Why Keep a Tax That Everybody Avoids Paying?

//Why Keep a Tax That Everybody Avoids Paying?

Why Keep a Tax That Everybody Avoids Paying?

Hunt Lawrence & Daniel Flynn – October 12, 2017

Even critics of Donald Trump’s tax cuts concede that the president likely wins this fight.

But victory rarely resembles the initial plan. Though assuming anything in this presidency relegates one to the ranks of fools, Trump slashing the top rate of 40 percent to 35 percent looks like a much better than even bet. The draconian taxes on businesses, too, appear ready for a reduction, albeit one perhaps less ambitious than outlined. The part of the plan on the shakiest ground looks like the estate tax, dubbed, for as long as one remembers, as the “death” tax in Republican circles. But like death and taxes, the death tax, perhaps predictably given its two sure-thing components, remains one of life’s certainties.

Trump articulated his thoughts on the estate tax during the campaign. “No family will have to pay the death tax,” he wrote. “You earned and saved that money for your family, not the government. You paid taxes on it when you earned it.”

His plan as president reflects his rhetoric as candidate. But several Republican senators appear skittish. To not make the perfect the enemy of the good, and perhaps to acknowledge that no plan reads as perfection, the estate tax likely emerges as the component of the overall plan most open to negotiation.

One possible compromise involves lifting the death tax in exchange for a provision that taxes estates on unrealized appreciation. Income or capital gains already provided revenue to the government on the money left in a will. So, an estate tax atop all that represents double (and in some minds triple) taxation on those assets.

So, under this proposal, high-income earners taxed at the capital gains rate of 20 percent face a fifth of their unrealized appreciation handed over to the government upon death. In practice, this means stocks purchased for $10,000 worth $20,000 at the time of the owner’s passing results in a $2,000 tax.

As it stands, a fraction of a percent of Americans face estate taxes because the law exempts willed property beneath a threshold of about $5.5 million. But occasionally businesses and farms get hit hard because the willed property does not offer up much by way of liquid assets, so the death tax may mean, in effect, the death of the business or farm. So, any change in the law, such as the one proposed here, should aim to shield such estates as much as possible.

Currently, wealthy individuals often find ways to maneuver around the estate tax in preparation for their deaths. As Trump advisor Gary Cohn bluntly put it, “Only morons pay the estate tax.” So, this proposal may prove a win-win that both protects estates and guarantees income to the federal government. It allows people with wealth to behave rationally during their lives rather than basing their actions on the tax code. It eliminates the waste inherent in hiring attorneys and accountants for an event calling for the hiring of morticians and priests. And, unlike the administration’s proposal, it retains incentives for the wealthy to give to charity upon their deaths.

Under the status quo, liberals can claim to impose a redistributive tax on the uber-wealthy at a massive, 40 percent clip. But in fact, the uber-wealthy generally avoid paying at this massive, 40 percent clip.

Why not eliminate this all-bark-and-little bite tax and replace it with one less punitive that actually generates income for the government instead of income for lawyers and accountants?

Alas, the symbolism of the hefty tax on millionaires outweighs the substance of a simpler plan that makes avoidance more difficult and compliance an easier pill to swallow.

By | 2017-10-31T02:35:54+00:00 October 31st, 2017|Death Tax|0 Comments

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