Saturday, September 24, 2016

Death and Taxes

There is a saying "Nothing is certain except death and taxes." But what about the "death tax" (aka estate tax)? That seems to be a perfect storm. I saw some posts yesterday about the candidates' positions on estate taxes. As expected, Clinton wants to increase the estate tax and Trump wants to repeal it. As you know, I loathe both of these candidates, so I am not taking sides based on loyalty to one vs. the other.

So let's consider the estate tax objectively. The USA was founded on the principles of life, liberty and property. Respect for private property, therefore, should be a cornerstone of American politics. And yet the estate tax effectively destroys the notion of private property. Let me explain.

For the purpose of this discussion let's assume an estate tax of 50%. Whether it's higher or lower doesn't change the principle, it only makes the math different. Now, let's say I own a house worth $100,000. It is mine. Period. I have no mortgage, but own it outright. I want my child to have this house when I die.

However, when I die, my child has to pay the government $50,000 for this house. So effectively the house was only half mine, and half the government's. Now my child wants to give it to his child when he dies. That child (my grandchild) will have to pay the government $50,000 for this house (for the purpose of discussion I am ignoring any increase or decrease in the value of the house - it doesn't change the principle).

Over time my family never owns the house free and clear - they always will have to pay the government in order to keep living in it. That is called "renting." The government owns the house de facto and charge my family $50,000 for a lifetime lease. I know on paper it say we own the house, but if we really did we could do with it what we pleased without having to pay the government for permission to continue to live there.

You could say the same thing about property tax, but at least in the case of property tax your property is receiving services (water, sewer, garbage pick up, snow removal, etc.) in exchange for the tax. In this case the government is just taking the money with no guarantee of any services provided in exchange.

So that covers the principles of why estate taxes are wrong, but what about the economic value? Isn't it good to make people pay "their fair share?" Clinton points out that the 1% don't pay "their fair share" in inome tax, and so we have to take their property to make up for it. Isn't that how we can make the rich give back and get money to the poor? Back to our example.

I die and leave my $100,000 house to my child. He has to pay $50,000 in taxes to keep living in it. But, like most people, he doesn't have $50,000 in cash. What can he do? He can sell the house. Of course, he has to sell it pretty quick, and so can't wait for the housing market to recover, or even for a good buyer to come along. So some rich guy buys it just to flip it and the rich get richer and the poor get poorer.

Alternatively, if he has the credit rating, and the house is worth it, he can get a mortgage. That means for the next 30 years he pays a bank to live in his own house, and the rich bank gets richer and the poor get poorer.

Worse, say this is a family owned business rather than a house. No business has 50% of it's value in cash assets (except maybe Apple). So again we have to either take a loan, and the bank gets richer, or sell the business (at a loss) to a big company with lots of cash on hand (and the rich get richer). Seeing the pattern yet?

So, no, we haven't taken money from the rich with our estate tax, we've taken money from the average person and given it to the rich.

But surely when the very rich die they will be hit by this tax and billions will go to the government (yay). Um, no. Have you ever noticed that all these billionaires and millionaires are Democratic supporters? They know that these kinds of taxes will put money in their pockets and will never affect them directly.

Consider the Clintons. They can effectively avoid this tax by donating as much as they want to the Clinton Foundation (tax exempt), where it will be paid as a salary to their daughter for her "work" running this "charity" (which spends less than 6% of its donations on actual charitable work and the rest on salaries and fundraising).

Likewise, other rich fat cats can set up corporations and trusts where they can play games with ownership to avoid having to pay the estate tax. Again, it's the little guy who gets hit and the rich gt richer.

I haven't even included the way the tax affects people's economic behavior - for instance the elderly shedding their property in order to avoid the tax, and subsequently becoming dependent on government assistance. This is similar to what Jesus talks about in Matthew 15 - people ridding themselves of wealth to avoid having to support their families.

So the estate tax is bad bot in principle and in practice.


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