StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between

CNBC Should Know: The U.S. Doesn't Tax Death

15 Apr 2009
Posted by Stan Collender

I'm going to play Dean Baker for a moment and criticize the media on an economic issue.

CNBC ran the report below yesterday about the estate tax.  The only problem was that the network decided to label the tax it was discussing as the "death tax" and in doing so immediately became a participant in one of the great public relations hoaxes of all time.

As I've said before, the phrase "death tax" was invented to increase support for cutting or eliminating the federal tax on the estates of the extremely wealthy.  This is a tax that very, very few pay and getting support for legislative changes has always been hard.  So proponents came up with a truly brilliant public relations ploy: instead of talking about taxing "estates," they talked about a tax that would be applied by Washington after someone passed on.

The thinking was that, while few have an estate, everyone dies.  Hence the tax that only a relative handful will ever pay and few cared about became a tax about which everyone should be concerned.  Cutting the "death tax" had far more popular support.  It was brilliant.

The only problem is that it was also not true.  The estate tax isn't on death any more than the income tax is on life.

Given it's primary audience, it's not hard to understand why CNBC used this phrase as the title of its report.  It's just sad.

Not so fast

Income tax is payable when you receive income.

Estate tax is due...when you die. I'm not an absolutist on getting rid of the tax, but the terminology is no hoax.

Both proponents and opponents, largely, have no understanding of this tax (which indicates something in and of itself). It probably should be an inheritance tax or, even better, we should just absorb this into capital gains taxation as I suggest here.

This is not money that escapes taxation, it is taxed like any savings I've accumulated. It is possible to sidestep capital gains tax, but only to the extent the asset was included in a taxable estate.

Income tax is payable when

Income tax is payable when you receive income.
Incorrect..........Black's law dictionary clearly states income is NOT Wages..........wages are earned DIRECTLY .........income would be my annuity fund or anyone's retirement {that is correct}........notice how they will tax that right off the top? This is why the IRS {the muscle for the Federal Reserve.......unconstitutional but I digress} will not access your 'income' until April 15 but will immediately take the penalty for early withdrawal without your participation.

Good argument, bad comparison

Your point is well taken about the dastardly effectiveness of spinning the estate tax into the "death tax". But since many of us, especially lower income people, would argue that the income tax, in fact, IS a tax on Life, our lives and our labor and our very being, your comparison stinks.

The one nice thing about the term "death tax"

is that it instantly reveals the both the politics and the non-credibleness of the one using it.

Why the richest happily support the estate tax.

"one of the great public relations hoaxes of all time".

Oh, don't exaggerate so.

Yes, people with political objectives really do attach favored names to things to frame them in public debate.

Are you equally appalled that legislation to ban the secret ballot from union elections is called the "Employee Free Choice Act"?

Or does the sight of gambling only on the right side of the casino disturb?

As such misnomers go, the "death tax" is pretty reasonable, since it is about a tax that actually applies only at death, even if not to everybody who dies.

Quite similarly, an "expatriate tax" was just enacted to apply to persons (including foreigners) who permanently depart from the US with over $600,000 of mark-to-market gains.

Everybody in Congress from left-to-right is quite happy to call it an "expatriate tax", even though it applies to only a quite small number of rich expatriates. Is that very wrong of them?

BTW, that tax was part of the "Heroes Earnings Assistance and Relief Tax Act of 2008".

In addition, you engage in a good bit of spin yourself when you say:

"the phrase 'death tax' was invented to increase support for cutting or eliminating the federal tax on the estates of the extremely wealthy"

In reality, the "extremely wealthy" have already pretty much eliminated the estate tax on thmeselves, and pay much lower effective estate tax rates than the only moderately wealthy.

That's why the "extremely wealthy" as a group are quite happy with the estate tax as it is, and support it so.

E.g.: IRS Statistics of Income for estate tax returns filed in 2007 show that 363 estates with gross assets of $17.8 billion (average size $49 million) owed and paid no tax, zip, nada, $0.

And among only estates that did owe tax, the average effective tax rates by gross size of estate were:

$3.5 million < $5.0 m ....... 20.2%
$5.0 million < $10.0 m ..... 26.1%
$10.0 million < $20.0 m ... 29.5%
$20.0 million + ................. 19.8%

Add to that all the tax-free "$20 million+" estates, and all the most "extremely wealthy" paid 13.7% in total -- much less than the merely moderately wealthy under them, any way one dices the numbers.

This is because the return to investment in tax planning for the estate tax scales up rapidly with the size of the estate.

Hey, why do the "extremely wealthy" ranging from the Kennedy family to Warren Buffett support the estate tax??

Because .... THEY DON'T PAY IT.

The Kennedys are all riding on a fortune that hasn't paid estate tax for generations ... and Buffett has already assured his wealth won't be touched by estate tax, and will continue to enrich his family, by putting it in various "charitable trusts" that his kids have been employed to manage -- for which they will be paid the market rate for managing billions of dollars in investments.

They may well take a good deal more money from that wealth than Warren takes for himself today. Plus, add for them all the, ahem, "opera tickets" that they'll get from everyone lobbying them for charitable distributions from the now tax-free income on billions of dollars. And all the social and political influence that comes with that.

This is the mega-"legal" tax scam of the "extremely wealthy" that lets billion-dollar estates go estate tax free forever, and support families for generations, so they can play in politics or high-society or whatnot. (Kennedys, Rockefellers, etc).

Which I'd imagine would get the left-side "tax the rich"-ers really upset ... but oddly, never seems to.

Try pulling that "legal" tax scam with a moderate-sized successful family business valued at say $6 million, but with only moderate positive cash flow, that's facing a tax hit between 25% and 30%. Good luck!

So, looking at the facts, I find the claim that the estate tax actually taxes only a very few of "extremely rich" to itself be a bit of "framing" and political spin -- and I am shocked to see such behavior taking place in the left side of the casino.

"I don't need Bush's tax cut. I have never worked a [bleeping] day in my life."
-- Patrick Kennedy, campaigning with Howard Dean, 2003, WaPo.

Many people with incomes

Many people with incomes don't pay any "Income Tax".

So many people who die don't pay the "Death Tax".

But I concur with your desire to have more accurate labels. Perhaps the Income Tax should be re-labeled the "Tax on Big Incomes".

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