Correspondence with Readers

Correspondence: letter from Contact form:

The estate tax is a death tax. My family owns a small business that employs 40 workers. My father's gross at the end of each year is $36,000. He is the president of the company. He has already paid taxes on that income. He has paid taxes on any interest income that comes from investing that income. He has paid taxes on any dividends that come from investing that income. Why should I pay any tax on it when he dies and it has already been taxed? The Estate tax is not a democratic tax. It is a tax that is levied because you die and try to leave your belongings to your family. If you don't die, you don't get taxed on it again. If you die, the tax kicks in. Death Tax. You don't have a clue.

Correspondence posted with permission

Reply

But you see, I do have a clue. My parents also had their own business, and when my mother dies, I will inherit it. But, at the moment the exemption is two million dollars in assets, so I won't pay a dime. If your father's business only nets $36,000, then it is highly unlikely that you will inherit more than the exemption, either.

I do agree that the estate tax needs work, because if nothing is done, the exemption (after rising to $10 million) will revert to $600,000 in 2011. What I think is required is to raise the exemption to somewhere around $10 million, and index it to inflation, so that small businesses and farms like your father's and my parents will be able to be passed down intact to the next generation.

However, if the estate tax is abolished, the very, very wealthy will get wealthier and wealthier, and the US will have created a permanent, wealthy caste, their large incomes unrelated to anything they do of value to society, like the Senators of fifth century Rome. They will not need to consider the interests or needs of the rest of society.

The abolition of the estate tax is not about families like yours and mine; it is about the families worth hundreds of millions or billions. An estate tax with an exemption of ten million dollars would leave inheritors with comfortable livings, but would not create a permanent, powerful wealthy class, and would leave small business, farms, etc. intact.

Further, if the estate tax is abolished, then everyone else's taxes will have to go up to make up the difference. We cannot go on borrowing and spending, as the current administration has done, but government does cost a lot of money, and it has to come from somewhere. I said the

estate tax was a "perfect tax" in economic terms, because it takes money from someone who cannot strive after he dies, and therefore does not affect economic incentives very much.

If you're worried about inheriting your father's business, you should really look into the tax law more carefully. I doubt you'll have a problem--unless the exemption reverts to $600,000.

Best

Reply from Pat

Ok, agreed on the 10 or 12 million exemption. You are correct, I probably won't have to worry about it, but that's not the point.

I simply don't think that an estate should be taxed at all. I have no problem being taxed on the income from that estate that I inherit, only on the money that I make on the business after getting it. Double taxation (which is what I feel the Estate tax is) infuriates me because it is against my entire being. "Progressive" taxation is already a huge part of the income tax system. To me, lowering taxes would be "progress", not the current state of our income tax. Those in the highest 25% of income in this country pay 84.9% of the income tax in the U.S. That's enough. I'm not even saying that the rich are overtaxed.... but they aren't undertaxed either.

I'm not sure that I'm overly concerned about a wealthy caste either. The U.S. has always had a wealthy caste. Our founding fathers were part of the original wealthy caste. I think that you and I have an inherent difference of opinion on this subject. I don't want to call it "class envy" but I'm not sure that I can describe it better than that overused term. I don't care if we have ridiculously wealthy people in this country. I don't believe that anyone has to do anything of value to society to "earn" that money. The side effect of capitalism is the fact that we will always have our Paris Hiltons.... I'm not sure why you think that this is terrible for society, other than the fact that you and I have to deal with seeing her on television all the time.

Correct me if I'm wrong, but I thought that we basically abolished the estate tax until 2012, when it reverts back to the original mess that it was. Therefore, if this is true, the government doesn't have income from it now anyway, so we don't need to replace it. Those types of arguments anger me to the core anyway, because it promotes the notion that all tax income has to be replaced by different tax income. I prefer to take a different approach to remedy this problem: stop excessive government spending! This is my greatest problem with the so-called "conservatives" that were recently ousted from power. I really am a fiscal conservative and have been steamed at the Republicans that were in power, as the supposed conservative party has been spending our tax money like drunken sailors.

By the way, my father's business doesn't only net $36,000.... That's the gross income that he takes from it. The business itself is worth much more than that, but we try to distribute the revenue out to those that create that income at our company. That's why I have a problem with the Estate Tax. At our company, we are helping 40 families live a good life with what has been a successful business. The business is worth a few million I suppose, but my father doesn't suck it dry. The government, however, will suck it dry at his death if the value of the company is taxed. The worth of something inherited shouldn't be taxed.... It makes no sense.

I have a simple belief: Give to Caesar what is Caesar's ... but don't give it twice.

Pat

P.S. - Although I disagree with most of the content of your website, it's well done. As a frequent visitor to Rome and Italy, I also have an intense interest in everything Roman. I'm not sure that all things can be directly correlated from the Roman Empire to the U.S. today, but I find your comparisons interesting. I'll continue to bother you as I read more, I'm sure...

