The Death Tax Label - Essay Example

?563575 Everyone knows that a portion of the money they have earned will be going to the government to pay its bills, and most people will concede that taxes are a necessary evil if there is to be infrastructure, order, and public assistance among many other services which taxes fund. However, one tax has more detractors than supporters even though some who speak out against it would benefit from it the most. This specific tax is not assessed on money or assets that a person earns but on money that s/he inherits—the inheritance tax. The inheritance tax also goes by the name “estate tax” or the more dastardly sounding “death tax.” Of course, the moniker one chooses all depends on how one views the tax. Is it a tax on a deceased person’s estate willed to his/her heirs or a tax on the unavoidable but mostly undesirable act of dying? Is it an income tax or a wealth tax or both? The initial emotional reaction to the inheritance tax is usually distaste probably because, as the old joke says, it includes the two most inevitable and unpleasant events in life, death and taxes. However, framing it as a death tax is not entirely accurate, honest, or ethical. The “death tax” label came about during the debate in the first years of George W. Bush’s presidency when those who saw the inheritance tax as a tax on wealth—their wealth—wanted it repealed. Using terms such as “death tax,” and framing the inheritance tax as a “double tax,” the small minority, approximately 2% of Americans, won the repeal. It did not hurt having a president set not only to inherit but who also has heirs to a sizeable fortune, and who wanted to please his “base,” deep-pocketed conservatives. In all actuality, the inheritance tax is a wealth tax: it taxes estates willed to heirs that net worth exceeds $5 million, so only the wealthy are affected by it. Even David Joulfaian of the U.S. Department of the Treasury admits that it is a wealth tax. “The estate and gift tax is the only wealth tax levied by the federal government. The estate tax was first enacted in 1916 and applied to the wealth of decedents with estates in excess of $50,000. It has undergone numerous changes, especially in 1976, 1981, and 1997. Significant temporary changes were introduced in 2001 and are set to expire in 2011” (Joulfaian, 2010). Yet even many poor people oppose it because they believe it will somehow affect them, and that has to do with the way those who the tax will affect marketed the idea to the masses. Conservatives succeeded in their efforts to have the estate tax temporarily repealed mainly because of the way they presented their argument. They framed the argument against the estate tax as though it would affect everybody who would inherit any sum of money or property upon a relative’s death including the heirs of small business owners and farmers. These people fear that, should they die, their business or farmland would be worth more than the $5 million dollars where the estate tax kicks in, and then their heirs would not be able to keep the business or land, which would affect the future income of the heirs. Small business owners and farmers, who subscribe to the conservative view, fear that if they die suddenly their families would be left in poverty because the government would tax them out of their source of income. But, conservatives not only emphasize the fact that heirs would not inherit the full worth of a business or farm they include the presumption that small business owners are so concerned over the estate tax that it affects their hiring practices. The website, Nodeathtax.org, says, “The United States economy has endured a severe recession and is currently growing too slowly. Accordingly, it is imperative that policy be focused on generating the maximum possible pace of economic growth. The estate tax is an important element of pro-growth tax policy. Recent research indicates that the estate tax has significant impacts on asset accumulation (and, thus, balance sheet repair), as well as the payroll and investment decisions of small and family businesses” (Holtz-Eakin & Smith, 2010). Unfortunately, the “recent research” that indicates that “significant impact on asset accumulation” is not cited. The other side of the issue, those who see the inheritance tax as a progressive tax, meant to equalize the opportunity for all Americans, has a lot of experts and statistics who support them. The IRS lays out several reasons why estate taxes “serve a number of legislative objectives” (Internal Revenue Service, 2011). The obvious reason is that they generate revenue. “In 2003, these taxes yielded about $22 billion and accounted for about 1.2 percent of federal government receipts.” Another reason the IRS defends the estate tax is that they “act as a backstop to the income tax by reducing the erosion of its base.” In other words, a lot of the capital income of wealthy people escapes taxes for one reason or another. “Under the personal income tax, accrued capital gains are taxed only when realized, and interest income from state and