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Why the Estate Tax Debate Is So Heated

Why the Estate Tax Debate Is So Heated

obama.jpgLet's face it. The debate over the federal estate tax --- which Republicans and libertarians like to call the death tax --- is a heated debate despite the fact that it's not really that important. I mean it’s not a big government revenue generator. But the debate over the tax does dig at the heart of a person's political philosophy.

The existence of the estate tax makes my blood boil since a 45 percent tax on assets accumulated over a lifetime that were already taxed when earned seems confiscatory and simply immoral. Most Democrats disagree, of course, stating that heirs of rich people must be spared from the horrors of inherited wealth (see Warren Buffett’s arguments). And so the class warfare, culture wars arguments swing into full roar.

But either way, the tax isn't all that productive. It doesn’t raise much revenue and it may stifle economic growth and job creation. According to the Tax Foundation, the death tax raises about $25 to $30 billion a year, or about 1 percent of gross tax receipts. "That's not nothing," says Tax Foundation spokesman Bill Ahern. But, he adds, that some argue the tax is "essentially voluntary" since there are so many loopholes to the estate tax. "Clever millionaires can avoid the worse [aspects of the tax burden legally] by hiring good accountants," Ahern says. Some call it the “lousy accountant tax.”

In the long run, there are a host of negative side effects, since the estate tax "shunts large streams of assets out of the taxable sector into the non-taxable" part of the economy. That's because typically multi-generational large pools of wealth (think of the Searle family or the Kennedys) have minimized the tax problem with their stable of propeller-head lawyer and accountants. Sometimes the tax is dampened or avoided by donating money to questionable charitable organizations that "probably are not deserving of the name," Ahern says.

Financial advisors who have entrepreneurial clients best listen up. Who gets nailed? "The 55-year-old beer distributor, the first generation wealth creator whose ticker goes out unexpectedly and his wife suddenly realizes they have an estate worth $15 million," says Ahern. The long-time rich have planned and exploited the many loopholes and financial and legal instruments available to protect the wealth, to transfer it from one generation to the next. It's the entrepreneur, the guy who is young(ish) without a financial plan whose estates get plundered. (For more on the negatives of the tax, you can go to the Tax Foundation's website, or go to the Heritage Foundation about how Obama's planned restoration of the estate tax in 2011 closes loopholes that would unfairly hit owners of family businesses.)

Says the Heritage Foundation: "When the death tax was active, family farms and business could discount asset values to account for the fact that it is difficult to sell them in order to pay the death tax. The Obama Administration would disallow this discount and force families to pay the death tax on the full value of the assets, even though there would be no new cash generated to pay the tax. The budget would also make it more difficult for family-owned businesses to protect their business from the death tax as it grows."

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