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Death and Taxes

by Carl Pearlston
cbpearl@socal.rr.com

Benjamin Franklin, in a 1789 letter to a friend, opined "...in this world nothing is certain but death and taxes". As a pundit noted "...but death only comes once", while another added "At least there is one advantage in death, it does not get worse every time Congress meets." 

Taxes have been a burden from the dawn of organized civilization, as my friend Charles Adams points out in his monumental and highly readable work, For Good and Evil: The Impact of Taxes on the Course of Civilization. The first civilization of which we have record was ancient Sumer in modern Iraq, 6,000 years ago. The cuneiforms on their earliest clay tablets tell of war and heavy taxation, which was unrelieved when the war ended. Everywhere "there were the tax collectors." Everything, including burial of the dead, was taxed. The cuneiform states: "You can have a Lord, you can have a King, but the man to fear is the tax collector." So it began and so it has always been.

In ancient societies, the most common taxes were those on land and its produce, head or capitation taxes, and import duties. But the mind of man is ingenious in devising ever-new incidents of human life and activity to tax. Taxes generally varied depending more on the ability of the government to make people pay than the modern concept of the ability of people to pay. Taxes on the incident of death itself were inaugurated by Rome's first emperor, Augustus Caesar at the turn of the Common Era, when he imposed inheritance taxes of 5% on Roman citizens in order to pay for military retirements. Wives and children were exempted. Two hundred years later, Emperor Caracalla granted citizenship to everyone in order to increase the number of those subject to the inheritance tax, thus increasing the tax revenue. Rates were doubled and exemptions eliminated.

As Adams points out, during the Middle Ages and well into the modern age, Jews were a special target of taxes. In addition to the usual wealth taxes, head taxes, religious custom taxes, special food taxes, protection taxes, road use taxes, and various arbitrary special levies from country to country, there was commonly an estate death tax of one-fourth to one-third of the decedent estate imposed throughout Europe on the various Jewish populations up until the time of Napoleon. Non-Jews were not exempt from death taxes, but they were far less onerous; e.g. a feudal lord would receive a cow from a deceased peasant's property, while a King would get a year's income from land passing to a feudal lord. 

In the 17th century, the Dutch modeled an inheritance tax on the old Roman format, exempting wives and children, and taxing others on a sliding scale, from brothers at 5%, to 30% for non-relations. The English used the same scheme in the next century to finance their resistance to the American Revolutionary War, taxing personal property bequests at 2% for brothers to 6% for non-relations. These rates were later expanded and raised by including children at 1%, and raising the rest proportionately to 10% for non-relations. 

The estate tax (as distinguished from an inheritance tax on beneficiaries) had its modern beginnings with the English Stamp Act of 1694, wherein Letters Testamentary which were issued to an Estate Executor by the Probate Court, required a government revenue stamp affixed. Over the next century and a half, the government gradually increased the revenue from the stamp, and by 1881, the stamp became an estate tax fixed at 3% of the estate's rental value. Coverage was expanded to joint tenancies, trusts, and life estates. In 1894, faced with rising spending not matched by revenues, the government raised the estate tax to a progressive rate of one to eight percent of the actual value of the property. In four years, the receipts of this tax covered half of the increased spending, helping to solve the budget problem caused by the naval race with Germany.

The new nation of the United States followed the older English example and enacted a death stamp tax in 1797 to pay for a naval buildup in response to tensions with France. The tax was abolished in 1802. In 1862, the tax was reenacted to raise revenue for the Civil War, and was repealed in 1870. Again, in 1898 Congress re-imposed a death tax to finance the Spanish American War. That tax was abolished in 1902. Thus, the historical example was clear that, in the United States, death or estate taxes were enacted to finance wars and were abolished when the war and its need for extra revenue was over. 

But that was not the case in 1916 when the estate tax was reintroduced, for it has been with us ever since, with the express purpose of breaking up large concentrations of wealth. When introduced, estates over $50,000 were covered (equivalent to $720,000 today with the shrinking value of the dollar), and the top rate was 10%. When it became evident that most people were giving away their assets during their lives to avoid the estate tax, a gift tax was enacted in 1924. Since 1976, the estate and gift taxes have been unified into one tax system, so that giving money away beyond the exemption of $10,000 per recipient fails to evade the tax. In 1926, the top estate rate was doubled to 20%, and in 1942 it went to 77%. Presently it is 37% for assets over $675,000 (scheduled to increase to $1 million in 2006) to 55% for estates over $3 million. There is no federal inheritance tax, and 20 states, including California, have repealed their inheritance tax since 1980.

Neither our neighbor to the north (Canada) or to the south (Mexico) has an estate or inheritance tax, nor does Australia. Most of the industrialized nations have inheritance taxes, with rates ranging from a low of 15% for Austria and Denmark, 20% for Turkey, 30% for Belgium and Sweden, to 35% for Germany and 70% for Japan. Switzerland's estate tax rate is 6%, while Italy's is 27%. When exemptions are considered, the effective tax rates shrink. With comparable estate dispositions, rates are around 10% in Germany and 30% in Japan, compared to 44% in the US.

The estate tax covers some 43,000 persons and generates about 1.3% of the total federal revenues. This figure has historically been near or under 2%. A most interesting fact about the revenue is that it is about balanced by the money spent to enforce and avoid the tax. Compliance and enforcement are estimated to take 65 cents out of every dollar of tax collected. Tax planning by a veritable army of tax and estate lawyers, accountants, financial advisers, and insurance companies which sell policies specifically to pay estate taxes, is a multi-billion dollar a year industry, creating and perpetuating fictitious legal entities for the sole purpose of avoiding the death tax. This vast army exists solely by virtue of its vested interest in the present system, and is therefore opposed to any reduction or repeal of the tax.

