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Von Aldo

Why All the Fuss Over the Estate Tax? It's a Voluntary Tax Anyway

The headlines today describe how the liberal wing of the Democratic party is apoplectic over Obama's tax compromise. Why? As we reported yesterday, The Tax Policy Center says that 99.8 percent of deaths trigger no estate tax liability. In short, it is virtually a voluntary tax, since most wealthy people plan ahead and legally avoid it. Those who pay are generally younger rich people who die unexpectedly, says a spokesman for the The Tax Foundation. "Basically, "It's a tax on bad accountants."

I spoke to Bill Ahern of the non-partisan Tax Foundation this past winter, and, consulting my notes, his point was simple: Tax laws, in general, are preposterously complex but many taxes can be avoided by "clever millionaires." And that is particularly true of the estate tax, or, as its critics call it, the Death Tax. Our sister publication, Trusts & Estates, essentially is dedicated to the quest of minimizing taxes and the goal of passing one's property (wealth is in fact personal property) to one's chosen heirs.

(To see the perverse, unintended consequences of our silly tax code, see today's New York Post about how successful entreprenuers, such as Larry Ellison of Oracle, Apple's Steve Jobs, and Google co-founder Larry Page, who get paid a salary of $1.00 and then get paid in stock options, which carry a capital gains tax rate of 15% versus a top ordinary income tax rate of 35%.)

In sum: The estate tax provokes "a host of negative side effects," Ahern told me.

Ahern says that the Death Tax's receipts "aren't nothing," but is "essentially a voluntary tax or, put another way, a tax on bad accountants." The big problem with the Death Tax is that it hits small- to medium-sized businesses in their first generation of wealth creation who haven't planned," Ahern told me. "If the ticker goes out on a 55-year-old millionaire, and his wife suddenly realizes they have a net worth of $15 million," well, she will have to disgorge more than half of their accumulated wealth and that may have negative consequences on the business her husband founded and ran.

The other big problem is that the tax is avoided by "donations to quasi charitable organizations that are probably not deserving of the name," Ahern argued. "The estate tax shunts large streams [of money] out of taxable sector into the non-taxable sector." In short, it takes productive capital out of the economy and puts it on the shelf in the non-taxable sector. "This shunts [wealth creation] on a long-term basis."

In a blog post yesterday, Scott A. Hodge, of The Tax Foundation argues: "Lawmakers should stop trying to "jump-start" the economy with temporary tax measures and instead turn their attention to making permanent tax changes that will increase economic growth for the long-term. As Boskin suggests, 'If anything, we should lower marginal effective corporate and personal tax rates further (for example, along the lines suggested by the bipartisan deficit commission's Erskine Bowles and Alan Simpson).'"

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