The Phony Estate Tax Farm Confiscation Ploy

(Thanks for this post on an important and timely issue. Iowa's three Republicans in the U.S. House all voted for the estate tax repeal that passed today; Democratic Representative Dave Loebsack voted against it. - promoted by desmoinesdem)

Dave Swenson

Senator John Thune, from my home state of South Dakota, has a degree in business and an MBA.  He knows little of tax math, incidence, or outcomes from what I can tell. Like many mouthpieces on many topics, he doesn’t let facts get in the way of a heartfelt story, though.  And the best story the GOP has spun over the last decade or so is the tale of woe and intrigue associated with the dreaded federal estate tax, which they’ve disingenuously rebranded as the “death tax.”

Thune co-sponsored the just-passed House bill to eliminate the federal estate tax and at that time said:

For too long the federal government has forced grieving families to pay a tax on their loved one’s life savings that has been built from income already taxed when originally earned. Currently more than 70 percent of family businesses do not survive to the second generation, and 90 percent of family businesses do not survive to the third generation.

Without citing one example, Thune intimated that the federal estate tax was destroying or would destroy businesses and was terrorizing grieving survivors.

There are others, our own Senator Grassley said recently to the Des Moines Register that the estate tax “violates the principle of the family farm.” I leave it to you to sort that out.  South Dakota Cattlemen’s Association President Todd Wilkerson said: “don’t tax us out of business.” And Representative Paul Ryan during a House committee meeting said it “… undermines the life work and the life savings of farmers and small- and medium-sized businesses … across the nation.”

It is all hooey.

First, there is no evidence the current federal estate tax has taxed any farm out of business. When pressed, Thune’s staff, according to the Washington Post,

could not identify a single farm that had been sold because of the estate tax, but they [claimed without providing any evidence] that some farms had to sell acreage in order to pay the tax.

The Center on Budget Policy and Priorities (CBPP), citing a joint congressional committee report on the estate tax reported that just 2 out of 1,000 estates would be expected to pay any estate taxes.   Further, the nonpartisan Tax Policy Center estimated that federal estate taxes were paid on only 20 small business or farm estates in 2013 nationwide.  

(all things being equal, then, we could project that Iowa would have either one small business estate or one farm estate paying federal estate taxes just every 5 years on average. Here is the CBPP study http://www.cbpp.org/cms/?fa=vi… )

Second, and this gets back to my original point, people complaining about taxes are often glaringly if not willfully ignorant of actual tax law or tax mathematics.

The federal estate kicks in at 40 percent of the value of a single person’s estate in excess of $5.43 million, in the case of a single-person estate, and $10.86 million for the estate of a married couple.  Estates of those sizes are not small, and the bulk of those estates are not usually composed of incomes that had already taxed, as Senator Thune asserted.  Those estates contain substantial portions that are real properties, stocks, and securities whose capital gains have yet to be taxed.

So, say I’m grocer (or farmer) Fred’s son, his sole heir, and grocer Fred dies.  Dad left me an estate of $6 million, meaning it is now subject to federal taxes. The tax man cometh.  

The entire estate is not subject to the federal tax, just the increment over $5.43 million.   I would owe federal taxes on $570,000, not $6 million, which at the effective rate of 40% would be $228,000.  Further, the federal government would allow me to take as long as 15 years to pay that off with only nominal interest charges.  Paid in a lump sum, my tax would be 3.8 percent of the total value of my inheritance (which, by the way, is completely deductible from my Iowa taxes).  

After taxes, my total inheritance would be $5.772 million.  The tax did not destroy me, I am rich beyond my wildest dreams.

The point is that the ostensibly confiscatory federal estate tax is nothing like the family-destroying monster it has been made out to be.  It is generous in its allowances, and it is by far the most progressive of all taxes in that it aggressively taxes wealth accumulations that are far and above those held by 99 percent of the population.

The beneficiaries of this ruse are the super wealthy, who have never minded exploiting our collective fondness for family farmers or the small businesses as they strive to further line their children’s pockets from beyond the grave.

About the Author(s)

daveswen

  • now

    Now unless I’m missing something, if it (property, farm, grocery stores) is valued at 6mil, that doesn’t make you wealthy if that 6 mil only nets you 100k.

    Think about it, even without the death tax play. What does 100 acres in des Moines cost(Polk, warren or Dallas county)? Plus equipment to farm it? Plus paying yourself a wage? Plus all the incremental fees associated?

    Now exclude sec179 as it was just lowered to 25k. Exclude all benefits that liberals are vehemently against.

    Now let’s say, with death tax and YOUR math, that 100k net the first year, minus 228k taxed puts you in the hole immediately on what you just inherited from a dead family member.

