Sunday, April 17, 2005

Estate Tax

I don't see much to disagree with in Mark Kleiman's thoughts on the estate tax (here and here).


Blogger Dave said...

The one point on which I would disagree with Kleiman is on children of the very rich: he seems to think that most such children end up as lazy derelicts. While that's certainly true of many, there are many other counterexamples.

This is not as strong an argument as the others he offers (i.e., Saudis and Kuwaitis who don't work because oil revenues sustain their lives.) Children of rich people often (but not always) are encouraged to pursue education, like the rest of us, and to see work as its own reward.

Yes, there are egregious exceptions (Paris Hilton, etc.), but exceptions such as Hilton prove nothing but their anomalous nature.

8:54 AM  
Blogger Reg said...

I had a bit of a different reaction to Kleiman's post.

General Point: Taxpayer Rights?

Should a taxpayer have any protected *rights*? We have a Bill of Rights for our civil liberties because these rights are deemed to be fundamentally important to our country. Slippery slope and all that. Are there any basic taxpayer rights that our country holds as sacred? If not why is the slippery slope arguement ok for civil rights but not ok for taxpayer rights?

Here's what I'm getting at:

1. Is it ok to tax someone's net worth twice, three times, etc? Does it matter if they are alive or dead (estate) when we tax someone's net worth? What's the principle that we are protecting here?

2. Is is ok for someone to be taxed over 50%? How about 60%? 90%?Is there a point where we can say, "no that tax rate violates a principle of our country"?

3. Is there a complexity principle that says any reasonably intelligent individual taxpayer should be able to plan and process his/her own taxes? Does this currently apply to estate taxes now? Or do we just assume that tax attorneys are a complexity cost built in to current estate tax law?And by complexity I'm talking basic estate planning like preserving the first-to-die unified credit which can drastically change the estate's tax liability.

4. How stable should tax regulations be? Do we care if taxpayers plan-- sometimes unavoidably irrevocalby-- under one tax law regime and then be legislation or regulation changes hurting the taxpayer? Are there any principles here that we should protect or for that matter even care about?

Specific Points:
1. I think *Gift* tax exclusion should mitigate the $5 to 2 million people that Matt raised with regard to estate vs. inheritence tax.

2. Kleiman says we should crank up the estate tax rates. At least he's more consistent than other critics. Paris Hilton financial incentive structure would not change a bit if her dad's estate is taxed at 0% or 60%. She still would have more than enough for her and her friends to live a slothful lifestyle. If social engineering is the goal let's really be consistent: how about a unified exemstion of $1M and then 100% tax on all the rest. What's wrong with that? Why should she be entitled to any money she *never* worked for? Again, where's the principle here?

3. It's funning to here alot of the people opposing abolishing the estate tax talk about the unified credit. "Oh, of course the unified credit should be raised..." Oh really? I never remember hearing them when it wasn't indexed with inflation for many many years. Oh but now it's obvious. Their sincerity is touching. And btw, what should that unified credit be?It used to be $600K, it's $1.5M now, to go to $3.5M in 2009 and then to sunset. What should it be? What's the principle?

Back of the envelope:

a)Let's assume an estate of $10M and $1M exemption and 50% estate tax. Two parents one kid. Roughly, $2M exempt because Buffy has a competent tax attorney and then $4M net from rest of the estate. Total after tax: Buffy now is worth $6M. Buffy invests in stocks and bonds yielding a consistent annual income of between $300K and $600K.

b)Compare that with no estate tax. Buffy's now worth $10M and makes 500K and $1M annually.

Is Buffy's incentive structure to be a productive memeber of society really different under a) or b)
I think not. She can be secure in her sloth-dom under both scenarios.

So Mr. Kleiman unless your willing to really really crank up that estate tax I don't see your incentive point.

5:25 PM  
Anonymous Anonymous said...

Do you not believe that people are motivated to work at all for the welfare of their adult children or grandchildren? Followup -- how large of an exemption do you favor? I can't see a world where the latter isn't substantial.

9:31 PM  

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