local bonds, as well as proceeds from life insurance policies, among others, are tax-exempt.” The estate tax helps to recover some of that. The IRS also admits that the inheritance tax serves “to reduce wealth concentration. By taxing the wealthiest estates, the estate and gift taxes are expected to reduce the size of bequests, thus reducing the wealth accumulated over generations. This is also accomplished by subjecting capital income that has escaped the personal income tax to estate taxation.” The estate tax also functions to control generational wealth. That is, wealthy people often try to avoid taxes by naming grandchildren as heirs (as opposed to children). These wealth transfers are taxed at the time of transfer and also when they transfer that wealth (and any other accumulated in the ensuing years) on to their children/grandchildren. In the meantime, the wealth could have grown tremendously or it could have diminished to a great extent and not be subjected to an inheritance tax. Finally, the federal estate tax also minimizes the competition between states, some who have state inheritance taxes and some who do not. “The state death tax credit virtually offsets taxes levied by states on the wealthiest of estates” (Internal Revenue Service, 2011). One must keep in mind though, that federal estate taxes are only levied on estates that exceed $5 million dollars in assets and only on the amount over $5 million. Those who oppose estate taxes do so by saying that any tax makes business owners less likely to hire, which is bad for the economy, and even worse in the current unemployment crisis. Perhaps the argument that estate taxes are bad for fiscal recovery has to do with the current buzz about the economic state of the country. Many people all over the world are currently concerned over the horrible financial predicament that affects most of the people on the planet. In the United States the biggest worry is unemployment. No one seems to be hiring and millions are out of work. If conservatives can say that estate taxes affect the way a small business owner hires that will get the attention of everyone—conservatives and liberals alike. Yet, even before the economy took such a drastic plunge the right wing was opposing estate taxes. As far back as early in the twentieth century people opposed the estate tax much to the amazement of scholars, who just like now, are perplexed that the majority of people oppose the tax when it affects such a small minority of people and that minority are the wealthiest people. Ann Mumford tells of Simeon Baldwin, who in 1905 explained why the tax should be accepted by most people. “As long as society agrees that some form of taxation is necessary to fund government, then inheritance taxation should be one of the least controversial forms of tax assessment and collection. ‘The real victim is dead’, as Baldwin suggested, and therefore not in a position to protest” (Mumford, 2007, p. 568). Yet then as now, many living people oppose the inheritance tax. Probably the reason cited most frequently for the opposition has to do with double taxation. It seems unethical to tax a person’s income while they are alive and then to tax it again after they die and transfer it to their heirs. The person who dies with more than $5 million in net worth earned money, paid taxes, and saved the rest for his/her heirs. Now the government wants to tax that money again. The website Nodeathtax.org tells a story of Joe an electrician who owns a store with inventory, pays income tax, capital gains taxes when he sells some of his assets, and dies with an estate over the federal tax threshold and then must pay taxes again on the amount above that threshold. Nodeathtax.org claims Joe has been taxed not twice, but three times on the same income (American Family Business Institute, 2011). However, the “third taxation,” after Joe’s death did not affect Joe as the first two may have. After all, Joe is dead and not even the IRS can disturb a dead person. Nevertheless, it did affect Joe’s heirs who had to pay taxes on the income they earned by inheriting Joe’s estate. Those who oppose the estate tax would frame that as a “death tax” on Joe rather than an income tax on his heirs. Other arguments against the estate tax fall along the same lines: if a business owner must worry about making too much money and having to pay taxes on it after his/her death, then s/he will not expand the business, hire more people, invest, etc. Therefore, the country will continue to have a high unemployment rate and a bad economic outlook. Yet, Nodeathtax.org fails to cite one actual business owner who refused to expand his/her business, hire more employees, or make as much money as they possibly could because they would have to pay taxes on it after they had died, probably because it would not be they who paid the taxes on it because they would be dead. Of course, it would be their heirs who paid taxes on the estate, but that 2 % who actually have enough money to warrant an estate tax also can afford to make gifts during their lifetime to