur merely by accident or as a by-product of work. Rather, savings represent the conscious decisions of individuals to forgo immediate consumption.10 The prospect of tax rates up to 60 percent, however, diminishes the value of their deferred consumption.”
Saxton could very well be right but even if a wealth individual chooses to spend most of their money to avoid taxes that should still be viewed as an economic success. The bulk work of the American economy is based on consumerism and any investment is good for American society as a whole. Not to mention that taxes are still be collected through sales, real estate etc. by buying places and things.
The economic arguments for keeping the estate tax are two fold. The first concern is an economic concern for society at large. The belief being that repealing the estate tax would cost a massive amount of expenditures in to enforce. The Center on Budget and Policy Priorities elaborates on enforcement,
“ Making permanent the repeal of the estate tax after 2010 — repeatedly proposed by President Bush— would add almost $1.3 trillion to the deficit between fiscal years 2012 and 2021, the first ten years in which the full costs of extending repeal would be reflected in the budget. This cost includes $1 trillion of lost revenues and $277 billion of higher interest payments on the national debt.”
The nation is already in the midst of a national deficit crisis. Right now our country does not have the monetary or political will to undergo such a massive expense. This reason alone is good enough to allow the estate tax to go back into place after 2011.
The second reason not to repeal the estate tax is because of individual economics. Many people think that they will save money if their inheritance is not taxed. But in reality they will just experience a larger capital gains tax. The estate tax provides a “ step up” bonus wherein an inheritance recipient is spared from most capital gains taxes.
Liz Pulliam Weston of MSN Money elaborates on the “ step up“ bonus, “Say your parents paid $20,000 for stocks that were worth $200,000 on the day they died and bequeathed them to you. Without the step up, you'd have to pay capital gains taxes on that $180,000 increase in value if you sold the investments. Thanks to the step-up, however, the stocks get a new basis of $200,000. If you sold them for $200,000, you wouldn't owe any capital gains tax.”
In conclusion many of the arguments behind an estate tax are values issues. However, the economic reasons to maintain the estate tax are very compelling. Repealing the inheritance tax would add more than one trillion dollars to the United States deficit. In addition, the level of money the individual is saving is relatively marginal because instead of paying an inheritance tax they would simply be paying a larger capital gains tax. While there may be some truth in the fact that families will give less to their children to be exempt from the taxes, more money into the consumer market is hardly a bad thing. This is all the more true in our current economic condition where frugality is killing businesses.
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