Wednesday, September 5, 2012

Estate and Gift Taxes - A Waste of Time

A couple of my tax nerd friends (I have a few) were debating the estate tax the other day.  Apparently, if Congress doesn't do something the estate tax will go to 55% on all estates over 1 million dollars.  Right now, the tax is about 35% on estates over roughly 5 million dollars.  Predictably, the liberal tax nerd said "the rich need to pay their fair share".  The conservative one said "it's class warfare."  Nice job spewing the talking points, fellas.  Also, nice job missing the point.

The estate tax produced about 17 billion dollars in revenue in 2010.  It's bastard step-child, the gift tax, produced about 3 billion dollars.  It's all right here.  Total tax revenue was about 2.3 trillion.  So these two little taxes are less than 1% of tax revenue.  This is not unique to 2010; the estate tax has been a tiny portion of revenue (never more than 2.5%) since the 1960s, and the gift tax has always been the bastard step-child.  This is also according to stats compiled by the IRS.  We're not going to balance any budgets with these two little taxes.  I wonder if we even need them at all.  Are they worth it?

Estate planning is big business.  Millions are spent on estate lawyers and accountants and tax shelters and blah-di-blah-blah.  Maybe if no one played these games, we'd have more revenue.  But the bigger problem, I think, is that the estate planning parts of the tax code (which involve various types of trusts and other assorted nonsense), make the tax code way more complex than it needs to be.  Is 1% of revenue worth all of this trouble?

There's another cost as well.  There were two high profile cases that I remember (and god knows how many low profile cases) of rich people renouncing their citizenship and moving overseas to avoid estate taxes.  I'm talking about Denise Rich, ex-wife of tax-cheat Marc Rich, and Eduardo Sevarin, a co-founder of Facebook.  They took their money with them, and that hurts us. 

Make no mistake, I think both of them are incredible douchebags.  Renoucing the country that gave you the opportunity to become rich is both ungrateful and ungracious.  But what they did is perfectly legal, unlike Ms. Rich's ex-husband's shenanigans.  Several politicians, such as Senate Majority Leader Harry Reid, have proposed writing legislation to penalize this behavior, but I say hell no.  The onus is on us to entice people to come here and stay here.  This is a free country.  We should not construct a regulatory Berlin Wall to keep people here.

Had both stayed they would have continued to earn income and pay taxes. Then, they would have spent or invested their money.  Spending money results in income for individuals and businesses, which are taxed through income taxes.  If the business is a corporation, it pays corporate taxes.  All businesses have payrolls, so there would be payroll taxes.  Investing in businesses would help businesses grow, generating more of the three taxes.  And these taxes produce real money.

Individual income taxes are half of the total revenue.  Payroll taxes are 35%.  Corporate taxes are smaller than these (12%), but not insignificant.  All three combined are 97% of tax revenue.  Ms. Rich and Mr. Sevarin could have generated millions in taxes each year.  But they bailed out to avoid a tax which would have been prohibitive for them, but insignificant for the government.  The amount we would have received over the remainder of their lives would exceed what we might have gained when they died.

So axe the estate tax.  It a big hassle, and it's not a big revenue source.  This might take money out of the pockets of estate lawyers and CPAs, but that's too bad.  The demand for their services is artificial.  It's produced by regulation, not by actual market demand.  While we're at it, let's axe the gift tax too.  It was designed to prevent people from giving their estate away to avoid estate tax.  But estate taxes aren't that much, relatively speaking, to begin with.  Getting rid of these taxes will encourage people to keep their money here, where it will be spent and invested.  This will grow the economy and produce far more in tax revenue than the estate and gift taxes ever could.

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