their future heirs, so that the inheritance tax can be avoided in that nefarious way. The other option would be for the person with that great of an estate to spend their wealth before they die. “Economist Joseph Stiglitz and David Bern admit that the estate tax encourages consumerist behaviour. They explain: ‘Of course, prohibitively high inheritance tax rates generate no revenue; they simply force the individual to consume his income during his lifetime” (American Family Business Institute, 2011). If a person is worth so much that his/her heirs will pay inheritance taxes, and s/he decides to spend the wealth rather than pass it on, then the infusion of that much wealth into the economy cannot be detrimental. Many wealthy people are actually “forced” to give their money to charities to avoid the “death tax.” Another argument against the estate tax has to do with impeding upward mobility. Ethically, every person has the right to dispose of his/her worldly goods accumulated over a lifetime in whatever way s/he sees fit. It is the right, opponents of the tax argue, of a person to leave money to his/her heirs to assist the heir’s financial improvement and not fair of the government to take a portion of it. Jens Beckert acknowledges that “inheritances play a pivotal economic role. In agrarian societies, the inheritance of land is the precondition for economic independence. In today’s societies, the inheritance of wealth from parents can make the heirs independent from market success or, at the least, enhance their socioeconomic position” (Beckert, 2008, p. 521). Not only that, knowing that a person can pass wealth on to heirs encourages prudence and motivation for earning as much as possible. Yet there is another side to that as well. “Conversely, the inheritance of wealth can destroy this motivation in heirs whose living standard is secured independent of their own contribution” (Beckert, 2008, p. 521). The revenue generated by estate taxes are used for progressive purposes—to help those with less wealth have the same opportunity in life to accumulate wealth as those who inherit wealth without the prerequisite effort of earning it. Some who oppose inheritance taxes would say the motivation of those who benefit from the inheritance tax revenue would also be destroyed. Perhaps, but the amount of revenue generated by the inheritance tax does not go a long way in assuring that huge number of those who cannot afford private schools, health care, or even adequate diets do not have to work even with a little extra help from the government in equalizing their situation. “Since the distribution of wealth in society is hugely unequal, so is the transfer of this wealth mortis causa. The richest 10% of households in the United States owns almost 70% of all private wealth, while the bottom 50% of households must content itself with a meager share of 2.8%” (Beckert, 2008, p. 521). Clearly the distribution of revenue from estate taxes would not go far with so many poor people to re-distribute it to. The heirs of those who have estates large enough to tax have the advantage in life by far over those who do not. Without doubt more people favor doing away with the estate tax than keeping it, but because it is really an ethical issue and a complicated one at that, it is predictable however misguided. Keith Dowding expresses his and others’ surprise at the unpopularity of estate taxes even among those who would most benefit from the revenue they generate. “The puzzle is why inheritance tax is so unpopular relative to other taxes. Inheritance taxes should be progressive—unlike sales taxes, which are flat or regressive. Given the structure of society, inheritance taxes ought to benefit rather than harm a greater number of people” (Dowding, 2008, p. 179). Those who want the tax repealed like the American Family Business Institute (AFBI) and others of their ilk have done a good job framing an emotional argument without logical basis. Of course, they had some wealthy families behind the effort, bankrolling it, and making sure that theirs was the voice heard above that of reason. Emotional stories like that of Joe the small business owner go a lot further persuading the masses that the government just wants their money than actual statistics and verifiable proof. Persuading people that it is more ethical for the heirs of wealth to pay taxes on their inherited income appears to be an uphill battle even though it is the right one to pursue. Some people believe that such ethical issues should be pursued, like Kurt Mosser in Philosophy: A Concise Introduction, who says, “Critical inquiry into our beliefs gives much greater insight into what we think and believe; as philosophers often say, only a belief that we are willing to submit to critical inquiry is the kind of belief worth having” (Mosser, 2008). Of course, in today’s mindset of instant gratification it may not be that the masses even concern themselves with the minutiae of the issue like which side is the ethical side. They may be too intellectually lazy to think beyond the sound bite: “death