Most assets in estates bequeathed to heirs have never been taxed before. This includes all sorts of capital gains, stock gains, property gains, even imaginary tax breaks taken over years like the ridiculous "depreciation" deduction on commercial property. Those real gains are never ever taxed creating a two tiered society. Wage workers pay heavy taxes of 40% to 55% (federal income tax, state income tax, social security tax that's not used for social security, etc.). The investor class that does not work for wages pays ZERO tax on gains held until they are bequeathed to heirs.
Let's look at a man who works at McDonalds and decides to save 1/3 of his wages to leave to his children. He will pay a federal income tax rate of 15%, social security and medicare tax of 7% and a state income tax of probably 5% depending on the state. That's a total of a 27% tax give or take. And let's say this man is the manager of McDonalds and makes $24,000 per year. After taxes the man will have about $1,600 per month (assuming his personal exemption, etc.). If he saves 1/3 of his income and works 30 years and then leaves the money to his children, they will receive about $190,080 (assuming a zero rate of return which is what the stock market has produced over the past 15 years on average). He will have paid somewhere betwen 20% and 27% on his estate even without paying an estate tax because his "estate" is less than the $3.5 million that triggers the tax ($7 million if married).
Let's take a man with a $10 million estate. Let's assume that this man does not work and lives off of the income from his investments and property. If he collects rents from commercial property, he also gets an imaginary tax break by claiming that the property he owns is becoming worth less each year on its way to zero under a very generous tax rule that assumes commercial buildings crumble and become completely unusuable after 30 years. He actually gets to deduct this imaginary loss from his real income!
He also enjoys a 20% capital gains tax rate and the tax only applies if he has a taxable event, which means selling, which is just the same for his commercial property. No taxable gain until you sell.
So the game all rich people play is that you keep rolling over the property and rolling over the tax (1031 exchanges, etc.), you buy dividend stocks so that you can collect income while not selling the stock for long periods to defer the tax until... NEVER!
And never is when you bequeath your estate to your heirs -- spouse, children, etc. And then, under the current estate tax (or the one that expired a few days ago) up to $7 million for a married couple is simply not taxable at all. Zero tax.
Most people paying the "death tax" aren't merely rich (only 1% of Americans pay at all), THEY DIDN'T PAY ANY TAX ON A LOT OF GAINS IN THEIR ESTATE EVER -- LIKE NEVER EVER PERIOD. Another important point is that like marginal tax rates, the estate tax only applied to the amount over the cap -- so 0% up to $7 million and 45% on each dollar OVER $7 million. So a $14 million estate pays an effective rate of 22.5% and again this is on gains that in the majority of cases were never taxed.
Ordinary Americans support this insanity because they are dumb as door knobs. It's why our republic has ceased to function. The gap between those who know what's going on and those who watch the TV version of what's going on has grown into a chasm. Ordinary people have no idea how tax policy works and no idea how little tax people who make 30 to 100 times the average family's wage pay in taxes.
The average American family makes $65,000 a year in total income before taxes. Most think because they have $100,000 or $300,000 in a 401K that they are members of the investor class. But they don't get that when they try to take money out of their 401K, it's taxed at the income tax rate and not the capital gains tax rate. Rich people don't have 401K plans.
Bob Ferguson - 14 years ago
I'm always amazed at how many people vote to do away with the estate tax. Where do they think that the government is going to get the money that is needed to run our country? You all can disagree until the cows come in regarding what is and is not a justifiable use of tax dollars. What you cannot disagree on is that someone has to be taxed. Those dead certainly aren't going to mourn the loss of a percentage of their wealth going to support the country. Let's hear it for school lunches for poor kids etc. However, their kids who, in some instances, have sat on their butts most of their lives will have a lot to whine about. What exactly is wrong with this picture? Perhaps I'm just jaundiced since I live near Seattle, home of the trust fund babies.
