estate tax = pwnd

I read the other day about Obama’s and McCain’s estate tax proposals, if they should be elected. I am still pretty stoked about it, because my term paper from May, when I was taking a tax policy seminar, outlined a plan that Obama has now adopted. $3.5 million exemption, 45% top rate. I knew I was brilliant. If you don’t believe me and want to see the paper, I can send it to you. I have no intention of boring the internet to tears unnecessarily.

A friend of mine asked about wealth redistribution. Obama and Biden have been talking about it and they’re wigging a lot of people out. Largely because most people have no idea what they mean by this. People who talk about wealth redistribution always bring up the estate tax. It’s a nice, tangible thing to talk about that actually exists and isn’t some nebulous plan than makes us all worry about Bolsheviks taking over. So, would Obama’s estate tax proposal actually redistribute wealth? Yes, in the sense that any tax redistributes wealth, but the tax rate he proposes is 10% LOWER than the rate that had been in place for over a decade before Congress in 2001 passed a sunset law forcing itself to do something about the tax in the next 10 years.

Also, the old tax gave everyone $1 million tax-free. So if you kicked it in 1999 and between your money, house, car, stocks, furniture, vintage Barbies and Star Wars lunchbox, you possessed $1,100,000 worth of stuff, the federal government would only tax you on $100,000. Not the whole thing. The exemption under the 2001 law (EGTRRA) has been rising each year. Its highest level will be $3.5 million in 2009. This is the number Obama proposes for the estate tax exemption to be permanently. (I did as well. In May. ::flips hair::)

The tax rate pre-2001 was also 55%. So, on your $100,000 that’s taxable if you died in 1999 with $1,100,000, you’d owe $55,000 in tax. This is what they mean when they say “wealth redistribution.” People who die loaded and don’t plan well would get taxed at a crazy high rate and lose over half their wealth, so their kids and grandkids, ad infinitum, would not be idly rich. When the tax was invented, that was a large part of the ploy- to prevent a class of idle rich in America like there was (is?) in England. I don’t have an opinion on how well this worked, because we can’t know if, in an alternate universe where there was never an estate tax here, there would have been more idle rich people. I think it’s a nonsensical inquiry. Obama’s proposed tax rate is 45%, which, while less than half, is still pretty punishing.

The salient point is, though, that virtually no one pays this tax. No one. Next to no one dies with that much money. And the ones that do hired a lawyer and had them write a will and come up with a plan. You can give everyone you want $12,000 every year as long as you want. Tax-free. This is one of the most obvious ways to get money out of your estate, which is the name of the game. If there’s not enough in your estate when you die, you don’t get taxed. So really, the only people who have to pay estate taxes are both rich and stupid. This is not a particularly sympathetic bunch. Of course, estate tax opponents like to trot out their small businesspeople and say, holy crap! Joe the Plumber’s kids will have to liquidate the business to pay the taxes and won’t be able to carry on the family business! Again, these people are wrong. Small businesspeople who don’t have lawyers to organize their businesses, write their wills and help them with business planning are idiots. The way to avoid the tax, which everyone with any sense does, is to transfer shares of the business to the next generation over time, so then they gradually get control and no one dies owning the whole show.

It’s also worth keeping in mind that the tax encourages charitable giving. Anything you bequeath to charity on your death will be untaxed.

So, should we redistribute wealth? Noting that the tax doesn’t really do that very well and the Obama tax would do it even less?

I think so. DP argues that if he earns millions of dollars fair and square, he should get to keep them. I told him he’d be dead. You can’t own stuff when you’re dead. It’s not possible. It’s a neat feature of old English property law that we’re allowed to distribute our stuff largely as we choose when we die. Not an innate feature of the stuff we own. It’s a societal construct.

My father was skeptical about this whole idea, but was convinced by Bill Gates, who admits that it’s the American system that allowed him to make the money he’s made. Without the business opportunities, tax structure, venture capital and other features of American capitalism, Bill wouldn’t be where he is. It’s a system that enables some and doesn’t do favors for some others. He seems to think maybe he owes some of his success to the country he succeeded in, and didn’t do it all completely on his own. My father thinks this makes a lot of sense, and I have to agree.