tax.” Unfortunately, one explanation for the widespread opposition to an estate tax may be as simple as apathy: the American lay people especially, but really people all over the world, find no interest in financial detail. Mumford says, “It was the low intensity of public opinion about tax questions in general, and the estate tax in particular, that made the tax vulnerable to repeal. The blame for this apathy can be placed at the door of fiscal legislation itself, which was little understood” (Mumford, 2007, p. 576). To be fair, economics consists of a lot of numbers and variants and so forth, which are not only confusing but difficult to apply to one’s life. Most people heard inheritance tax and thought it did not really apply to them, which is absolutely correct. Most people, except for that wealthy minority, do not believe they stand to inherit great wealth when a relative passes away. They cannot see how such legislation applies to them until they hear a well-financed campaign full of emotional stories about how unethical the tax is. Then rather than considering both sides of the debate, they reject the logical argument in favor of the emotional hype those who oppose the estate tax presented. The proponents of the tax only presented more confusing numbers about how the tax benefited people like them. The argument offered by those who oppose an estate tax makes the tax sound unethical for the reasons cited above: its double taxation, it discourages hard work and saving, and it is redistribution of wealth which discourages upward mobility. Yet when one looks beyond the emotions associated with both death and inheritance, a perfectly logical argument in favor of inheritance taxes emerges. While some objections have already been offered, there are others to each of these points. The double taxation argument, of course, exists far from any standard of reason when one considers that the estate tax does not fall on the person who earned the money to pay, but his/her heirs who received the money without earning it. Why should heirs not have to pay income tax on money they inherited when people who earn money the more difficult way, by working for it, do? But, there is another reason why the inheritance tax repeal argument is not logical. A person who favors repealing the tax might say that a person planning to will his/her money to heirs who is aware of an inheritance tax may work and save even more money to offset the amount taken by the government upon his/her death and the heirs inheritance. This then will mean that the person trying to offset the tax would hire fewer people, sock away more money that could be circulating and improving the economy, and thus, carrying the tax burden themselves rather than forcing it onto heirs. That is one scenario, or another is that the person will be careful not to earn too much so that the inheritance cannot be taxed so that person would not then, in effect, be taxed twice on the same amount. However, Stuart White points out, “The assumption one must apparently make to float this version of the double tax objection (people save more to offset tax) is the opposite of the assumption one must make to float the usual incentives-based objection to inheritance (people save less because their bequests will be taxed). This implies that there is a tension involved in trying to press both objections simultaneously” (White, 2008, p. 163). The illogical part is that those who oppose the inheritance tax claim both objections and use them to persuade people that the tax is unfair. But the claim to inequity by those who oppose an inheritance tax does not end there. They also like to argue that the wealthy carry the greatest tax burden and that an inheritance tax is just another wealth tax, even though as Joulfaian said, it is the only wealth tax. Opponents of the tax claim that small business owners, who fall into the middle income tax bracket, would also be subject to the tax. Yet the IRS says, “Most relatively simple estates (cash, publicly traded securities, small amounts of other easily valued assets, and no special deductions or elections, or jointly held property) do not require the filing of an estate tax return. A filing is required for estates with combined gross assets and prior taxable gifts exceeding . . . $5,000,000 or more for decedent's dying in 2010 or later” (Internal Revenue Service, 2011). Not many middle class small business owners are going to die with estates that are valued at $5 million or more. According to the Tax Policy Center, only 14,700 heirs paid the estate tax in 2009, and in 2010 no one had to pay it (Rohaly & Lim, 2011). White and a growing number of others object to this inequity of tax burden. “The very rich are able to avoid the tax so that its burden falls on the moderately wealthy (or ‘middle classes’). This is the inequity that ought to be our concern. . . .The inequity should be rectified by getting the very rich to pay a reasonable amount of IHT [inheritance tax] or tax equivalent. This might be pursued directly by seeking to close down the various