This entire issue has been turned into a political shell game. Calling it the "death tax" is simply demagoguery. And in its current form, the estate tax affects less than 1% of the U.S. population. If Americans truly understood the tax, how it works, who it affects, and it's socioeconomic consequences, they would likely not oppose it. But the politicians have successfully blurred the real issues. How many Americans of average wealth would vote to contribute to the wealth of the super-rich? How many of those same people would agree to creating dynasties of individuals who no longer need to contribute to society because they've inherited enough wealth from their parents and grandparents that they never have to work another day in their lives? And how many would do so in the face of higher taxes that affect EVERY American because of the current economic cirisis we face, rather than generating taxes on inherited wealth that they will never have to pay?
The burden on small businesses and family farms is often cited as the reason to repeal the estate tax, yet the government's own statistics refute that argument.
Whatever happened to having a sane, rational debate about the issues involved, free of partisan politics, devoid of emotional demagoguery, and simply focused on the realities of the impact, both positive and negative, of a tax on the transfer of wealth, both during life (the gift tax) and at death (the estate tax)? That is apparently beyond the ability of the politicians we've elected to represent us in these matters. They'd rather blur the real issues and, like a magician, use smoke and mirrors to make things seems as they want them to be seen, rather than as they really are.
Martin Melnick - 14 years ago
In your editorial you state
"Regardless of how you feel about the estate tax, this is terrible public policy and a disgraceful failure by the Senate, where the minority party's continual intransigence on what should be bipartisan issues is starting to produce the same kind of gridlock experienced by the California Legislature."
When you refer to the "minority party's continual intransigence" on the estate tax extension one could assume that you are spreading the blame to both parties. While Republicans were in control of Congress, the minority Democrats threatened a filibuster whenever estate tax changes were broached. That this issue needed to be addressed was known for over 5 years and until now, the last two weeks nothing has been done. However, you conclude by blaming blaming solely the Republicans for inaction rather than both parties. Thus your newspaper tryies to make this one more arrow in your political agenda rather than discussing an objective view of the issue.
That was an enjoyable read. Well done, gentlemen!
Most assets in estates bequeathed to heirs have never been taxed before. This includes all sorts of capital gains, stock gains, property gains, even imaginary tax breaks taken over years like the ridiculous "depreciation" deduction on commercial property. Those real gains are never ever taxed creating a two tiered society. Wage workers pay heavy taxes of 40% to 55% (federal income tax, state income tax, social security tax that's not used for social security, etc.). The investor class that does not work for wages pays ZERO tax on gains held until they are bequeathed to heirs.
Let's look at a man who works at McDonalds and decides to save 1/3 of his wages to leave to his children. He will pay a federal income tax rate of 15%, social security and medicare tax of 7% and a state income tax of probably 5% depending on the state. That's a total of a 27% tax give or take. And let's say this man is the manager of McDonalds and makes $24,000 per year. After taxes the man will have about $1,600 per month (assuming his personal exemption, etc.). If he saves 1/3 of his income and works 30 years and then leaves the money to his children, they will receive about $190,080 (assuming a zero rate of return which is what the stock market has produced over the past 15 years on average). He will have paid somewhere betwen 20% and 27% on his estate even without paying an estate tax because his "estate" is less than the $3.5 million that triggers the tax ($7 million if married).
Let's take a man with a $10 million estate. Let's assume that this man does not work and lives off of the income from his investments and property. If he collects rents from commercial property, he also gets an imaginary tax break by claiming that the property he owns is becoming worth less each year on its way to zero under a very generous tax rule that assumes commercial buildings crumble and become completely unusuable after 30 years. He actually gets to deduct this imaginary loss from his real income!
He also enjoys a 20% capital gains tax rate and the tax only applies if he has a taxable event, which means selling, which is just the same for his commercial property. No taxable gain until you sell.
So the game all rich people play is that you keep rolling over the property and rolling over the tax (1031 exchanges, etc.), you buy dividend stocks so that you can collect income while not selling the stock for long periods to defer the tax until... NEVER!
