Feeds:
Posts
Comments

Posts Tagged ‘Death Tax’

As a fiscal policy economist, one of my responsibilities is to educate policy makers about the impact of taxation.

Simply stated, I try to help them understand that taxes alter behavior. If you tax something at a higher rate, you get less of whatever is being taxed.

Politicians actually understand this basic lesson when it suits their purposes. Many of them will pontificate that we need higher tobacco taxes to discourage smoking.

I don’t think it’s government’s job to dictate our private lives, so I don’t agree with the policy, but I give them an A+ for economics. Higher taxes on tobacco will lead to less tobacco consumption.

My frustration is that politicians conveniently forget this elementary analysis when the discussion shifts to taxes on productive activities such as work, saving, investment, and entrepreneurship.

And they also fail to realize that the higher taxes on tobacco will lead to more illegal smuggling and other actions that result in far less revenue than politicians think they’ll collect.

But let’s set that aside and look at some truly remarkable examples of how taxes influence things that – at first glance – seem completely impervious to fiscal policy.

Would anyone think, for instance, that taxes could impact the day people are born? Well, here’s some new research, as summarized by Dylan Matthews at the Washington Post.

…where there are humans making choices, there are public finance economists asking how tax incentives influence them. …Williams’s Sara LaLumia, the University of Chicago’s James Sallee and the Treasury Department’s Nicholas Turner took it upon themselves to figure out if policies like the Child Tax Credit (CTC), the dependent exemption and the Earned Income Tax Credit (EITC, which is more generous for families with more children) are pushing mothers with due dates in January to move their children’s births forward, so as to reap another year of tax benefits. …What they find is that, after controlling for other factors that could affect birth timing, an additional $1,000 in per-child tax benefits is associated with a 1 percent increase in the probability of a birth occurring in December rather than January.

This study isn’t an outlier. Other research has reached similar conclusions. Indeed, in some case the impact of taxation is found to be much larger.

They actually aren’t the first ones to tackle this question. They cite at least four previous studies that found that parents alter birth timing to maximize tax and other public benefits. …Syracuse’s Stacy Dickert-Conlin and Harvard’s Amitabh Chandra found a 29.6 percent increase in December births resulting from a $500 increase in tax benefits.

Notice, by the way, that the research is also saying that government handout influence behavior, a point that I’ve repeatedly made when analyzing the harmful impact of redistribution programs on work incentives.

Let’s close by recycling some research that shows how taxes even influence when people die.

When Australia repealed the death tax back in the 1970s, researchers found that people lived longer in order to protect family assets.

And don’t forget that the U.S. death tax was repealed for one year back in 2010. I imagine we’ll see some fascinating and illuminating research on this period once economists have a chance to collect and crunch the data.

Though there’s already strong anecdotal evidence that death rates may have been impacted.

At least the statists can be happy that the death tax is now back in place – and that it’s even more onerous than the death tax policies in places such as France, Venezuela, and Greece.

But the main lesson of this post isn’t to complain that we have some very bad features to our tax code.

Instead, the goal is to simply get more people to realize that government policies have real-world effects and specifically that higher taxes will influence behavior.

In the grand scheme of things, it presumably doesn’t make much difference what days people are born and when they die. But when we apply these lessons to the broader economy, it turns out that taxation has a huge impact on economic opportunity and prosperity.

P.S. Heck, taxes even cause gay people to adopt their partners.

Read Full Post »

I generally believe that social conservatives and libertarians are natural allies. As I wrote last year, this is “because there is wide and deep agreement on the principle of individual responsibility. They may focus on different ill effects, but both camps understand that big government is a threat to a virtuous and productive citizenry.”

I even promoted a “Fusionist” principle based on a very good column by Tim Carney, and I suspect a large majority of libertarians and social conservatives would agree with the statement.

But that doesn’t mean social conservatives and libertarians are the same. There’s some fascinating research on the underlying differences between people of different ideologies, and I suspect the following story might be an example of where the two camps might diverge.

But notice I wrote “might” rather than “will.” I’ll be very curious to see how various readers react to this story about a gay couple that is taking an unusual step to minimize an unfair and punitive tax imposed by the government of Pennsylvania.

John met Gregory at a gay bar in Pittsburgh nearly 45 years ago and immediately fell in love. …Now, as lifelong partners facing the financial and emotional insecurities of old age, they have legally changed their relationship and are father and son — John, 65, has adopted Gregory, 73. The couple was worried about Pennsylvania’s inheritance tax. “If we just live together and Gregory willed me his assets and property and anything else, I would be liable for a 15 percent tax on the value of the estate,” said John. “By adoption, that decreases to 4 percent. It’s a huge difference.” …the couple had considered marrying in another state, but because their primary residence was in Pennsylvania, which does not recognize same-sex marriage, they would still be subjected to the inheritance law.

The Judge who approved the adoption obviously wasn’t too troubled by this unusual method of tax avoidance.

