If you do not think it’s a good idea for someone to have to accelerate or delay his or her death due to changing tax laws, then you cannot be very pleased about the back-and-forthing on the estate-tax law in the U.S.
Here’s how we laid it out in SuperFreakonomics:
In the United States, the rate in recent years was 45 percent, with an exemption for the first $2 million. In 2009, however, the exemption jumped to $3.5 million – which meant that the heirs of a rich, dying parent had about 1.5 million reasons to console themselves if said parent died on the first day of 2009 rather than the last day of 2008. With this incentive, it’s not hard to imagine such heirs giving their parent the best medical care money could buy, at least through the end of the year. Indeed, two Australian scholars found that when their nation abolished its inheritance tax in 1979, a disproportionately high number of people died in the week after the abolition as compared with the week before.
For a time, it looked as if the U.S. estate tax would be temporarily abolished for one year, in 2010. (This was the product of a bipartisan?hissy fit in Washington, which, as of this writing, appears to have been resolved.) If the tax had been suspended, a parent worth $100 million who died in 2010 could have passed along all $100 million to his or her heirs. But, with a scheduled resumption of the tax in 2011, such heirs would have surrendered more than $40 million if their parent had the temerity to die even one day too late. Perhaps the bickering politicians decided to smooth out the tax law when they realized how many assisted suicides they might have been responsible for during the waning weeks of 2010.
Well, as it turns out, the bickering politicians haven’t smoothed things out. The estate tax was abolished for 2010 and, as this excellent Wall Street Journal article makes clear, there’s a good chance the law will return next year at an even higher rate and with a lower cap. Highlights:
If Congress doesn’t change the law soon – and many experts think it won’t – the estate tax will come roaring back in 2011. Not only will the top rate jump to 55%, but the exemption will shrink from $3.5 million per individual in 2009 to just $1 million in 2011, potentially affecting eight times as many taxpayers. The math is ugly: On a $5 million estate, the tax consequence of dying a minute after midnight on Jan. 1, 2011 rather than two minutes earlier could be more than $2 million; on a $15 million estate, the difference could be about $8 million. …
Advisers say the estate-tax dilemma is especially awkward for heirs. “At least in December 2009, people wanted to keep their relatives alive,” says Ronald Aucutt, an estate-tax attorney with McGuire Woods in the Washington area. Now he and others are worried that heirs may be tempted to pull plugs on Dec. 31. Economists might call the taking of a life to reap a tax advantage a “perverse incentive.” District attorneys might call it homicide.
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It is depressing to constantly get reminders of how incompetent our elected officials truly are.
The tax code, in all its glory, not just the estate portion, has to be one of the biggest signposts of our governments’ inability to do the right thing.
The real incentive is not to hope (or cause) a more timely death, but to spend yourself into debt prior to your death.
As usual, the people who live beyond their means and have no intention of leaving anything to their children win. While those that carefully plan, save & invest for the future are penalized for doing so.
Comments #2 & 3: You realize that with some property, investments & cash that it’s not really that hard to save more than $1 million throughout your lifetime. It means making sacrifices, working hard and being frugal. All virtues discarded in these modern times.
If you had worked & saved like this, how you feel if the government swooped in and taxed away half of that lifetime of effort?
I can assure you that the Congress-critters that are letting this happen have some built-in protection against having to pay the tax themselves. Most of them are millionaires. Or will be prior to their deaths.
It would be useful to remember that dead people do not pay estate taxes. Living heirs pay them. In the Steinbrenner example, the living heirs have just been handed hundreds of millions of dollars for having been lucky enough to have a billionaire be their father, so economically I’m not worrying about the injustice to them.
People don’t understand the negative effects this have, based on the comments. Someone may have a business worth $5 Million, but when he dies, the heirs are responsible to pay up to 40% and going higher of the majority of that value. TO get that cash often they need to sell the business. This is a negative thing no matter how you look at it. If someone is worth $5M he doesn’t have that much cash lying around. Enough with this rich vs. poor crap. I have no where near a $1M but I can appreciate that someone who does has the right to keep it in his family.
This tax anomaly is an artifact of the Republican hubris of the early 2000′s where they figured their unique style of klepto-government would give them permanent majorities. The idea was that in 2010 when the tax cut would expire they would be able to eliminate it for good, but two disastrous wars later that plan didn’t work out so well.
The estate tax is a critical tool is prevent a permanent aristocracy from developing in the United States. The easiest way to make money is to have money to begin with. By having a large pool of capitol one is able to put themselves on the winning side of the boom-bust cycle, selling their assets to the commoners as markets rise, then buying them back after the markets crash. Extreme wealth concentration not only leads to social instability and serious inequity, but also a net reduction in economic output as the vast majority of consumers will be unable to consume.
The truth is that there are more than enough mechanisms to allow small businesses to stay within the family so to speak. All that is required is for the principle owner to slowly divest themselves of ownership over the course of their lives to various members of their family. Granted this would prevent them from acting like autocrats by controlling their kin through wealth up until the moment of death.
Of course the easiest way to avoid the tax is to simply to give one’s wealth to charitable causes. The whole policy behind taxing estates is to make it clear that an individual has an obligation to use some portion of their wealth to benefit the community, not subvert the community by transferring said large amounts of wealth to people that earned it through nothing more than being born. In America people are expected to earn their place in life through hard work. A strong estate tax serves to mitigate the most egregious subversions of this idea.
I find it amusing in a perverse way: The Right will rail against people getting what they haven’t worked for from the Government, i.e. unemployment, assistance, even Social Security, then fight vehemently for the children of the rich, who haven’t worked for theirs either, to get the self-perpetuating handout called inheritance. Many countries use the inheritance tax as a way to level the playing field, as a means to prevent the perversity that is self-perpetuating wealth. We seem to think that all that dead capital is somehow going to magically work itself out of the hands of the Trust Funders and into our economies. Through encouraging the development of self-perpetuating wealth, we produce generations of rich incompetents through simple application of regression to a mean: A capitalist grandfather may have created the wealth (and I do not begrudge him one cent) but the idiot grandchild, who benefited from the wealth in the form of education, training and contacts a much more skilled poor child would never have, can’t make any more out of it (and so goes into politics, very well funded, by the way). The Inheritance Tax plays an important role in getting the capital out of the hands of the idiot grandchild and into the hands of the next capitalist and so plays a very important societal function, one so often forgotten by those who would have no handouts, except to their own children.
Ari, there are several solutions to your issue: founding parents transitioning control of the business to the next generation within their lifetimes, or using a life insurance policy to cover the gap. Yes, one requries money, but the other simply requires trust and a formal agreement between generations. Family-owned Yuengling Brewery currently runs a radio commercial where current boss Dick Yuengling describes how he bought the business from his family in the early 1980′s. A failure to properly plan ahead is really not a problem for people outside the family.
I understand there is a catch to the current no-estate-tax regime that could be very interesting in the years to come: there is no “step up in basis” on estates this year. If the estate doesn’t get taxed at market value, each of those asset’s basis flows to the heir. Example: the parents bought a $40K house (or a $40K wad of stock) in the 1970′s worth $1MM today. If the parent’s estate gets taxed, the kids get the asset with a basis of $1MM. Sell it next year for 1.1, have cap gains income of $100K.
If the estate does not get taxed, the heirs get an asset with a basis of $40K (and a need for good records that go back decades). Sell it next year for 1.1, have a cap gains income of $1.06MM.
If there HAS to be an inheritance tax, it should be based on cash transfers only. If property, stocks or a business is handed down, it can be taxed if and when it is sold…and on the entire sale value. This way, property and businesses can be handed down for generations