Reply to Pat

No, it's not true that the estate tax has been abolished until 2012. It has existed all along, just with the exemption rising each year. It continues to garner quite a bit of revenue, and that would have to be replaced somehow, unless a lot of what the government does, like building highways, and defending the country, and preventing the spread of infectious disease, is no longer being done. There is a lot that only the government can do, because these are collective goods; you can't charge for them and have a functioning society.

As for double taxation, what about the property tax? You are taxed on the money before you buy a house and you are then taxed on owning the house.

The reason we disagree on the estate tax is that I see taxes as not just sources of revenue, but also as tools for regulating society. If there is no regulation at all, what you end up with is something very like the late Roman Empire at the end of its era; it's called anarchy, and you and I would probably not survive in it.

Further, the income tax is really not very progressive at all, not any more. The top bracket is nowhere near 84.9%, it's at about 40%, and the cut-off is quite low, meaning most middle class earners are in that bracket. [More precise figures below in corrected second reply]. The highest bracket under Eisenhower was 70%. In other words, it has become much more of a flat tax in recent decades. Also, large corporations don't pay taxes much at all. Something like half the Fortune 500 paid no corporate tax, and many billionaires have many ways of avoiding taxes altogether, so that in practice the income tax is not even flat, or progressive; it has become regressive: taking out more taxes at lower levels of income than at higher levels.

In fact, when you figure in all taxes: sales, property (which includes renters' rent), income, corporate, payroll, the poor pay the highest proportion of income and the wealthiest pay the lowest proportion--although they pay more in actual dollars.

As for the wealthy caste; yes, there has been inherited wealth since before George Washington, but the large amount of wealth now held by a very few (500 billionaires now), is unprecedented at a time when pay-scales have been stagnant for decades. That concentration of wealth can become an economic drag on society, as well as a very anti-democratic force. See my page on The Rich. Think of the disproportionate power they wield.

So, bother on.

Reply from Pat

I beg to differ on the 84.9 percent, but we may be talking about different things. Check out the chart where I got the info on this below. I'm not sure if the site is liberal, conservative, bullshit, or not, but this is my source:

http://www.taxfoundation.org/publications/show/250.html

Property tax to me is actually somewhat acceptable, although our state (PA) is attempting to lower the burden at the moment. The reason that I'm ok with paying a form of property tax is because it goes to public schools in our state. I have no children, have no intentions of having children, but understand the need to educate those future citizens of our country. I still don't like the double taxation.... but this is not a tax thrown on you for no reason. To me, the estate tax takes advantage of an already difficult situation (losing a loved one) and then rear ends you by taking money that was already taxed in the first place.... Real estate tax is not retaxing income already received. It is a property tax, and although a double tax in a way, is not retaxing income that was already taxed the first time.

Don't get me wrong, I understand the need for government... I understand the need to take care of our own, and to take care of those in our society who cannot take care of themselves. I'm not a heartless conservative... I just believe we already pay too much in taxes to watch our federal government flush it down the drain to their pork barrel projects. Your argument for "building highways, defending the country" etc. would ring a little more true if we didn't provide grant money to artists who proceed to throw monkey crap on a statue of Buddha, put in on a painted stand and call it art, or to build a "weather museum" in Punxsutawney, PA.

You are correct... I am against most uses of tax money to "regulate" society, and that is a fundamental difference between our beliefs that I'm sure we won't change in each other. Obviously, we need law enforcement and a code of law, but to continually create more and more legislation to "regulate" is unnecessary in most instances and wastes a lot of the money that our government collects.

I also think the move to a flat tax makes much more sense, as long as the lower income citizens pay nothing up to a certain point, then only pay on income above that level. What's wrong with that? It shrinks our need for a bloated bureaucracy in the IRS and it is fair. No loopholes. Here's my gross income, tax me on it at a flat rate. You claim that it takes "more income" from the lower levels than the higher ones, but that's not true.... a greater percentage of their income, yes, but not the most money. A flat tax fixes that as well. If you institute a flat tax, the rich pay the same percentage as the middle class, but a hell of a lot more dollars. I guess the question that I would have for you is this: Why is it terrible that the rich pay a lower proportion of their income if they pay such a large proportion of the overall burden in dollars? I'm not being a smartass, I'm actually curious why you think what you think.

I'd also be interested to know what you think of the "fair tax" that has been thrown around lately. I think the link is www.fairtax.org. I'm not sure what to think of it, as I have only heard a bit about it and haven't spent the time to study it.

Have pay scales really been stagnant for decades? My income and my employees' incomes have not been stagnant, except in the late 90's, for about a 2 year period when our industry had a down cycle. My wife has continually received pay jumps and COLA raises as well. I suppose it matters what you consider stagnant. I'll be curious to know where you get that information and what it takes into account. I'll take a look at your page on the rich....

I suppose I'd better get back to work, or this company may fall below the value of the Estate Tax and this argument will be moot....

