Defense A of the Federal Estate Tax
Oliver Barry Professor Fitzpatrick American Government 218A 4/16/08
The Federal Estate Tax is a federal tax assessed upon the transfer of a "taxable estate" of a deceased person. This tax is assessed regardless of whether said estate is transferred via the will of the deceased party or through the state laws of intestacy. Whether or not to repeal this tax is an important debate in American politics today. It would be a mistake to repeal the Federal Estate Tax. This paper demonstrates why the abolition of this tax would not serve the interests of the American people, the economy, the government, or the United States of America themselves. The value of all the property interests in the estate are calculated, this figure is referred to as the gross estate. Then that figure is modified through a series of deductions before it arrives at the taxable estate. A certain amount of each estate is exempted from taxes, this amount changes with time but is currently, and has been since 2006, two million dollars. The 2001 tax act will raise the exemption rate in 2009 to three and a half million and then repeal it for 2010. Then it will readjust the rate to the 2001 level of one million dollars. The government also extends a variety of different credits towards the Federal Estate Tax. (Estate Tax 1-8) The estate tax is part of a grouping of taxes called the Unified Gift and Estate Tax. The other part of this system is called the Gift Tax. To understand the Estate Tax it is necessary to understand other parts of the United States tax system which are related to it. The most important of these related taxes being the Gift Tax. As of 2007 a gift or
gifts made to a single person or entity of more than twelve thousand dollars in value must be reported to the IRS. The recipient of this gift does not need to report it to the IRS and does not have to pay either gift tax or income tax gift on the value of the gift. The donor however must report the value of this gift to the IRS and will have to pay taxes on the gift. Gifts are defined as money, property, transferring ownership or control of something. If you sell something below market value or give an interest-reduced or interest-free loan you might also be making a taxable gift. Gifts made under the annual allowance of twelve thousand dollars are not taxable. Furthermore the following gifts are usually not taxable; donations to charity, gifts made to your spouse, gifts made to political organization, or gifts made to assist in paying for tuition or medical expenses. Additionally with consent of their spouse someone can make donations to a single person or entity of up to twenty four thousand dollars. This pooling of annual allowances is known as splitting gifts between spouses and means that the gift is seen legally to be one half from each person. (Gift Tax) There are many merits to the Federal Estate Tax aside from the revenue that it brings to the federal government. One of the important functions it serves is to address a giant problem in the United States of America; uneven distribution of wealth. In 2001 the top ten percent of the population own seventy one percent of the nation's wealth. The top one percent controls thirty eight percent of the nation's wealth. While the bottom forty percent of the population owned less than one percent of the nation's wealth. (Distribution 4) Such a large amount of wealth so heavily concentrated in the hands of so few has numerous repercussions for our nation. From the ethical angle it goes against the principle of equality which our very nation was founded on. The idea being that all
people are presented with the same rights, freedoms, and opportunities. Having so much wealth concentrated so heavily lowers the opportunities available to a significant portion of the population below what would be considered an acceptable standard of living. While equality for all Americans doesn't mean that they should all be afforded the same standard of living and the same percent of the nation's wealth, it is indicative that such a monopoly of so much of the nation's money is unethical. This goes against the principle of equality that is part of the basis of our nation's Constitution. The argument could
be made that accumulation of such riches represents the principle of freedom and is the paragon of the American dream. This argument doesn't misstate the facts that one of our country's founding principles is freedom or that being able to accumulate wealth through your labors is the American dream. But these points are erroneous when attempting to justify the distribution of wealth in the United States. So great is the wealth of so very few that it dramatically lowers the wealth and thereby standard of living for a huge amount of the populace. While the top ten percent of the nation control seventy one percent of the wealth, the bottom ten control less than one. So great is the wealth of the elite that it is making pursuit of and achievement of the American dream by the general populace astronomically more difficult. This is why such an uneven distribution of wealth actually isn't supported by the American citizen's right to freedom, but is inimical to it. In this manner examination of such an argument reveals it to be erroneous to supporting the morality of the United State's uneven wealth distribution. But the principles which it is based on actually support the other side of the argument. It is also important to consider that having so many Americans be possessed of such a pittance of the nation's money disengages these Americans from the nation's