The judge did turn to John and said, “I am really curious, why are you adopting [Gregory]?” “I said, ‘Because it’s our only legal option to protect ourselves from Pennsylvania’s inheritance taxes,'” said John. “He got it immediately.” The judge agreed to sign the adoption papers on the spot and handed it to the clerk. Then he turned and looked at John, “Congratulations, it’s a boy.”

So what’s your take on this issue? For some groups, it’s easy to predict how they’ll react to this story.

1. If you have the statist mindset of England’s political elite or if you work at a bureaucracy such as the OECD, you’ll think this is morally wrong. Not because you object to homosexuality, but because you think tax avoidance is very bad and you believe the state should have more money.

2. If you’re a libertarian, you’re cheering for John and Gregory. Even if you don’t personally approve of homosexuality, you don’t think the state should interfere with the private actions of consenting adults and you like the idea of people keeping more of the money they earn.

3. If you’re a public finance economist, you think any form of death tax is a very perverse form of double taxation and you like just about anything that reduces this onerous penalty on saving and investment.

But there are some groups that will be conflicted.

Social Conservative Quandary1. Social conservatives don’t like big government and bad tax policy, but they also don’t approve of homosexuality. And, in this case, it’s now technically incestuous homosexuality! If I had to guess, most social conservatives will argue that the court should not have granted the adoption. We’ll see if there are some good comments on this post.

Leftist Quandary2. Leftists also will be conflicted. They like the death tax and they want the government to have more money, but they also believe in identity politics and wouldn’t want to offend one of their constituent groups.  I’m guessing identity politics would trump greed, but I suspect their ideal approach would be to tax all inheritances at 15 percent.

In my fantasy world, needless to say, there’s no death tax and the entire issue disappears.

Read Full Post »

Just before the end of the year, I shared some fascinating research about people dying quicker or living longer when there are changes in the death tax. Sort of the ultimate Laffer Curve response, particularly if it’s the former.

But the more serious point is that the death tax shouldn’t exist at all, as I’ve explained for USA Today. And in this CNBC debate, I argue that it is an immoral form of double taxation.

You’ll see that Jared sneakily tries to include wealth taxes and death taxes together in order to accuse me of an inaccuracy, but the chart (click to enlarge) clearly shows that there are many jurisdictions that wisely avoid this anti-competitive levy.

The data is a few years old, but it’s clear that the United states has one of the most punitive death tax systems in the world.

Unfortunately, this is a good description of many parts of our tax system. We also have the world’s highest corporate tax rate and we also have very high tax burdens on dividends and capital gains (and the tax rates on both just got worse thanks to the fiscal cliff legislation).

But probably the key difference between us is that Jared genuinely thinks government should be bigger and that the tax burden should be much higher.

Though I will give him credit. Not only does he want class-warfare tax hikes, such as a higher death tax, but he openly admits he wants to rape and pillage the middle class as well.

Not surprisingly, I argue that more revenue in Washington will exacerbate the real problem of a federal government that is too big and spending too much.

P.S. Here’s a cartoon that is only funny if you don’t think too deeply about what it means.

P.P.S. You’ll notice that the video in this post has good quality, unlike the fuzzy resolution and discontinuous footage in clips I’ve recently shared. That’s because Cato’s expert on such things is back in the office and we’re no longer relying on my sub-par technical knowledge.

Read Full Post »

In some ways, it would be fun to be a leftist.

No, I’m not talking about living a life of idleness and letting others pay my bills, though I suppose that’s tempting to some people.

And I’m not talking about becoming a Washington insider and using corrupt connections to obtain unearned wealth, though I confess I’m actually friends with some of those people.

Instead, I’m talking about what it must be like to engage in reckless demagoguery and personal smears.

Remember during the presidential campaign when Mitt Romney was – for all intents and purposes – accused of causing a woman’s death because of his actions at Bain Capital?

The pro-Obama Super-PAC that produced that ad relied on indirect connections and overlooked some very salient facts that completely disproved even the indirect connections.

But even though the ad was exposed as maliciously false, the folks who put it together probably laughed all the way to the bank.

With this in mind, maybe it’s time to publicly ask why President Obama wants to kill old people.

“Time for your death panel appointment”

This isn’t a blog post about Obamacare, though there certainly are enough horror stories from the United Kingdom to make us fearful of government-run healthcare.

I’m referring instead to what might happen because of Obama’s proposal for a much more onerous death tax, which is part of his class-warfare agenda and would take effect in just a couple of days.

It seems that there’s good evidence this may lead to some premature deaths. CNBC reports.

Many families are faced with a stark proposition. If the life of an elderly wealthy family member extends into 2013, the tax bills will be substantially higher. An estate that could bequest $3 million this year will leave just $1.9 million after taxes next year. Shifting a death from January to December could produce $1.1 million in tax savings. It may seem incredible to contemplate pulling the plug on grandma to save tax dollars. While we know that investors will sell stocks to avoid rising capital gains taxes, accelerating the death of a loved one seems at least a bit morbid—perhaps even evil. Will people really make life and death decisions based on taxes? Do we don our green eye shades when it comes to something this serious? There is good evidence that there is some “elasticity” in the timing of important decisions about life and death.