My Reply

Hi Patrick

Okay, first of all, the 84.9% is the gross share of tax paid by the top 25% of income earners of all taxes paid; in other words the lower 75% pay the remaining 15.1% of the total revenue collected by the income tax, but they don't pay at a 15% rate, either. It is not the rate at which they are taxed. According to the tables you reference above, the rate of tax, i.e. the percentage of income paid by the top 1% of income earners is 34.47%, while the top 5% pay at a rate of 26.85% and the bottom 50% pay at a rate of 6.1%. Those are cumulative amounts, made up of the lower rates paid at levels below each cut-off. The top bracket is 35%, which is the rate at which net adjusted income above something like $168,000 is paid, but not any of the income below that. You pay lower %s for income up to each bracket: 10% up to $7,550, 15% between that and $30,650, and higher %s (three brackets between), but not the highest, on income up to $168, 275. In the Eisenhower years there were about 15 brackets, so there are very few now, by comparison.

But think of what you pay for. The people in the top tier of income would not be able to earn that income if our society were in chaos--like Iraq, or Somalia, for example--and property, security, pure food, standard weights and measures, certainty that what you earned today you will still enjoy tomorrow, all that is a benefit that the well-off enjoy disproportionately. The poor have less security, their garbage isn't picked up as regularly, they have no property to protect, and so on, so why should they pay as much of their income? A progressive tax system makes sense when you realize the benefits enjoyed are disproportionate, as well.

You also complain about all the money spent on the IRS, but actually we spend very little on it; it is quite efficient. The government as a whole is more efficient than people realize--with the gross exception of the pork barrel projects voted by Congress. Social Security, for example, has about a 1% overhead cost, whereas private pensions figure at least 15%. Those pork barrel projects are pretty gross, however, and have gotten much worse (escalating several hundred percent) since the Republicans controlled all parts of government.

The other thing to consider is this: if you have a highly unequal society, because taxes don't moderate disparities in earnings, then the level of personal security will go way down, because you have class envy and conflict. My cousins in Venezuela, who are well-off, have to live in walled compounds. One of them has an apartment in Caracas and you wouldn't believe the security: locking systems that look like bank vault safe doors after a three key system just to get you to the door. And there are whole sections of Caracas that are considered completely unsafe.

This is why a leader like Chavez, who is promoting a form of socialism, has a lock on the electorate: about 70% of the population did not have regular employment when he took power. My cousins hate him, but he is the first Venezuelan leader in a long time who has actually improved the lives of the "shirtless ones," if only marginally so far: some jobs, vacant land occupations, health care and literacy programs. Some of the land occupied, btw, belonged to my uncle, an absentee landowner, but after he died no one could maintain the hacienda.

It is also because of the kind of dynamic you see in countries like Venezuela, created by huge class inequalities, that you need an estate tax in the US. The US is not--yet--a third world country like Venezuela, but its degree of wealth inequality is now greater than any other industrialized country. Without an estate tax, and with a flat tax, that inequality would accelerate.

Perhaps you can justify the abolition of the estate tax and the creation of a flat tax in economic or libertarian terms--perhaps, I'm not conceding this--but the political consequences could be disastrous. Just remember: the reason we didn't have a Communist revolution, or at least a Socialist takeover in the 1930's Depression, was because we had Roosevelt, a patrician ("traitor to his class"), lead a government that looked after the needs of the common people--taxed the rich and regulated the banks, stock market and utilities. Without something like the New Deal, the US would have gone through a very radical politics.

As for pay scales: Yes, nationally they have been stagnant below the top executive levels. Almost all the increases in wealth produced by the large increases in productivity since the early 90's has been gained by the very wealthiest in the nation. When you add in those gains with all wages, then of course the average goes up, but median incomes (adjusted for inflation) have not gone up. There are a number of reasons for this, including the competition that workers face with workers in places like Mexico, China and India, the loss of power by unions to protect workers' wages, and the increased political and hence economic power of corporations to dictate lower wages--or they'll move. That's why raising the minimum wage is one of the first priorities of the incoming Democrats. The minimum is a floor that, when raised, creates pressure for other wages to rise as well.

Since productivity has increased tremendously, without wage increases, a rise in wages should not be inflationary, but probably will be, if firms can get away with raising prices. Many cannot, however, because of international competition.

What kind of business does your family have? Some businesses are still insulated from international competition, but about 70% of American businesses are not. It never used to be that way, but the US has been encouraging corporations (through tax incentives) to send production and services overseas whenever possible. That's the major reason why wages have stayed lower than they would have; it's also the major reason--along with our dependence on imported oil--why we run such huge trade deficits.

At some point there will be a reckoning; we can't keep on borrowing abroad forever. Already the Chinese, our largest creditor, has spoken about "diversifying" their foreign exchange holdings: translation, holding fewer dollars, i.e. lending less to the US. Our interest rates are likely to go up as a consequence.

Douglas

All correspondence posted with permission.