The Tea Party-ers and other like minded folks have death on the brain it appears. Now there is great howling over the Inheritance Tax or ‘Death Tax’ that is racing through Congress. Today the house passed the Estate Tax Bill 225-220 with nearly all Republicans voting against the bill.
What does the Estate Tax do? The bill extends a 45% inheritance tax on estates larger than $3.5 million, and cancels a one-year repeal of the tax set to begin next month. $3.5 million seems like quite a lot money for someone to inherit tax free.
USA Today reports the reasoning:
“The bill passed by a 225-200 vote, with all Republicans opposed. Majority Democrats argued that a permanent tax rate makes it easier for families and small business owners to do estate planning, noting that fewer than 1% of all estates are subject to the tax.
In America, it’s not a sin to be rich nor is it a crime to die rich,” said Rep. Jared Polis, D-Colo. “This bill gives our nation’s wealthiest families the ability to know exactly what their obligation to the nation that fostered their wealth will be, and it is fair and it is just.”
The bill follows the federal budget proposed by President Obama. But many Republicans called for permanent repeal of the estate tax, arguing it hurts families that pass down farms and small businesses to their children.
“The majority claims to be offering certainty to taxpayers and I suppose in a way they are — they are certainly repealing the hope of ever eliminating the death tax,” said Rep. Dave Camp of Michigan, the top Republican on the tax-writing House Ways and Means Committee
Those inheriting over 3.5 million dollars make up less than 1% of all estates. I hardly think that this ‘death’ tax will affect that many people. The middle class certainly won’t be affected by this new law. Yet those are the people I keep hearing talk about the death tax. Are they trying to impress the rest of us or do they just not know what they are talking about?
Time for the more affluent to pony up. The rest of us are tired of doing it. The Senate is deliberating similar legislation currently. Why did that many Republicans vote against the bill? Are they all that wealthy or are they protecting their future campaign contributions? Do people who are that affluent know how to tax shelter their assets better than the middle class?
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What about small businesses that are unincorporated? It’s very easy for that business to have a value of more than $3.5 million. There are no shortage of cases of family businesses that have had to be sold to pay the tax bill when the founder died.
Also, don’t forget that the estate pays the inheritance tax if it is valued over $3.5 million, even if it were to be split up among a large number of beneficiaries. Imagine someone who dies with a $4 million estate with three children. Each of them gets $866,000 and Uncle Sam gets $1.8 million (assuming there are no state taxes.) Does that sound fair to you?
More to the point, why can I give my money away as I choose up until the moment I die, but as soon as I die the government is entitled to a 45% cut? That’s higher than our top marginal income tax rate! I might support some level of an inheritance tax but something more in the range of 10-15%.
Of course, in the case of people with sizable estates, they have trusts established long in advance that shield their assets from this tax in the first place, so really the only people who get hit by it are those who die suddenly before they have established a trust or small businesses that cannot establish a non-revokable trust because of limitations on trusts.
Lastly, if you think the affluent aren’t ‘ponying up’ their fair share of taxes, you really, really need to do some research on how the tax burden is distributed in this country, particularly the income tax. If anything, the tax burden needs to shift towards the lower middle class, a very large percentage of which no pay no income tax at all. Many of these people are strong proponents of the ‘tax the rich’ plan. Personally, it’s the height of gall to suggest someone else isn’t paying their fair share when you aren’t putting in a single penny. (I’d be happy to provide documentation of how income taxes are distributed but it’s very easy to find online.)
Libs still haven’t figured out that the more they raise taxes (of any kind), the less money they make in total. I wouldn’t get too worked up over it because folks that wealthy should know how to get around those taxes anyway, and if they’re not smart enough to get around it, they can pay up. It’s not too hard.
I think 45% is too much also. 10% after $350 Million doesn’t sounds all that unreasonable.
Formerly, most lower middle class people are sweating bullets as it is. They don’t make enough to be able to protect their assets. Everyone pays taxes in one form or another unless you live like Grizzly Adams and eat off the land.
I am waiting for that SS tax to be jacked up to $200k a year, and I believe it will be.
There are a number of farmers that are barely making it, but have land that was in the family for generations. When the owner dies, the kids are hit with a bill of 45% of the value of the farm? Guess what. A family farm is gone.
Joe Robbie started the Miami Dolphins franchise. It was his dream to pass the team to his kids. The $50 million in taxes forced them to sell the team and the stadium.