And what does that mean? Well, according to some of the academic research, the President is going to have proverbial blood on his hands.

Gans and Leigh looked into another natural experiment. In 1979, Australia abolished its federal inheritance taxes. Official records show that approximately 50 deaths were shifted from the week before the abolition to the week after. “Although we cannot rule out the possibility that our results are driven by misreporting, our results imply that over the very short run, the death rate may be highly elastic with respect to the inheritance tax rate,” Gans and Leigh write. This isn’t just something peculiar to Australia. Economists Wojciech Kopczuk of Columbia University and Joel Slemrod of the University of Michigan studied how mortality rates in the United States were changed by falling or rising estate taxes. They note that while the evidence of “death elasticity” is “not overwhelming,” every $10,000 in available tax savings increases the chance of dying in the low-tax period by 1.6 percent. This is true both when taxes are falling, so that people are surviving longer to achieve the tax savings, and when they are rising, so that people are dying earlier, according to Kopczuk and Slemrod. “Death elasticity” does not necessarily mean that greedy relatives are pulling the plug on the dying or forcing the sickly to extend their lives into a lower taxed period. According to a 2008 paper from University of Pittsburgh Medical Center Doctor G. Stuart Mendenhall, while tax increases give potential heirs large economic incentives to limit care that would prolong life, distressed patients may “voluntarily trade prolongation of their life past the end [a low tax period] for large financial implications for their kin.

I’ve previously cited the research from Australia, and also wrote a post about incentives to die in 2010, when the death tax temporarily was abolished, so this research makes sense.

What’s the bottom line?

…based on past reactions to changes in taxes, it at least seems likely that some deaths that might otherwise have occurred shortly after January 1 will occur shortly before. Death may slip in ahead of the tax man for some with estates worth over $1 million.

In the grand scheme of things, I have a hard time feeling anguish about some elderly rich guy dying today rather than one week from now. But there is real data to suggest that Obama’s policies will cause premature deaths.

And these premature deaths will only occur because the President is greedy for more revenue from a tax that shouldn’t even exist. Indeed, it’s worth noting that every pro-growth tax reform plan – such as the flat tax or national sales tax – eliminates this pernicious form of double taxation.

Since I’m an economist, I can’t resist a final comment about this tax having a terrible impact on capital formation. This is bad for workers, since it translates into lower wages.

And it’s definitely not good for U.S. competitiveness.

P.S. Whatever you do, don’t die in New Jersey.

P.P.S. It’s a morbid topic, but there is such a thing as death tax humor.

Read Full Post »

I’ve previously shared the famous parable that uses beer drinking to explain the tax system and here’s a funny video of a comedian talking about taxes and Halloween.

I also found this bit of tax humor from England, though it’s really more about redistribution than taxes, and I think this cartoon about class-warfare taxation and the economy hits the nail on the head.

But in all my years of blogging, I’ve never found a worthwhile cartoon on the death tax.

So I was very pleased when a professor of tax law gave a presentation in the Cayman Islands earlier this week and showed this clever cartoon about the death tax. He was kind enough to share it with me so I could share it with you.

If you want a serious but concise explanation of why the death tax is very bad policy, check out my column from USA Today. And here’s some very depressing data on how the death tax undermines American competitiveness.

P.S. One final serious point about the death tax. If you have a nest egg for your kids, it’s better to die in Australia than New Jersey.

P.P.S. There are a lot of jokes targeting the IRS, which isn’t really the same as tax policy humor. But many of them are worth sharing, including a new Obama 1040 form, a list of tax day tips from David Letterman, a cartoon of how GPS would work if operated by the IRS, an IRS-designed pencil sharpener, two Obamacare/IRS cartoons (here and here), a sale on 1040-form toilet paper (a real product), a song about the tax agency, the IRS’s version of the quadratic formula, and (my favorite) a joke about a Rabbi and an IRS agent.

Read Full Post »

Considering that every economic theory agrees that living standards and worker compensation are closely correlated with the amount of capital in an economy (this picture is a compelling illustration of the relationship), one would think that politicians – particularly those who say they want to improve wages – would be very anxious not to create tax penalties on saving and investment.

Yet the United States imposes very harsh tax burdens on capital formation, largely thanks to multiple layers of tax on income that is saved and invested.

But we compound the damage with very high tax rates, including the highest corporate tax burden in the developed world.

And the double taxation of dividends and capital gains is nearly the worst in the world (and will get even worse if Obama’s class-warfare proposals are approved).

To make matters worse, the United States also has one of the most onerous death taxes in the world. As you can see from this chart prepared by the Joint Economic Committee, it is more punitive than places such as Greece, France, and Venezuela.

