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Who Pays Estate Taxes? August 20, 2006

Posted by federalist in Taxation.
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Hendrik Van den Berg offers a good perspective on death taxes (a.k.a. “estate” or “inheritance” taxes) in a letter in today’s WSJ:  

The relevant question is whether the inheritance tax is more or less harmful than the other taxes that have to to be levied to pay for what our government spends. Are inheritance taxes worse than higher income taxes that discourage work and innovation? Are they worse than higher property taxes that discourage the accumulation of wealth? Are they worse than higher corporate profits taxes that discourage issuing equity and shift business offshore? Clearly not.

Given the government’s budget deficits, its immense need for revenue and the high economic costs of obtaining that revenue through other types of taxes, it makes little sense to cut a tax that is relatively less harmful to the economy and falls entirely on people who are, because of their wealth, relatively well-positioned to efficiently deal with the costs.

That’s the end of his letter.  The obvious question to follow this fine reasoning is: Given that the estate tax is 100% avoidable, and given that the wealthy are “well-positioned to efficiently deal with” the tax, who actually pays it?  Is this a real source of revenue for the government, or just a “hose-the-rich” measure that never hits anyone in practice?

For as little as a few thousand dollars a wealthy individual can create trusts, family offices, or insurance arrangements that legally and completely avoid the death tax.

Presumably, then, the only people who actually pay this tax are:

  1. People who want to leave half of their estate to the government instead of to their designated beneficiaries.
  2. People who didn’t know their assets were so large as to be subject to confiscation upon their death.
  3. People who didn’t want to pay the tax and knew they were subject to it, but who died before they implemented the avoidance measures available to them.

 In other words, this is effectively a tax on rich people who are stupid, disorganized, or unfortunate.

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