One rationale given for the tax is that only the very rich pay it, but in actuality, as cogently stated by economists Aaron and Munnell, "[estate taxes are] penalties imposed on those who neglect to plan ahead or who retain unskilled estate planners." Use of life insurance trusts, qualified personal residence trusts, charitable remainder trusts, charitable lead trusts, family limited partnerships, foundations, and other tools of the estate planner minimize any estate tax paid by the wealthy. The well-attended lecture circuit is full of clever and successful promoters of schemes to avoid the estate tax. Those schemes work for the wealthy, as shown by the fact that over half of the estate tax revenue comes from estates under $5 million. 

The debilitating effects of the estate tax on small businesses was illustrated in a study of 365 family-owned and operated businesses in upstate New York. They spent an average of $124,000 in planning to avoid the estate tax, and an average of $55,000 in tax. This translates, for the 365 businesses involved, to roughly 5,000 jobs that could have been created by the money spent on the tax planning and payment. One-third of the businesses indicated that they would be forced to liquidate all or part of their business to pay the tax. Nationally, 70% of families cash out or abandon their business after just one generation; only 13% make it to the third generation. Required payment of estate tax is a large factor in this turnover. In a national survey, 51% of small businesses, 58% of minority-owned businesses, and 37% of family farms indicated that they would have significant difficulty surviving in the event of the principal owner's death. Only 10% indicated that the estate tax would have no effect.

One of the prime rationales for the estate tax has been the redistribution of assets and prevention of great inherited wealth. One has only to consider the continuing great wealthy families like the Kennedys, the Rockefellers, the Fords, etc, to realize that astute financial planning makes this objective unobtainable. Inherited wealth still accounts for a significant 41% of the Forbes 400 list of the most wealthy. While the third plank of the Communist Manifesto was the abolishment of the right of inheritance, most Americans believe that it is not immoral but right to want to leave their property to their children. Billionaires Warren Buffet and Bill Gates may give their money to charity in the belief that their children will be better off not burdened by too much money, but most Americans work and save to make things better for their children, not the government or charities. Polls repeatedly show that Americans overwhelmingly (77%) reject the idea of discouraging inherited wealth, and by a similar margin (69%) believe that the estate tax is unfair, even though very few will ever pay the tax. They would agree with Oprah Winfrey when she said "I think its so irritating that once I die, 55% of my money goes to the United States government--You know why that’s so irritating? Because you already paid nearly 50% [when the money was earned.]"

Proponents of the estate tax fear reductions in charitable bequests of 25-45% if it were reduced or repealed, since property given to charity is exempted from the tax. Recent research indicates that the charitable tax deduction exerts only a modest stimulative effect on charitable giving, with less than 2% of the total revenues of charitable groups coming from bequests. According to IRS data, only 18% of estates make charitable bequests. Even among estates over $20 million, 49% do not claim a charitable deduction. The wealthiest 0.3% account for over 80% of the charitable bequests. Since charitable gifts are deductible for income tax purposes, one may save more by gifts during life than at death. Some will choose to give during life to take advantage of tax benefits in the income tax laws; others will choose to hold on to their wealth and give it at death. But the tax incentives do not seem to alter the total amount of charitable giving over the person's lifetime; taxes may affect the timing of the donation, but not the amount. When the top estate tax rate was cut from 70% to 55% in 1981, charitable bequests did not decrease, as might be expected from the decreased tax-saving incentive, but increased by almost 23% over the following 5 years, and also increased as a share of GDP. 

Self-described liberal law professor Edward McCaffery argues that the estate tax undermines the concept of fairness and equality championed by the liberal progressive movement: 

"The estate tax discourages behavior that a liberal, democratic society ought to like--work, savings, bequests--and encourages behavior that such a society ought to suspect--the large-scale consumption, leisure, and inter vivos giving of the very rich. Our polls and practices show that we like sin taxes, such as on alcohol and cigarettes. The estate tax is an anti-sin, or a virtue, tax. It is a tax on work and savings without consumption, on thrift, on long-term savings. There is no reason even a liberal populace need support it."

Congress has acted twice in the past two years by large bipartisan margins to repeal the estate tax, citing the above concerns over low revenue from the tax, excessive costs of compliance and avoidance, harmful effects on small businesses and family farms, loss of jobs and economic opportunity, and the basic perceived unfairness of taxing at death assets which have already been taxed when earned. Even if Congress were not to repeal the tax in the latest tax negotiations, a reform should be made to reduce the top rate to it's pre-WWII 20% rate, which is more in line with other nations, and to increase the exemption to at least $10 million to minimize the harmful effects on small estates, including small businesses and family farms, which pay a disproportionate share of the estate tax.


Related Quotes

A state may not impose a charge for the enjoyment of a right granted by the federal constitution... The power to impose a license tax on the exercise of these freedoms is indeed as potent as the power of censorship which this Court has repeatedly struck down... a person cannot be compelled 'to purchase, through a license fee or a license tax, the privilege freely granted by the constitution.' --MURDOCK V. PENNSYLVANIA 319 US 105 (1942)

Government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it. ~~ Ronald Reagan (1986)

Keep in mind that the Boston Tea Party was sparked by a one half of one percent increase in the tea tax. Couple that with the fact that most American citizens pay over 50% of their earnings in one form of tax or another, and you'll understand why the camel's back is expected to break at any time. ~~Angel Shamaya

The difference between death and taxes is death doesn't get worse every time Congress meets. ~~ Will Rogers

The power to tax is the power to destroy. ~~ John Marshall

The reward of energy, enterprise and thrift — is taxes. ~~ William Feather, American Writer, (1897-1962)

We contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle. -- Winston Churchill (1903)

 

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