economic success. One general principle is that the more wealthy people in the country the better it is for the economy. Having the same amount of wealth concentrated in the hands of few isn't the same thing. The more wealthy people in the country the more people who have a vested interest in the financial success of the country and will take active roles towards that end. When the wealth is more concentrated the vast majorities are disengaged from the country's economic interests. Also the more wealthy individuals in a populace the better the average level of education of the populace. And the better the levels of education of subsequent generations will be. In this manner the country with a more even spread of wealth produces, over time, vastly more productive members of their society. With an the sad state of the American education system it is important to consider the notion that on average wealthier parents place a higher value on education than poorer, or at least have the means to provide for that education while the poor likely do not. Throughout history societies have worked to implement measures to prevent the uneven distribution of wealth in a populace. There is societal precedent for limiting inheritance. It is important to note, as those who will oppose this argument will no doubt point out, that ancient societies are not comparable to ours in many ways. But it is still useful to examine these societies for the lessons they hold about the dangers of uneven wealth distribution and that limiting inheritance is a measure against this. For example funeral rites to lords or chieftains involved large wealth expenditures on religious sacrifices, ceremonies, and feasting. Often the wealthy were often buried, as in the case of the Egyptians, or burned, as in the case of the Vikings, with most of their possessions. Though enforced in the name of tradition or by religious edict these traditions served a
very real and vital purpose; the halt of the accumulation of large disparities in wealth. These disparities lead to disruption of social and economic functioning, destabilize the societies, and can lead to revolution or collapse. (Estate Tax 8) In our society the Federal Estate Tax is a measure to alleviate the uneven distribution of wealth our nation suffers from. Upon the death of possessor's of extremely wealthy estates, a significant portion of the estate is assessed in taxes and redistributed to the remainder of the populace. Findings show that lowering of the Estate Tax can increase wealth inequality. It only follows that repeal of the Estate Tax altogether would have a similar yet more drastic effect. (Isaac p 187) Opponents of the Federal Estate Tax claim that it is unfair because it taxes the estates of the wealthy much more heavily. This is true. But our country uses a progressive system of taxation. That is that it taxes the more wealthy at higher rates than the less wealthy, placing more of the nation's tax burden on them. While its opponents argue that the higher burden the Federal Estate Tax places on the wealthy is unfair that burden increased according to wealth is the basis of our taxation system. While America does have the most progressive taxation system worldwide it is also among the richest nations in the world and with the bulk of that wealth in the hands of few. As of 2003 the richest one percent of the nation accounted for thirty four percent of the nation's federal income tax, the top ten accounted for sixty six percent, while the upper earning half of the population accounting for approximately ninety seven percent of the nation's income taxes. (Distribution 4) The Income tax is also objected to by the wealthy on the basis that it is a progressive system. The Federal Estate Tax is part of our progressive tax system. And it is even more despised by the wealthy because not only is it progressive, but by its
nature of limiting inheritance and alleviating inequality of wealth distribution in the United States it disrupts the Aristocracy the super-wealthy have formed. Conservative members of the Republican Party tend to push for repeal of the Federal Estate Tax. This action reeks of self-interest. The power and influence money lends to the wealthy allows them to attain positions of power in government. And the core of the GOP represents just the sort of Aristocracy that the Federal Estate Tax works at breaking up. The United States of America was created completely free of hereditary nobility, yet the passing of fortunes from generation to generation has created a nobility of sort. People born into such money are indeed treated as if they were better or special than everyone else. Indeed they inherit vast amounts of power and influence along with their vast fortunes. This "new" nobility is not a positive thing for the greater good of the nation. Otherwise, people with great power and influence would be those with enough intelligence and experience to amass that power and use if responsibly and effectively. As well as possess a respect for the work that it takes to amass great amounts of money, power, or influence. The election of George W. Bush to president of the United States of America is a perfect example of how America's aristocracy can be disastrous for the country. George W. Bush was born into a family of immense wealth and political connections. Bush's entire history is a tale of mediocre performance, spattered with arrests for disorderly conduct as well as multiple arrests for Driving Under the Influence, being rewarded because of his family's influence. Bush essentially went awall in 1972 from the Air National Guard at a time which coincided with an announcement that a random drug screening program may be implemented. Bush never received court marshal for his actions. He admittedly was an abuser of alcohol until he was forty years old. He had no
