Eliminate the "Death Tax", but ...

As Congress and the Republicans continue to shift the tax burden exclusively toward labor income and away from accumulated wealth [House bill passed] , [Senate bill pending], I find myself reflecting on the notion that some believe money which has been taxed once should be exempt from tax in the future. This is one prime argument against the estate tax, but one which I find phony.

On the other hand, there is something unseemly about the feds hovering over the estates of the dead, waiting to extract their portion before the remains are distributed to heirs. Indeed if a fabulously wealthy person wanted to leave the entirety of their estate to charities and the indigent, then I too would find it offensive for any portion to be taxed before being distributed according to the wishes of the deceased.

A few years ago, before I investigated this, I had always assumed that the estate tax was really an inheritance tax, which strikes me as the reasonable and fair way to collect from those who can afford to contribute their fair share toward our collective coffers. So put me on record as being opposed to the estate tax, BUT simultaneously in favor of instituting an inheritance tax with a MODEST exemption - something in the order of 15K to 50K, not the insane million dollars, which is currently the case.

I wondered why the feds taxed estates rather than inheritance to begin with, and found part of the answer here.

The Committee [in 1916] recommended an estate tax rather than an inheritance tax because many states already imposed inheritance taxes. It felt that the estate tax helped to form a well-balanced system of inheritance taxation between the Federal Government and the various states and that an estate tax could be readily administered with less conflict than a tax based upon inherited shares.

Ease of administration and balance with existing state taxes were the rationale in 1916, and I wonder if they remain legitimate issues today. It is easy to imagine concerns around ease of cheating for inheritors. I wonder if filing of documents with the IRS by an estate for each beneficiary inheriting over some threshold amount would be less onerous than the current paperwork associated with estate taxes.

To be sure, there are details and consequences which are well beyond my ability to fully apprehend, but the logic of taxing windfall inheritances seems fundamentally sound and fair to me. If one accepts the notion that government does have a role to play in providing for societal concerns that otherwise would not be attended to, then the necessity of a tax which calls on citizens to contribute to those functions as they are capable is clear. If income from labor contributes to such an ability, then certainly income from inheritance does as well, and I see no logic in exempting inheritances up to one million dollars. That the deceased paid taxes on his/her income during his/her lifetime, should have no bearing on whether the beneficiary is exempt from declaring inheritance as part of their income. In a healthy economy money moves all the time from salary to purchase to expenses to salary, etc. We don't exempt someone from payroll taxes because they were paid for by sales which had been taxed.

There is a legitimate concern about assets with a large value for which a tax could not be paid without liquidating the asset. For that I would suggest deferred taxation at the point of the sale of the asset. The gain would then be taxed, and the basis of an inherited asset would be zero plus any portion of the exempt portion of the inheritance applied toward that asset. The same would go for inherited stocks and bonds.

While I'm changing the tax code, ;-) here are some more:

• Remove the cap on the Social Security tax while reducing the rate.
• Exempt the first $500 of interest income.
• Capital gains are simply income; tax at the normal rate - if anything tax gains from very briefly held securities at a higher rate.
• Do away with the mortgage interest deduction (from which I benefit mightily). After all, aren't renters also paying this for their landlords - only in a disguised manner?
• Do away with lots of other special deductions based primarily on the strength of some lobby.
• Keep the deduction for charitable gifts, AND make it claimable on top of the standard deduction.
• Remove the "marriage penalty".
• Keep the deduction for state taxes paid, but only if not taking the standard deduction.
• Adjust the tax rates, which would remain on a progressive sliding scale, to account for all of these changes and begin to close the deficit gap. (I'm guessing they would actually go down due to inheritance taxes, removal of deductions and special capital gains rates.)

So that's a lot of changes, and I don't claim to be able to anticipate all of the unintended consequences. Certainly studies would need to be done to anticipate the effects. But the current system is broken, clearly benefitting those with access to power at the expense of those without that access. It's hard to get people to take to the streets to affect tax code changes, but the Republicans have been able to mobilize on behalf of some bizarre constitutional amendments lately - surely we can do better. Probably not during this administration, but maybe someday.

One more thing: I just don't buy it that a national sales tax is the way to go, though the people at Fair Tax.org make an interesting case for it, accompanied by a government 'rebate' to EVERYBODY to cover the cost of consumption taxes for the very poor. Ultimately, they're saying that our system of government is too corrupt for the changes that would spread the burden fairly to ever become law. They may be right, but we can keep working at it.