Who would have ever thought that Russia would have the correct death tax rate, while the United States would have one of the world’s worst systems?

Fortunately, not all U.S. tax policies are this bad. Our taxation of labor income is generally not as bad as other industrialized nations. And the burden of government spending in the United States tends to be lower than European nations (though both Bush and Obama have undermined that advantage).

And if you look at broad measures of economic freedom, America tends to be in – or near – the top 10 (though that’s more a reflection of how bad other nations are).

But these mitigating factors don’t change the fact that the U.S. needlessly punishes saving and investment, and workers are the biggest victims. So let’s junk the internal revenue code and adopt a simple and fair flat tax.

Read Full Post »

Governor Rick Perry of Texas has announced a plan, which he outlines in today’s Wall Street Journal, to replace the corrupt and inefficient internal revenue code with a flat tax. Let’s review his proposal, using the principles of good tax policy as a benchmark.

1. Does the plan have a low, flat rate to minimize penalties on productive behavior?

Governor Perry is proposing an optional 20 percent tax rate. Combined with a very generous allowance (it appears that a family of four would not pay tax on the first $50,000 of income), this means the income tax will be only a modest burden for households. Most important, at least from an economic perspective, the 20-percent marginal tax rate will be much more conducive to entrepreneurship and hard work, giving people more incentive to create jobs and wealth.

2. Does the plan eliminate double taxation so there is no longer a tax bias against saving and investment?

The Perry flat tax gets rid of the death tax, the capital gains tax, and the double tax on dividends. This would significantly reduce the discriminatory and punitive treatment of income that is saved and invested (see this chart to understand why this is a serious problem in the current tax code). Since all economic theories – even socialism and Marxism – agree that capital formation is key for long-run growth and higher living standards, addressing the tax bias against saving and investment is one of the best features of Perry’s plan.

3. Does the plan get rid of deductions, preferences, exemptions, preferences, deductions, loopholes, credits, shelters, and other provisions that distort economic behavior?

A pure flat tax does not include any preferences or penalties. The goal is to leave people alone so they make decisions based on what makes economic sense rather than what reduces their tax liability. Unfortunately, this is one area where the Perry flat tax falls a bit short. His plan gets rid of lots of special favors in the tax code, but it would retain deductions (for those earning less than $500,000 yearly) for charitable contributions, home mortgage interest, and state and local taxes.

As a long-time advocate of a pure flat tax, I’m not happy that Perry has deviated from the ideal approach. But the perfect should not be the enemy of the very good. If implemented, his plan would dramatically boost economic performance and improve competitiveness.

That being said, there are some questions that need to be answered before giving a final grade to the plan. Based on Perry’s Wall Street Journal column and material from the campaign, here are some unknowns.

1. Is the double tax on interest eliminated?

A flat tax should get rid of all forms of double taxation. For all intents and purposes, a pure flat tax includes an unlimited and unrestricted IRA. You pay tax when you first earn your income, but the IRS shouldn’t get another bite of the apple simply because you save and invest your after-tax income. It’s not clear, though, whether the Perry plan eliminates the double tax on interest. Also, the Perry plan eliminates the double taxation of “qualified dividends,” but it’s not clear what that means.

2. Is the special tax preference for fringe benefits eliminated?

One of the best features of the flat tax is that it gets rid of the business deduction for fringe benefits such as health insurance. This special tax break has helped create a very inefficient healthcare system and a third-party payer crisis. It is unclear, though, whether this pernicious tax distortion is eliminated with the Perry flat tax.

3. How will the optional flat tax operate?

The Perry plan copies the Hong Kong system in that it allows people to choose whether to participate in the flat tax. This is attractive since it ensures that nobody can be disadvantaged, but how will it work? Can people switch back and forth every year? Is the optional system also available to all the small businesses that use the 1040 individual tax system to file their returns?

4. Will businesses be allowed to “expense” investment expenditures?

The current tax code penalizes new business investment by forcing companies to pretend that a substantial share of current-year investment outlays take place in the future. The government imposes this perverse policy in order to get more short-run revenue since companies are forced to artificially overstate current-year profits. A pure flat tax allows a business to “expense” the cost of business investments (just as they “expense” workers wages) for the simple reason that taxable income should be defined as total revenue minus total costs.

Depending on the answers to these questions, the grade for Perry’s flat tax could be as high as A- or as low as B. Regardless, it will be a radical improvement compared to the current tax system, which gets a D- (and that’s a very kind grade).

Here’s a brief video for those who want more information about the flat tax.

Last but not least, I’ve already receive several requests to comment on how Perry’s flat tax compares to Cain’s 9-9-9 plan.

At a conceptual level, the plans are quite similar. They both replace the discriminatory rate structure of the current system with a low rate. They both get rid of double taxation. And they both dramatically reduce corrupt loopholes and distortions when compared to the current tax code.

All things considered, though, I prefer the flat tax. The 9-9-9 plan combines a 9 percent flat tax with a 9 percent VAT and a 9 percent national sales tax, and I don’t trust that politicians will keep the rates at 9 percent.

