Searching for the Moon

Shannon Clark's rambles and conversations on food, geeks, San Francisco and occasionally economics


Posted by shannonclark on November 10, 2002

In reply to a comment posted on Estate Taxes

when I figure out the permlinks here I’ll link back to the original post – it was my post of Nov 4/5th about voting

The Estate tax may (or may not) impact a number of families in any given year, but it has an effect far in excess of the impact in a given year – namely in what it encourages (and discourages) families and small businesses do when planning finances.

First – it is a moving target for something that is unplanned (i.e. few people know when they will die – variable estate tax laws make planning very complex).

Second – for most of this decade it has been triggered not at $5M but at $2M – a much lower number that far more families and small businesses can hit – based solely on the appreciation of a person’s primary asset a home as well as perhaps a life insurance policy or retirement/pension policy.

Third – An estate tax is fundementally a tax on appreciated earnings/assets (it is the assets angle that is particularlly galling) – these assets represent the accumalation of a lifetime – during which taxes have presumably been paid on interest, realized capital gains, property (in the form of property or sales taxes) – why should the government tax this for a second time due to a transference of these assets to another party (or in most cases parties)

Fourth – “luck” has nothing to do with it. Family wealth is the result (in almost all cases except perhaps lottery winners) of a lifetime of effort, hard work, and carefully planning (and the power of reinvested savings – compound for long enough and we call can be millionaires).

Fifth – The estates that are most penalized by estate taxes are the estates where the primary assets are non-liquid ones – such as small family busineses (or farms), art, homes etc – here the estate taxes force a variety of all bad solutions. One, the assets may have to be sold to pay taxes (which are due rather quickly) being forced to sell something almost never results in selling it for the best price or to the best buyer – in the case of a family business this can be devestating to the business, the business owners, the employees, the customers, and the surrounding community. Two, the primary approach to avoid the asset sales is the use of life insurance policies – to provide an influx of cash for the payment of Estate taxes – this requires an ongoing expenditure of significent real cash over time to pay for these insurance policies – while the insurance companies presumably invest this premium payments, this means that the insured have less resources to invest in their business or community. This is an impact to the economy as a whole – diverting resources to insurance companies instead of local business (either as investment into a local/family owned business or in the form of additional spending by wealthy people – which benefits the businesses they spend with)

In short I do find the Estate tax very eggregious – the recent raising of the bar on it is very welcome, but the pernicious effects of it still pervade the economy as a whole, and fixed bars (as in the case of the Alternative Minimum Tax as well) will not keep pace with historical inflation and asset appreciation – even assuming low historical gains in property values, homes alone often double or treble or more by the time most families have paid off their mortgages. We have entered into a period of fast rising percentages of home owners – as these home owners pay off their mortgages and hold appreciated assets their estates will presumably rise in value.

It is a complex issue, and there are always seemingly good plans and places for money to be spent – the challenge of government or businesses is deciding where to spend (and where not to) and how to obtain the resources to spend. This will NEVER satisfy everyone – but perniscious sources of funding that have crippling effects to a large number of people would be one place I recommend not looking for earnings – and would recommend looking for other sources/means for those earnings.


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