loopholes that the rich are able to use to avoid the tax” (White, 2008, p. 167). When the issue is presented that way, the arguments presented by the campaign against an inheritance tax do not sound very ethical. However, those who oppose an estate tax also oppose raising taxes on the wealthiest Americans. In fact, they held the debt ceiling hostage for weeks in congress while the balance of revenue generation and budget cuts were debated. In the end, they would only agree to the cuts and not the tax rate hikes that would only affect the very same people who disagree with the inheritance tax. The cuts that this hold out group supports affect those that an estate tax would benefit most. Many of them claim that taxing their income and their inheritances amount to socialist politics. They have worked hard, invested correctly, or inherited their wealth. Why should they have to share it with a bunch of poor people who are not as industrious or as lucky as they? The government’s imposition of such a tax amounts to redistribution of wealth. Redistribution of wealth will make those who benefit from it not have to work for the benefits they received and will go through life depending on the government to support them because they were granted an unearned windfall from some wealthy person’s estate. They will become lazy and feckless. The opposite tactic could also be applied though. A person who inherited wealth from his/her parents or grandparents may never have to work for anything either. They too may be lazy and feckless. The difference is that they can afford to be. A person without an inheritance cannot. One only has to mention the names Paris Hilton, a convicted drunk driver and ex-convict, and Michael Skakel, a wealthy relative of the Kennedys who got away with the murder of Martha Moxley for fifteen years, to provide example of the wealthy and worthless. The lack of an inheritance tax can lead to other immoral behavior by those who inherit estates. White explains that inheritances may “encourage selfish or otherwise ‘vicious’ motivation and behaviour. It gives family members a reason to look forward to the death of loved ones and so may compromise this love. It can lead to ugly competition between family members to secure favoured standing in the eyes of the parent or grandparent with a large estate. It can underpin, and so encourage, lives of vacuous underachievement by those who inherit large fortunes” (White, 2008, p. 169). Whereas, the distribution of revenue from the inheritance tax will help to provide many more children with the opportunity that the wealthy already have the means to provide for their children such as good schools, adequate health care, dental care, proper nutrition, and a stable home life. These sorts of “opportunities” many poor children lack and that is what causes the underachievement in that sector, not the measly benefits they are now afforded through programs to assist them. After all, if the inheritance tax is so burdensome to the wealthy and it so unfairly redistributes wealth, where is that wealth going? Why are there still homeless children? Did their parents squander the money they were given for food to feed those children on a refrigerator in which to keep the food as some conservatives complain? Better, say those who oppose the inheritance tax, to let the heirs of the wealthy inherit it. They deserve it after all their parents or grandparent hard work or luck. Those poor kids by virtue of their parents’ lack of hard work or bad luck do not deserve it. References American Family Business Institute. (2011). Kill the Death Tax. Retrieved August 21, 2011, from Nodeathtax.org: http://www.nodeathtax.org/deathtax/killthedeathtax Beckert, J. (2008). Why Is the Estate Tax so Controversial? Sociology , 45, 521-528. Dowding, K. (2008). Why are Inheritacne Taxes Unpopular? Political Quarterly , 79 (2), 179- 183. Holtz-Eakin, D., & Smith, C. T. (2010, September 3). Growth Consequences of Estate Tax Reform:. Retrieved August 20, 2011, from Nodeathtax.org: http://www.nodeathtax.org/uploads/view/2028/economic_impacts_of_estate_tax_reform_ 9-13-10.pdf Internal Revenue Service. (2011, March 25). Estate Tax. Retrieved August 21, 2011, from IRS.gov: http://www.irs.gov/businesses/small/article/0,,id=164871,00.html Joulfaian, D. (2010). Estate and gift tax, federal. Retrieved August 20, 2011, from Tax Policy Center: http://www.taxpolicycenter.org/taxtopics/encyclopedia/Estate-and-Gift-Tax.cfm Mosser, K. (2008). Philosophy: A Concise Introduction. Washington D.C.: CUA Press. Mumford, A. (2007). Inheritance in Socio-Political Context: The Case for Reviving the Sociological Discourse of Inheritance Tax Laws. Journal of Law and Society , 34 (4), 567-593. Rohaly, J., & Lim, K. (2011, June 13). Wealth Transfer Taxes: How many people pay the estate tax? Retrieved August 21, 2011, from The Tax Policy Briefing Book: http://www.taxpolicycenter.org/briefing-book/key-elements/estate/how-many.cfm White, S. (2008). What (if Anything) is Wrong with Inheritance Tax? Political Quarterly , 79 (2), 162-171. Read More