The worst thing that can happen with a flat tax is that we degenerate back to the current system. The worst thing that happens with the 9-9-9 plan, as I explain in this video, is that politicians pull a bait-and-switch and America becomes Greece or France.

Read Full Post »

Whether I’m criticizing Warren Buffett’s innumeracy or explaining how to identify illegitimate loopholes, I frequently write about the perverse impact of double taxation.

By this, I mean the tendency of politicians to impose multiple layers of taxation on income that is saved and invested. Examples of this self-destructive practice include the death tax, the capital gains tax, and the second layer of tax of dividends.

Double taxation is particularly foolish since every economic theory – including socialism and Marxism – agrees that capital formation is necessary for long-run growth and higher living standards.

Yet even though this is a critically important issue, I’ve never been satisfied with the way I explain the topic. But perhaps this flowchart makes everything easier to understand (click it for better resolution).

There are a lot of boxes, so it’s not a simple flowchart, but the underlying message hopefully is very clear.

1. We earn income.

2. We then pay tax on that income.

3. We then either consume our after-tax income, or we save and invest it.

4. If we consume our after-tax income, the government largely leaves us alone.

5. If we save and invest our after-tax income, the government penalizes us with as many as four layers of taxation.

You don’t have to be a wild-eyed supply-side economist to conclude that this heavy bias against saving and investment is not a good idea for America’s long-run prosperity.

By the way, Hong Kong’s simple and fair flat tax eliminate all those extra layers of taxation.

That’s the benefit of real tax reform such as a flat tax. You get a low tax rate, but you also get rid of double taxation so that the IRS only gets one bit at the apple.

Read Full Post »

New Jersey gets abused by comedians as being some sort of dump, but there are some scenic parts of the state.

So it actually can be a nice place to live. That being said, it’s not a good place to die. Here’s a chart from the American Family Business Foundation that was featured in a recent Wall Street Journal editorial.

As you can see, New Jersey has the nation’s most punitive death tax. Most of the blame belongs to the 35 percent federal tax, but successful residents of the Garden State lose an additional 19 percent of their assets when they die. As the WSJ opined:

Here’s some free financial advice: Don’t die in New Jersey any time soon. If you have more than $675,000 to your name and you die in the Garden State, about 54% may go to the IRS and the tax collectors in Trenton. Better not take your last breath in Maryland either. The tax penalty for dying there is half of a lifetime’s savings. That’s the combined tab from the new federal estate tax rate of 35% and Maryland’s inheritance and death taxes. Maybe they should rename it the Not-So-Free State. …Family business owners, ranchers, farmers and wealthy retirees can avoid that tax by relocating to Arizona, Florida, Georgia, Idaho, South Carolina and other states that don’t impose inheritance taxes. There are plenty of attractive places to go. New research indicates that high state death taxes may be financially self-defeating. A 2011 study by the Ocean State Policy Research Institute, a think tank in Rhode Island, examined Census Bureau migration data and discovered that “from 1995 to 2007 Rhode Island collected $341.3 million from the estate tax while it lost $540 million in other taxes due to out-migration.” Not all of those people left because of taxes, but the study found evidence that “the most significant driver of out-migration is the estate tax.” After Florida eliminated its estate tax in 2004, there was a significant acceleration of exiles from Rhode Island to Florida.

At the risk of stating the obvious, the correct death tax rate is zero, as I’ve explained for USA Today. Indeed, I also cited evidence from Australia and the United States about how people will take extraordinary steps to avoid this wretched form of double taxation.

New Jersey has lots of problems. All of those problems will be easier to fix if successful people don’t leave the state. Sounds like another issue for Governor Christie to address.

Read Full Post »

You readers have been presented with a series of challenging quizzes on topics such as Sharia law, healthcareincest, and vigilante justice.

Let’s now shift to the world of taxation.

We all know governments routinely make life hard for taxpayers. The IRS, for example, is a rather brutal bureaucracy, as explained in this video. But I’m not sure the IRS can match either of these two examples of reprehensible taxation. And I’m not sure which one is worse.

Our first story comes from Switzerland, which normally gets high marks for modest taxation and respecting individual rights. But the municipality of Reconvilier is going to extraordinary lengths to pick the pockets of local dog owners. Her’s an excerpt from an AP report.

Reconvilier — population 2,245 humans, 280 dogs — plans to put Fido on notice if its owner doesn’t pay the annual $50 tax. Local official Pierre-Alain Nemitz says the move is part of an effort to reclaim hundreds of thousands of dollars in unpaid taxes. He says a law from 1904 allows the village to kill dogs if its owner does not pay the canine charge. Nemitz told the AP on Monday that authorities have received death threats since news of the plan got out.

But if you think threatening to kill Rover and Fido is brutal, brace yourself for the next story. The government in King County, Washington, is taxing a family for an infant that passed away shortly after birth. Here’s part of the report from a local TV station.