And never is when you bequeath your estate to your heirs -- spouse, children, etc. And then, under the current estate tax (or the one that expired a few days ago) up to $7 million for a married couple is simply not taxable at all. Zero tax.
Most people paying the "death tax" aren't merely rich (only 1% of Americans pay at all), THEY DIDN'T PAY ANY TAX ON A LOT OF GAINS IN THEIR ESTATE EVER -- LIKE NEVER EVER PERIOD. Another important point is that like marginal tax rates, the estate tax only applied to the amount over the cap -- so 0% up to $7 million and 45% on each dollar OVER $7 million. So a $14 million estate pays an effective rate of 22.5% and again this is on gains that in the majority of cases were never taxed.
Ordinary Americans support this insanity because they are dumb as door knobs. It's why our republic has ceased to function. The gap between those who know what's going on and those who watch the TV version of what's going on has grown into a chasm. Ordinary people have no idea how tax policy works and no idea how little tax people who make 30 to 100 times the average family's wage pay in taxes.
The average American family makes $65,000 a year in total income before taxes. Most think because they have $100,000 or $300,000 in a 401K that they are members of the investor class. But they don't get that when they try to take money out of their 401K, it's taxed at the income tax rate and not the capital gains tax rate. Rich people don't have 401K plans.
I'm always amazed at how many people vote to do away with the estate tax. Where do they think that the government is going to get the money that is needed to run our country? You all can disagree until the cows come in regarding what is and is not a justifiable use of tax dollars. What you cannot disagree on is that someone has to be taxed. Those dead certainly aren't going to mourn the loss of a percentage of their wealth going to support the country. Let's hear it for school lunches for poor kids etc. However, their kids who, in some instances, have sat on their butts most of their lives will have a lot to whine about. What exactly is wrong with this picture? Perhaps I'm just jaundiced since I live near Seattle, home of the trust fund babies.
This entire issue has been turned into a political shell game. Calling it the "death tax" is simply demagoguery. And in its current form, the estate tax affects less than 1% of the U.S. population. If Americans truly understood the tax, how it works, who it affects, and it's socioeconomic consequences, they would likely not oppose it. But the politicians have successfully blurred the real issues. How many Americans of average wealth would vote to contribute to the wealth of the super-rich? How many of those same people would agree to creating dynasties of individuals who no longer need to contribute to society because they've inherited enough wealth from their parents and grandparents that they never have to work another day in their lives? And how many would do so in the face of higher taxes that affect EVERY American because of the current economic cirisis we face, rather than generating taxes on inherited wealth that they will never have to pay?
The burden on small businesses and family farms is often cited as the reason to repeal the estate tax, yet the government's own statistics refute that argument.
Whatever happened to having a sane, rational debate about the issues involved, free of partisan politics, devoid of emotional demagoguery, and simply focused on the realities of the impact, both positive and negative, of a tax on the transfer of wealth, both during life (the gift tax) and at death (the estate tax)? That is apparently beyond the ability of the politicians we've elected to represent us in these matters. They'd rather blur the real issues and, like a magician, use smoke and mirrors to make things seems as they want them to be seen, rather than as they really are.
In your editorial you state
"Regardless of how you feel about the estate tax, this is terrible public policy and a disgraceful failure by the Senate, where the minority party's continual intransigence on what should be bipartisan issues is starting to produce the same kind of gridlock experienced by the California Legislature."
When you refer to the "minority party's continual intransigence" on the estate tax extension one could assume that you are spreading the blame to both parties. While Republicans were in control of Congress, the minority Democrats threatened a filibuster whenever estate tax changes were broached. That this issue needed to be addressed was known for over 5 years and until now, the last two weeks nothing has been done. However, you conclude by blaming blaming solely the Republicans for inaction rather than both parties. Thus your newspaper tryies to make this one more arrow in your political agenda rather than discussing an objective view of the issue.