As executor of my father’s estate, I learned that the #1 argument against “the Death Tax” is completely false.
It is a truth universally acknowledged, that a great fortune seeking to pass from one generation of aristocrats to the next must be in need of tax relief. To this end, Thursday the House voted (mostly on party lines) to repeal the federal estate tax, a.k.a. the Death Tax.
Now, you might wonder why House Republicans would do that, given (1) Obama is sure to veto it if it gets that far, and (2) Republicans now claim they want to do something about income inequality. (They used to say it wasn’t a problem; now suddenly it is.)
So far in the 2016 cycle, the announcement speeches of all the Republican presidential candidates have centered on the next generation’s loss of hope in the American Dream. Typically they say something like this: “For me [or my parents or grandparents — I can’t wait to hear how far back Jeb Bush has to go before he finds someone who struggled] America was a place where you could come with nothing and achieve anything. I want that to continue to be true for future generations of Americans.”
None of them are talking about the old European Dream of establishing a dynasty that hands a huge fortune down through the centuries. But actions speak louder than words, and that’s the tax plan their party has united behind.
Who pays the Death Tax? As it currently stands, the federal estate tax only applies to estates larger than $5.43 million, so it is literally a multi-millionaires’ tax. The whole point of the Death-Tax framing is to fudge that fact. Everybody dies, so something called a “Death Tax” sounds like it ought to affect everyone.
But, sadly, not everybody leaves a multi-million-dollar estate. According to WaPo’s Plum Line, only 1 out of every 553 estates owes any estate tax at all. And that one gets to skim $5.43 million off the top ($10.86 million if the heir is a surviving spouse), so even if you’re fortunate enough to die with $6 million or $7 million, your estate is still not going to pay much.
So repealing the tax has nothing to do with passing a small family farm from father to son, or letting a Mom-and-Pop business continue as a Brother-Sister-and-Two-Cousins business. The real issue is the American equivalent of keeping Pemberley in the Darcy family or saving Downton Abbey for the Crawleys. Repealing the estate tax is all about the plutocracy maintaining itself.
The fairness argument. Even after Citizens United, we still have enough of a democracy that politicians can’t just admit they’re serving the hereditary aristocracy. So what do they say?
The usual argument against the estate tax is that it’s unjust, because the money is being taxed twice. I’m not sure exactly why double-taxation would be unjust — that’s a different discussion — but for now let’s just go with it: As the money came in, it was trimmed by the income tax, so taxing it again at death is unfair. The Patriot Post begins its ringing denunciation of the Death Tax like this:
There are lots of persuasive reasons to kill this odious tax. The money in a person’s estate has already been taxed over the lifetime that it was earned.
Persuasive? Maybe. It’s also false.
Dad’s farm. I’ve been hearing that double-taxation argument for years, but I didn’t realize how wrong it was until I became executor of my father’s will. One of the things Dad left behind was the family farm: a 160-acre square whose abstract of title includes documents going back to the Homestead Act.
My parents bought the farm from my grandparents in 1950 for $30,000, and I sold it to a cousin in 2013 for … well, considerably more than that. (It’s good Illinois topsoil, and Dad took care not to let it erode.) Because of the way the tax laws work, no one ever paid tax on that capital gain: not my parents while they were alive (because they didn’t realize the capital gain by selling), not the estate (which was under the $5 million limit), and not me or my sister (because of a nifty little loophole called stepped-up basis).
That’s not some special arrangement for farms; it applied to the rest of the estate as well. Mom and Dad were conservative investors who didn’t buy or sell that often, so the non-farm portion of their holdings consisted of a house and some stocks they had held for many years (and usually bought for a lot less than the current value). As a result, the great majority of what my sister and I inherited is money that, to this day, has never been taxed.
That’s not unusual. According to the Center on Budget and Policy Priorities:
Estimates recently made by economists James Poterba and Scott Weisbenner, based on data from the Survey of Consumer Finances, suggest that unrealized capital gains make up about 37 percent of the value of estates worth more than $1 million and about 56 percent of estates worth more than $10 million.
I’ll take a wild guess and say that the percentage keeps getting higher and higher as the estates get larger.
Heirs and entrepreneurs. If you look at the top of a list of the richest Americans, you might think we’re still an entrepreneurial society: Bill Gates, Warren Buffett, Larry Ellison — all founders of major corporate empires. That case gets only slightly dicier with the next two names: Charles and David Koch, who inherited Koch Industries from their Dad, but did manage it aggressively and multiplied its value. Dad’s company wasn’t a household name, but Charles and David’s company is. That’s why they’re on the list.
Four of the next five, though, are the heirs of Sam Walton, founder of WalMart. The singular virtue that makes the Waltons multi-billionaires is that they were born in the right place. Most of what they inherited was WalMart stock that Sam had owned since the founding, when it was worth virtually nothing. When he died, that vast capital gain disappeared for tax purposes, just like the gain on Dad’s farm. So the federal estate tax was the only tax that money ever faced.
Now imagine the “Death Tax” gone. The Gates, Buffett, Ellison, and Koch fortunes are in Microsoft, Berkshire Hathaway, Oracle and Koch stock. The vast capital gains on those holdings have never been taxed. Without an estate tax, that stock is just handed off directly to the heirs, who can hand it off to their heirs.
It never gets taxed. Ever.
That’s how you build a hereditary aristocracy.
But the rich have foundations. Another excuse for getting rid of the Death Tax is that the very rich find ways around it anyway. Look at Gates and Buffett: They’ve put billions into the Gates Foundation, money that the tax man will never see.
That continues a long American tradition, going back to the Rockefeller Foundation and the Ford Foundation. Andrew Carnegie’s money wound up in countless libraries, museums, and universities, rather than in the federal treasury.
I’m not sure why that’s supposed to be a criticism of the estate tax. If Bill Gates wants his money to fight malaria in Africa rather than lower the federal deficit, I’m OK with that. John D. Rockefeller decided to found the University of Chicago rather than hand his money over to the government. I got my graduate degrees there, so it worked out fine as far as I’m concerned.
Without the Death Tax. You know what would be worse than that? If the richest-Americans list were still dominated by Rockefellers and Fords and Carnegies. That would make us a fundamentally different kind of country.
It could have worked out that way. I’m not sure I buy Celebrity Net Worth’s estimate that Rockefeller, Carnegie, and Henry Ford put together were worth about $800 billion in today’s dollars — that would be about ten times Bill Gates — but I don’t doubt that those fortunes would still be competitive if the heirs could have held them together and invested them well.
Without the “Death Tax” either collecting taxes or pressuring billionaires to find other ways to dispose of their money, a century from now we could be that kind of country — the kind where the wealthiest people aren’t entrepreneurs, they’re heirs. The richest-Americans list of 2115 might consist almost entirely of Waltons and Ellisons and Kochs. The way to get on that list would be to marry into one of those empires, not try to start one of your own.
If thing work out that way, I’m sure the politicians of 2115 will still give inspiring speeches about the American Dream. But it will be the old European Dream of the Medicis and the Rothschilds that has won out. Don’t waste your time trying to invent the Next Big Thing, just hope your daughter finds her Darcy. Then keep handing the money down your family line forever.