    Why? Why does it need to even exist? Give a blatant reason besides the “well you just received 6mil,that’s more than 99% of what people have, who cares?”

    • it needs to exist

      because our tax system already puts a disproportionate burden on people at the lower end of the wealth and income scale. People of wealth already enjoy many benefits from our tax system–to name just one, they pay lower taxes on their unearned income than workers pay on their earned income. There is no reason large estates should be entirely tax-free.

      Plus, abolishing the estate tax deprives the government of revenue. To make up for that, we either have to cut spending (cuts would disproportionately fall on services that benefit lower-income people), raise taxes on people less wealthy than those inheriting huge estates, or add to the federal deficit. All of those are worse options than continuing to levy the estate tax.

    • if you want to argue

      a net worth of more than $6 million “doesn’t make you wealthy,” good luck with that. We’ll have to agree to disagree.

      • and

        No, our tax system provides the same loopholes and advantages/disadvantages to the rich and poor..its just the poor only do a simple 1040ez..because its EASY! they don’t look for deductions, or tax shelters.

        Just like a math book provides the same problems, and the same information to solve for the answer, you just have put in the work.

        • Self centered much?

          You mean they don’t adjust their income downward for their IRA contributions like well paid people do?  They don’t file Schedule D so they can use the lower capital gains rate like George Soros does?  They don’t deduct the interest on their two mortgaged homes like the jet setters do?

          How stupid of them to file on 1040EZ while not using these loopholes that are available to everyone (with money)!

    • 1.66% rate of return?

      Entropy, you don’t get $6 million. The estate pays that tax before you ever get it. But that’s hardly the point. If you can’t figure out how to make more than $100,000 on $6 million of assets, you’ve got bigger problems than the estate tax.  That post was unintelligible.

      But to answer your question.  Why should we tax someone who just got $6 million for doing nothing but sharing DNA with someone who may also have done nothing but share DNA with someone before that?  Because we have to tax someone.  Why should we levy a tax of a single dollar on someone working 40 hours a week earning $30k a year before we levy a tax on someone who got $6 million for doing nothing?

    • also ask this

      You might also ask how this farm got to be worth $6 million in the first place.  

      Could it have anything to do with corn exports that depend on the locks and dams of the Mississippi River built at public expense?

      Could it have anything to do with the Renewable Fuels Standard that puts farm products into fuel tanks?  

      Did your ancestor all by himself drive the value of that farm through the roof, or do you maybe owe some tribute to the society that made it so lucrative to own farmland?

  • would

    Would you support a flat, fair tax? 7% (for example) of what I earn and 7% of what you earn. Say $40k is our earnings a year.

    That way, ‘proportionately’we pay the same amount of our earnings.

    But, if I decided to use 15% of my money on stocks, or investment in education, or something to advance my life, or a risky land purchase and create more wealth for myself, and you spend that same 15% on tattoos, vices (cigarettes alcohol or drugs)and in 10 years I make a better life for me, and now you live in the slums. Why is that my fault?

    Of course I don’t care if you are the winner or loser of this story, its the content of it. What I’m trying to say is why should those who work hard, seized opportunities and took risks for a better life be disproportionately attacked?

    I better you support losers getting the same size trophy as well..

    • Perspective

      I love how the winner of the estate lottery in these hypotheticals is always hard working rather than lucky, while the poor person is always stupid and lazy rather than unlucky. It’s not about punishment. Now, if we compare the hard working person who makes it big, with no estate to inherit, he/she pays up to 40% of their marginal income in tax….that’s EARNED income. Why attack that person instead of the one who did nothing at all to earn it, as deserving as that person might be?

  • jonmuller

    I agree as you stated. Why attack the person who worked, and not the entitled person!

    I also agree if you can’t make more than 100k off of 6m..your issues are your work ethic and intelligence..

    Also, I did not go into much detail because its very easy to go thru loopholes available to not make $6m from inheritance, I just wanted to use numbers blatantly available…

    Why should we have to levy a tax on someone who just received 6m though? Whether it’s hard work, risk investment or “dna inheritance”?

    I’m all for tax for infrastructure (roads, defense and veterans) sources, but not for those who extend, or over extend their stay on the numerous immigration/unemployment/disability (which my father in-law after a severe stroke has been refused, unaccepted, on something he had paid several into) benefits available..

    • Taxes? Icky!

      “Why should we have to levy a tax on someone who just received 6m though?”

      Because we usually levy taxes when money is passed from one party to another:  income taxes and sales taxes above all.  

      Sometimes we even levy taxes when nothing is being transfered as in the case of property taxes.

      There is nothing egregious about the estate tax except the egregious sense of entitlement that so often accompanies wealth.

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