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  • Dead Men Pay No Taxes

    As the Congress prepares to address the death tax in the waning weeks of December, one argument undergirds the primary defense the tax. The argument is the tax is needed for “fairness”, to impose an adequate level of taxation on the rich. Of all the arguments in tax policy, this may be the least legitimate, because just as “dead men tell no tales”, dead men pay no taxes.

    There is a good reason it is called an “estate tax”, rather than a dead rich man’s tax. An estate is a business construct and can pay tax. It is a summary testament to the individual’s life’s work in the economic realm. The tax levied on the estate cannot then touch the deceased, who has naught left but to rejoice in freedom from the IRS.

    If not the deceased, who pays the tax? The recipients of the estate. Are they rich? Who knows? Some may be before their inheritance. More may be after their inheritance. But the tax is not levied on some or most, but on all by collecting the tax at the estate level.

    From a tax policy perspective, how should one think about inheritances? They are not income, which requires production. They are a capital transfer. Not capital income, however, but rather a basic example of a capital gain. The inheritance transfer results in a jump in the wealth of the recipient. That’s a capital gain. The capital gains tax rate today is 15 percent. Even the President’s grab for tax fairness only pushes the rate to 20 percent, not 35 percent and certainly not 45 percent.

    The correct solution from an economic and moral perspective is still to eliminate the death tax altogether, which means simply making 2010 law permanent. There is no justification for imposing one last tax on wealth on which tax has already been repeated levied over many years.

    However, in lieu of the best policy, a policy that would at least be logically consistent with the rest of the tax code would be to establish a generous exemption amount for each recipient and then include inherited amounts in the tax returns of the recipients and treat them as long-term capital gains taxed at the current 15 percent rate. The fairness arguement simply falls flat if you do not know who is paying the tax.

    Posted in Economics [slideshow_deploy]

    2 Responses to Dead Men Pay No Taxes

    1. Kevin H, Glen Burnie says:

      I prefer to keep America as a meritocracy. Why do you want to go back to aristocracy or monarchy where they kids of the rich who have done nothing to earn the money, get entire inheritance without paying any tax. We live in America, not the old England we sailed away from. I look at Paris Hilton types and think they should have to pay inheritance tax. I think they can afford it.

      You complain about deficits, but repealing the estate tax (that only affects .02 of all American estates) would add trillions to the deficit.

    2. Bobbie Jay says:

      How immoral government has become. A dead man's wealth shouldn't be considered taxable on the basis of having paid the obligational amount while alive. The wealth of the deceased should only go to where the deceased once alive, willed it to go. The recipients should have no obligation in paying any tax, as it's already been paid. It is deplorable, indecent of government, to place policy on the deceased in any regard.


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