Olivia Clark lived for only one hour. Doctors didn’t even expect her to survive birth.  Now her family has a hard time understanding why the King County Medical Examiner has to review her death and charge $50. …Although her parents were from Yakima, they came to the University of Washington Medical Center for her delivery. As a result, Olivia died in King county. Her family soon learned the impact that would have when they received the funeral bill. “There was a little line on there near the bottom of the bill that said ‘King county death tax: $50.’ And we looked at that, and looked at that and looked at each other and said ‘what is that?’ Couldn’t believe that a little girl that lived for an hour has to pay a $50 tax,” said Larry. …The medical examiner instituted the $50 fee for cremations three years ago. This year, it included the fee for burials as well.

To be fair, the government didn’t impose a tax on the family because their child died. It’s a fee imposed on all funerals in the county. But it still is a bit macabre for the government to impose such a levy.

And we shouldn’t forget that the IRS has a 35 percent death tax for people who make the mistake of saving and investing too much money before they die, so grave-robbing by governments is not an unknown phenomenon.

So which example is worse? Normally, taxing a dead baby would trump everything, but the tax – while horrible – doesn’t actually target infants. The bureaucrats in Reconvilier, by contrast, are dusting off a 1904 law and threatening to kill people’s pets.

How do you vote?

Read Full Post »

Appearing on Bloomberg TV, I pontificate about the good, the bad, and the ugly in the recent tax deal. I also make what I hope are good points about the Laffer Curve and the meaning of deficits.

The video won’t embed, but just click below and you can watch it on youtube. As always, feedback is welcome.

Read Full Post »

I debated a couple of pro-tax increase folks on the Diane Rehm show Monday.

If you have a spare 51 minutes and want to hear me spar with Alice Rivlin and David Walker on National Public Radio, you can listen to the discussion by clicking this link.

Feedback actually is much appreciated. Let me know what issues you think I addressed effectively, but especially let me know if you think some of my points were inadequate.

Read Full Post »

The death tax is a punitive levy that discourages saving and investment and causes substantial economic inefficiency. But it’s also an immoral tax that seizes assets from grieving families solely because someone dies. The good news is that this odious tax no longer exists. It disappeared on January 1, 2010, thanks to the 2001 tax cut legislation. The bad news is that the death tax comes back with a vengeance on January 1, 2011, ready to confiscate as much as 55 percent of the assets of unfortunate families.

I’ve criticized the death tax on many occasions, including one column in USA Today explaining the economic damage caused by this perverse form of double taxation, and I highlighted a few of the nations around the world that have eliminated this odious tax in another column for the same paper.

Politicians don’t seem persuaded by these arguments, in part because they feel class warfare is a winning political formula. President Obama, House Ways & Means Committee Chairman Charlie Rangel, and Senate Finance Committee Chairman Max Baucus have been successful in thwarting efforts to permanently kill the death tax. But I wonder what they’ll say if their obstinate approach results in death?

Congresswoman Cynthia Lummis of Wyoming is getting a bit of attention (including a link on the Drudge Report) for her recent comments that some people may choose to die in the next two months in order to protect family assets from the death tax. For successful entrepreneurs, investors, and small business owners who might already be old (especially if they have a serious illness), there is a perverse incentive to die quickly. 

U.S. Rep. Cynthia Lummis says some of her Wyoming constituents are so worried about the reinstatement of federal estate taxes that they plan to discontinue dialysis and other life-extending medical treatments so they can die before Dec. 31. Lummis…said many ranchers and farmers in the state would rather pass along their businesses — “their life’s work” — to their children and grandchildren than see the federal government take a large chunk. “If you have spent your whole life building a ranch, and you wanted to pass your estate on to your children, and you were 88 years old and on dialysis, and the only thing that was keeping you alive was that dialysis, you might make that same decision,” Lummis told reporters.

The class-warfare crowd doubtlessly will dismiss these concerns, but they should set aside their ideology and do some research. Four years ago, two Australian scholars published an article on this issue in Topics in Economic Analysis & Policy, which is published by the Berkeley Electronic Press. Entitled “Did the Death of Australian Inheritance Taxes Affect Deaths?”, their paper looked at the roles of tax, incentives, and death rates. The abstract has an excellent summary.

In 1979, Australia abolished federal inheritance taxes. Using daily deaths data, we show that approximately 50 deaths were shifted from the week before the abolition to the week after. This amounts to over half of those who would have been eligible to pay the tax. …our results imply that over the very short run, the death rate may be highly elastic with respect to the inheritance tax rate.

And here’s a graph from the article, which shows how many affected taxpayers managed to delay death until the tax went away.

Obama and other class-warfare politicians now want to run this experiment in reverse. I already noted in another blog post that there are Americans who are acutely aware of the hugely beneficial tax implications if they die in 2010. In other words, Congresswoman Lummis almost certainly is right.