outstanding academic or political credits or experience and managed to be elected governor of Texas. Eventually he would be elected President of the United States. The result is the complete and utter mismanagement of foreign policy leading to the biggest foreign affairs crisis in American history. Under his presidency the nation has been in steady economic recession. And in the most prolific natural disaster, Hurricane Katrina, which decimated New Orleans and a large part of the eastern seaboard, in modern American history he displayed an alarming ineptitude. Thus leaving one question; whether the scope of his ineptitude, or the fact that at this point it was still alarming anyone, was more alarming. He is a prime example of how the power of American "nobility" can have disastrous implications for our country. By working to eliminate American Aristocracy the Federal Estate Tax is working to make our country safer. While not a giant part of the federal government's revenue the Federal Estate Tax generates a significant amount of money. Another argument made against the Estate Tax is that because it takes so much capital away from the very wealthy it deprives them of resources that would have otherwise been reinvested into the economy. They propose that this would stimulate economic growth, and that increases in capital gains and income taxes would make up for the revenue lost by the federal government. This theory is not valid because there is no way to know that money would aid our economy. The United States economy has been losing jobs to outsourcing and a lot of money that is invested is no longer vested in the United States economy, but overseas. Even assuming that other taxes do make up for the lost revenue, which is not insignificant; upon its repeal the federal government would lose seven hundred and forty five billion dollars over10 years (Edwards), it would be collected by other taxes that more heavily stress the lower and
working classes. And, again assuming the lost revenue is eventually made up through other taxes, the increases in income tax from a theorized economic upswing wouldn't be assessed immediately. In the meantime the government would have to make numerous cutbacks due to the missing revenue source of the Federal Estate Tax. The exemption of charitable donations from the Gift Tax is a powerful Philanthropic motivator. It is estimated that upon the repeal of the Federal Estate Tax the sum of philanthropic donations in the United States made in one year would decrease from six to twelve percent. (Estate Tax 3) The Estate Management Industry, which helps people prepare to deal with Federal Estate tax alleviates another concern that many opponents of the tax bring. One of the problems that inheritors of small businesses or land often encounter is that they don't possess the liquid assets to pay the tax. This can force them to divvy up and sell part of the inherited estate. This may not be in accordance with their wishes or due to the state of the market at the time their best financial interests. Different methods used by this industry to help people manage their estates is to create trusts, irrevocable life insurance trusts, ensuring part of the estate is liquidated at appropriate times to provide inheritors with the means of paying the Estate Tax, as well as usage of property with high appreciation value. (Leipzig & Wolf) The Estate Management industry also benefits the economy by creating jobs. It isn't something that can be mastered by tutorials or the understanding of a few basic principles. (McNulty 409-438) It is necessary to be well versed in the laws as well Another argument brought against the Estate Tax is potential damage to the agriculture industry. Farms often have value, but don't produce regularly, and have low tendencies for liquidity. It is pointed out that the tax can devastate family owned farms and thereby
cripple the agricultural industry. But this argument is essentially moot because of considerations, mostly in the form of credits, given to farmers dealing with the Estate Tax by the Federal Government. In conclusion repealing the Federal Estate Tax isn't in the best interests of the United States of America at any level. The only people who benefit from this repeal are the superrich, and at the expense of the rest of the populace and the federal government and the nation's economy. The Estate Tax is an important measure against the uneven distribution of wealth which is bad for the whole nation. It coincides with the values which our constitution and our nation itself is based on. It provides the federal government with a valuable source of revenue. And with proper preparation and credits afforded by the government is not harmful to small businesses or the agriculture industry. There is no call for the complete repeal of the Federal Estate Tax.
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