The same thing has happened to countless businesses. Most of the time, the major holding is real estate and equipment. Most do not have 45% in cash just sitting around. They must sell the business to pay the taxes.
How fair is it for your Dad to work his ass off, hoping to pass what he accomplishes to his children, only to have the IRS take it all away. Often, the kid worked many years in the business, too.
Only rarely does the deceased have a wad of cash sitting around to pay off the death taxes. The heirs are almost always forced to sell much of what they inherited.
This tax is really unfair.
People with money are able to use legal means to hold onto things, like Indy Colt’s owner Irsay did, but the team is not a family owned business. It is a corporation with a board that could toss the CEO at any time.
Work hard all your life and do well, and give half to the government when you die.
If only we could find our way back to the sensible tax polices under Clinton, where the nation prospered, and government spending was PAID FOR by the revenues generated by are booming economy.
All of this Tea Bag tax philosophy relies on people having some pretty huge holes in our memories. They want us to forget the Bush administration and the Clinton administration. That’s a lot of forgetting.
I’d be happy if the Senate can put in some exceptions here and there so that small businesses worth $3,500,000 are not harmed. I can really relate to that, because we have several small businesses in our family worth more than $3,500,000. Just kidding. But there may be a point here.
I have to agree with M-H at the end of the day though. When our country is trying to recover from the Bush Economic Crisis, and waging two wars that have always been hidden off the budget and have never been paid for, it’s hard to shed tears for people who stand to clear more than $3,500,000 tax free. I imagine they are already doing quite well with trust funds and such.
As I said before, I think 45% is too high but at $3.5 million, it is hard to feel real sorry for anyone who is inheriting any part of more than $3.5 million. The devil is in the details. Perhaps there have been tweaks to the system. Anyone with $3.5 million in assets should do some serious estate planning to avoid the heartbreak of having to pay taxes.
I suppose the alternative would be to increase the taxes on the middle class. Yes, that’s the ticket. We wouldn’t want to inconvenience the wealthy. Poor dears.
Fewer than 1% of all estates are more than $3.5 million.
Married couples with a little estate planning can exempt $7 million. It is getting harder to find that empathy.
That inheritance tax is one of the primary causes of Warren Buffet buying so many businesses. He buys when they have to sell. Sees Candy was bought that way….
This nation was built on the premise of great returns on investment be it time or money, and that is the incentive that needs to be reenforced not the attitude that the more successful you are the more we are going to penalize you! How many out there have ever been employed by a poor person? Most of you have a well to do businessman to thank for your employment even though you have no knowledge of their struggle to succeed in the beginning. Check the history of any major company, and you will find that most had small business type beginnings. Heavily taxing a person’s success upon their death seems cowardice and cruel to me.
If only we could return to the glory days of Clinton! What a crock!
The “wonderful economy” was known as Y2K spending. Every company and individual spent massive amounts of money on technology. Yes. Clinton balanced the budget. But he DID NOT cut spending. He increased it, along with the Republicans. Instead of paying down the debt, we increased spending. So, when the spending went away on 1/1/2000, we were left with less revenue and higher spending.
The numerous new spending projects created under Clinton were no longer funded by the revenue increases that dried up. So we had to borrow to cover the spending level that Clinton (and the House and Senate) created.
And then Bush started allowing the same spending increases, and borrowed more money. And now, Obama has taken the irresponsibility to a whole new level.
Clinton was president when an unprecedented event – Y2K – occurred. Revenue came in far faster than anyone could have predicted. So fast that the morons in DC couldn’t spend it fast enough. That’s the only reason there was a budget surplus.
Congress will never make that mistake again. If a brand new Y2K happened tomorrow, they can move on Saturday night to wipe out any predicted surplus in minutes.
The problem is not that congress has too little money coming in, there is far too much going out. It really does not matter if we rape the rich or the middle class, or even the poor. The Federal beast will spend or borrow more than we have. Period.
This MUST stop. Not one dime more for the Federal government. They must live within OUR means. Who pays for the overspending is not a discussion we should even be having. It is mandatory that they cut spending to revenue levels. Then reduce it some more to pay off the debt.
We are already taxed too much.
FA – you math is not correct. A 4 million dollar estate would pay $225,000 in taxes (45% of the amount over $3.5 million), so each beneficiary would receive $1.26 million.
And there are state taxes to be paid also – this just addresses the Federal Taxes.
For a large part, the estate tax is completely misunderstood, and in many cases can be avoided with proper planning. This article is a little outdated – http://www.commondreams.org/headlines01/0408-02.htm – but talks about how in 2001, there were no farms lost to the death tax.
Currently, a person can pass $3.5 million – that is $7 million for the couple tax free to heirs – if they plan correctly. They can also put assets into Trusts to avoid even more. I have spoken to people of modest means who think they will pay estate taxes, and wipe out all they have – it is simply not true. How did the Heirs of Sam Walton keep such a large stake in Walmart (hint, planning). Or Paris Hilton (yuck!).
To me – if they want to spend some time fixing a tax issue – fix the AMT – which affects way more people every year than the estate tax.
They could also look into reforming farm subsidies – most of the money goes to large ranchers (not family farmers) – and a large portion of the money go to real estate owners who have no intention of farming.
And as for the rubric that the inheritance tax doesn’t hit the middle class, look at the small business scenario again. It’s very easy for a store or farm or have a value of greater than $3.5 million but generate an annual income that only provides a middle class lifestyle for the owner. In the case of a store, say all $3.5 million is in productive inventory (it wouldn’t be in real life but that just makes the situation worse.) Let’s also say you know your customers really well and turn your inventory twice a year. That’s $7.0 million in revenue. Let’s say your profit margin is a generous 15%. That leaves you $1.05 million in operating income. You aren’t working your store alone of course, so let’s take out $150k for 3 workers @ $10/hr (no health care or other benefits for them, but you do have to pay SS and Medicare/Medicaid)
Then there’s rent, property taxes, business operating licenses (for retail that’s usually about 1% of revenue, so there went $700k) Let’s go cheap and say another $75k a year in rent and $75k a year in advertising. (Both of those are low too.)
So how much does our would-be Plutocrat make in annual income of his $3.5 million dollar estate? About $53k. Now our Plutocrat dies and leaves the business to the next generation. But before they can inherit the business, they have to pay a tax of $1.57 million. (45% of $3.5 million.) If you are the son or daughter of a store owner making $53k, where exactly are you going to get $1.57 million? There’s only one place, the store. You either sell the business or have to reduce your inventory by 50%, which makes your business unprofitable. (Your sales shrink but none of your overhead costs do.)
This isn’t exactly an academic exercise. This happens to people all the time, and it happened to my extended family back in the 1990s. A second generation family business had to liquidate because they couldn’t pay the tax bill to pass it on to the third generation. According to Congress and some of the people here, they must have been rich, but they had incomes below the national average, although they were slightly above the average for where they lived. If they had lived in Fairfax County, they would have qualified for subsidized housing. Rich, indeed.
Many people bemoan the death of ‘main street’ retailers and small businesses. The inheritance tax is a substantial if not most significant factor in the death of these businesses. Much of the growth of WalMart in the midwest was due to their ability to identify towns that were losing small local businesses and supplant them with WalMarts. (And yes, that’s what happened to the town my relatives had their store in.)
I am the first one to say tax the rich, but 45% is absurd! Almost half? And that doesn’t even include anything earned from a business–the revenue will be taxed again.
In this day, 3.5 million isn’t a lot of money. I’m not saying folks in this category shouldn’t pay more, but 45% is just over the top.
BTW, small businesses and the working poor should ALWAYS get tax breaks, IMO. If anything, let the Wal-marts, Hollywood stars and Tiger Woods-types of the world foot the bill.
FA – your numbers do not add up. The $3.5 million dollar estate would pay $0 in federal estate tax, and 45% of the value above the $3.5 million – IF (IF) there is no planning done.
Talk to a financial advisor about estate planning, and *most* if not all of the estate tax issue can go away (one way is to buy life insurance to cover the estate tax – still cheaper)
Most people are misinformed about the estate tax, and it is an easy way to rile up the grass roots org.
If a business passed from the first to the second generation, but could not pass to the third, the second generation did something wrong. Look at the wealth that is passed down in the Hilton, Walton, Kennedy, Rockefeller, etc families – they do not pay 45% in taxes, I can tell you that.
Pat.Herve,
I accept that my math for a $3.5 million estate is off because the 45% rate is a marginal rate, but the it just shifts the numbers slightly higher. Double my example and the family making $106k a year (which is a decent but not ‘rich’ income) has a tax bill of $1.5 million just to keep the family business. That still doesn’t seem fair to me.
I freely concede that people with sizable estates are able to evade the inheritance tax. In fact, that’s my point. It does nothing to stop the transfer of passive assets from one generation to another through trusts, but severely penalizes functioning businesses who can’t take advantage of trusts because they are actively using their capital. If your estate is in the form of business equity, your options for avoiding the inheritance tax are very limited.
As an aside, I’m trying to understand the logic of “the inheritance tax isn’t so bad since it’s not hard to escape it” Why not put in a less onerous tax and reduce the need for avoidance schemes.
I have no problem with a lower estate tax (15% max) or only taxes passive investments (minority stakes in companies, bonds, etc.) but a 45% marginal rate on estates over $3.5 million is indefensible. (And of course, like the AMT, that $3.5 million will creep down every year.) I think a lot more people are going to pay the inheritance tax than think they will
45% is a huge chomp for anyone.
Formerly, I think you hit the nail on the head with
Makes sense to me.
Also Pat brings up a good point about doing away with that AMT tax. That one really is a creeper.
I am proud to say I didn’t pay the inheritance tax….Not a $3.5 million dollar baby here.
I think that locality might also add to this discussion. For example, a modest house in Silicon Valley might easily be worth 1.5 million bucks, maybe even more. It isn’t hard to ring up a $3.5 million dollar estate in an environment like that.
The bottom line is no one likes taxes and most of us are more than happy to let the other guy absorb the hit. I don’t deny that.
I don’t think there should be ANY inheritance tax. Remember that tax is usually been paid when income was earned and property was purchased. If someone has invested wisely and lived within his means in order to build an estate or business for his heirs, why should that translate into a bounty for the government?
An estate of $3.5M (or $7M for married couples) is really not that much at present. A home with a rental property and a sizable 401K can easily add up to $3.5M. In 10 years, that size of an estate may be typical for a relatively frugal middle class family.
It might be if we get the inflation that is predicted.
Kelly, so far the best argument yet is that the income is already taxed.
On the other hand, if it is inevitable, It is harder for me to feel sorry for someone getting hit for money over $3.5 million than what the average person inherits. If fewer than 1% of all estates are over $3.5 million, then we aren’t whistling average here.
Speaking of taxes, I have yet to hear [geez-typos] anyone, pres, past pres or congress suggest that the American public get any sort of tax break on their 401k. The average 401k/IRA got slammed for what? 40% during the melt down? Some more, some less. Knowing that the 401k is really only worth 76% in Virginia, that would be a help to get that one time ‘adjustment’ on at least money lost during 2007. just a 10% tax break might be nice. I don’t see that the American public got jack. Everyone else got some relief, We get to pay it back at tax time.
That is an excellent idea. A tax break may lead to more investment/spending which could encourage companies to start hiring again.
Some brilliant politician ought to think of it and get some legislation passed. It would sure help those of us who lost so much out. Banks doing like they are supposed to do would help, rather than playing funny money.
You don’t know how right you may be. Personally, I think we’ll be lucky if we get the inflation that is predicted. I think it’s going to be much, much worse. I am not a Gold Bug and don’t want to sound like one, but we as a country are in unchartered waters and the closest parallels in history ended very badly. There’s never been a painless deleveraging of an economy as dominant as ours. As sad as this sounds, the Argentina option may be our best hope. (Hyperinflation that ruins the economy but allows the debt to be paid off at a substantial discount factor.)
We should have started generating real surpluses in the 90s with the end of the Cold War(not the two fake ones we got during the dot com boom) and kept it going through the present so we’d have a chance of meeting our future obligations. Instead we have ever increasing deficeits just as some of the big bills are starting to come due. I really feel sorry for some young person entering the workforce these days. They will have to work harder for a longer period of time and still end up with far less than the previous 2-3 generations.
As always, these are opinions and should not be used for investment advice. Give all of my statements as much credibility as you would any anonymous posting on the Internet.
THe issue is NO DOUBLE TAXATION. This is a democracy!! Paying taxes on income once is fine.
But twice (as in an estate tax of any kind) is just plain unjust. Learn how to balance the
budget thru cost cutting and good management , no politics, and NO war…instead of robbing the rich OR the poor. Enough said!