I don’t actually think that Obama, Rangel, Baucus and the rest of the big-government crowd should be blamed for any premature deaths that occur. But I definitely think that they should be asked if they feel any sense of guilt, remorse, and/or indirect responsibility.

Read Full Post »

Australia got rid of its death tax in 1979. A couple of Aussie academics investigated whether the elimination of the tax had any impact on death rates. They found the ultimate example of supply-side economics, as reported in the abstract of their study.
In 1979, Australia abolished federal inheritance taxes. Using daily deaths data, we show that approximately 50 deaths were shifted from the week before the abolition to the week after. This amounts to over half of those who would have been eligible to pay the tax. Although we cannot rule out the possibility that our results are driven by misreporting, our results imply that over the very short run, the death rate may be highly elastic with respect to the inheritance tax rate.

It looks like this experiment will be repeated in the United States, but in the other direction. There was a rather unsettling article in the Wall Street Journal over the weekend. The story begins with a description of how the death tax rate dropped from 45 percent in 2009 to zero in 2010, and then notes the huge implications of a scheduled increase to 55 percent in 2011.

Congress, quite by accident, is incentivizing death. When the Senate allowed the estate tax to lapse at the end of last year, it encouraged wealthy people near death’s door to stay alive until Jan. 1 so they could spare their heirs a 45% tax hit. Now the situation has reversed: If Congress doesn’t change the law soon—and many experts think it won’t—the estate tax will come roaring back in 2011. …The math is ugly: On a $5 million estate, the tax consequence of dying a minute after midnight on Jan. 1, 2011 rather than two minutes earlier could be more than $2 million; on a $15 million estate, the difference could be about $8 million.
The story then features several anecdotes from successful people, along with observations from those who deal with wealthy taxpayers. The obvious lesson is that taxpayers don’t want the IRS to confiscate huge portions of what has been saved and invested over lifetimes of hard work.
“You don’t know whether to commit suicide or just go on living and working,” says Eugene Sukup, an outspoken critic of the estate tax and the founder of Sukup Manufacturing, a maker of grain bins that employs 450 people in Sheffield, Iowa. Born in Nebraska during the Dust Bowl, the 81-year-old Mr. Sukup is a National Guard veteran and high school graduate who founded his firm, which now owns more than 70 patents, with $15,000 in 1963. He says his estate taxes, which would be zero this year, could be more that $15 million if he were to die next year. …Estate planners and doctors caution against making life-and-death decisions based on money. Yet many people ignore that advice. Robert Teague, a pulmonologist who ran a chronic ventilator facility at a Houston hospital for two decades, found that money regularly figured in end-of-life decisions. “In about 10% of the cases I handled at any one time, financial considerations came into play,” he says. In 2009, more than a few dying people struggled to live into 2010 in hopes of preserving assets for their heirs. Clara Laub, a widow who helped her husband build a Fresno, Calif., grape farm from 20 acres into more than 900 acres worth several million dollars, was diagnosed with advanced cancer in October, 2009. Her daughter Debbie Jacobsen, who helps run the farm, says her mother struggled to live past December and died on New Year’s morning: “She made my son promise to tell her the date and time every day, even if we wouldn’t,” Mrs. Jacobsen says. …Mr. Aucutt, who has practiced estate-tax law for 35 years, expects to see “truly gruesome” cases toward the end of the year, given the huge difference between 2010 and 2011 rates.
The obvious question, of course, is whether politicians will allow the tax to be reinstated. The answer is almost certainly yes, but it’s also going to be interesting to see if they try to impose the tax retroactively on people who died this year.
So far in 2010, an estimated 25,000 taxpayers have died whose estates are affected by current law, according to the nonpartisan Tax Policy Center. That group includes least two billionaires, real-estate magnate Walter Shorenstein and energy titan Dan Duncan. …”Enough very wealthy people have died whose estates have the means to challenge a retroactive tax, and that could tie the issue up in the courts for years,” says tax-law professor Michael Graetz of Columbia University.
It should go without saying, by the way, that the correct rate for the death tax is zero. It’s also worth noting that this is an issue that shows that incentives do matter.

Read Full Post »

Good news for entrepreneurs and investors, at least the ones who are very sick. As of today, the death tax is repealed. But this silver cloud has a couple of dark linings. First, the tax springs back to life next January 1, so healthy taxpayers are out of luck. Second, the grave-robber politicians may try to reinstate the tax – and even make it retroactive. But as this Wall Street Journal article notes, it is unclear whether such an odious step would survive a legal challenge:

Starting Jan. 1, the estate tax — which can erase nearly half of a wealthy person’s estate — goes away for a year. For families facing end-of-life decisions in the immediate future, the change is making one of life’s most trying episodes only more complex. “I have two clients on life support, and the families are struggling with whether to continue heroic measures for a few more days,” says Joshua Rubenstein, a lawyer with Katten Muchin Rosenman LLP in New York. …The macabre situation stems from 2001, when Congress raised estate-tax exemptions, culminating with the tax’s disappearance next year. However, due to budget constraints, lawmakers didn’t make the change permanent. So the estate tax is due to come back to life in 2011 — at a higher rate and lower exemption. To make it easier on their heirs, some clients are putting provisions into their health-care proxies allowing whoever makes end-of-life medical decisions to consider changes in estate-tax law. …Of course, plenty of taxpayers themselves are eager to live to see the new year. One wealthy, terminally ill real-estate entrepreneur has told his doctors he is determined to live until the law changes. “Whenever he wakes up,” says his lawyer, “He says: ‘What day is it? Is it Jan. 1 yet?'” …Congress could pass an estate tax next year and make it retroactive to Jan. 1. Whether that would withstand a court challenge is a subject of debate in the estate-planning world. …In addition, the composition of the Supreme Court has changed, and some financial advisers believe the court might not again bless a retroactive law. …The situation is causing at least one person to add the prospect of euthanasia to his estate-planning mix, according to Mr. Katzenstein of Proskauer Rose. An elderly, infirm client of his recently asked whether undergoing euthanasia next year in Holland, where it’s legal, might allow his estate to dodge the tax. His answer: Yes.

Read Full Post »

I like USA Today for the sports section, but today’s editorial page has a piece by yours truly arguing (contrary to the statist position of USA Today) that the death tax shold be completely reprealed. While this tax is grossly immoral, my main points were about 1) the damage to economic growth because of reduced saving and investment, and 2) the loss of national competitiveness since other nation’s are getting rid of this absurd levy:

The politicians in Washington impose double taxation on interest, dividends and capital gains, but the “death tax” wins the prize for being the most self-destructive part of the internal revenue code. Adding an extra layer of tax when someone dies is an unsavory combination of bad economics and immoral grave robbing. …Economists warn that the death tax reduces the capital stock. That sounds like jargon, but it means all of us have lower living standards because of less investment, fewer machines, less technology and diminished innovation. Ironically, other nations have figured out that the death tax does a lot of damage in a competitive global economy. Many people will not be surprised to know that a free-market paradise such as Hong Kong has eliminated its death tax, but it is certainly newsworthy that European welfare states such as Austria and Sweden also have repealed this unfair tax. Australia, Russia and New Zealand are among the other nations that have figured out how senseless it is to penalize wealth creation.

But I also noted that we are going to conduct an interesting social-science experiment in 2010. How many investors, entrepreneurs, and business owners are willing to hasten their own death to protect their assets from the IRS grave robbers?

There may be a bit of good news on the horizon. Assuming Congress does not change the law, the death tax disappears in 2010. But since the death tax comes roaring back to life in 2011 (with an even higher tax rate of 55%), this creates a bit of a quandary. I’m sure the successful people affected by the death tax love their children, but how many of them are willing to jump off a bridge before the end of next year to keep the IRS from seizing the lion’s share of their wealth?

Read Full Post »

I wax poetic in a podcast discussion with the folks at Investor’s Business Daily. We talk about tax competition, the Laffer Curve, American competitiveness, and the dangers of Obama’s class-warfare tax policy.

Read Full Post »

I provided the opposing view to USA Today’s pro-death tax editorial today. In my column, I pointed out that the tax was inherently unfair, and also noted that it is a perverse from of double taxation:

If there were a prize for the most destructive tax, the death tax surely would be a prohibitive favorite. Known to policy wonks as the estate tax, this levy is a punitive form of double taxation that penalizes people for trying to create a nest egg for their children. …This matters because every economic theory — even Marxism — agrees that capital formation is the key to growth. Higher living standards are possible only if people invest by setting aside some of today’s income. But a punitive death tax, especially when combined with other forms of double taxation on capital gains and dividends, reduces the incentive to save and invest. Scholars who have examined this issue estimate that the death tax has reduced America’s stock of saving and investment by nearly $850 billion. Moreover, the death tax is a job killer, reducing employment by 1.5 million. Ideally, the death tax should be abolished. Nations as diverse as Russia, Australia and Sweden have killed this unfair levy.

In their pro-death tax editorial, the folks at USA Today offered a rather absurd argument about double taxation, claiming that the dead person is not taxed twice because he or she is dead when the death tax is paid:

Another canard is the double taxation argument, which goes like this: Someone becomes wealthy through hard work and enterprise, all along paying hefty taxes, and then is walloped again at death. This argument has one slight problem: Dead people don’t really pay taxes. Estate taxes are effectively paid by the people who are alive to feel the effect of the tax: the heirs.

Not only is this argument morally dubious, it is economically nonsensical. The death tax is bad for growth because it encourages wealthy people (who are still alive) to be less productive because they want to minimize a future tax. That is the reason America has a huge “estate planning” industry. This industry exists to advise people how to use their money less productively, which is why academics have found the big negative effects I cite in my column.

Read Full Post »

Follow

Get every new post delivered to your Inbox.

Join 2,399 other followers

%d bloggers like this: