Thursday, February 26, 2009

Welfare for the rich

As a tax preparer, I sometimes find myself thinking about estate tax issues. Now the estate tax is the official name for the nasty "death tax." You know, it's bad enough the government takes from you when you're alive, but then they even take your money from you when die. Oh, the humanity. I mean, how will anybody get into Heaven when the IRS is taking all their money so they can't pay the entry fee?

OK, so estates are all about leaving something to your heirs and the outrage is really about why shouldn't the heirs be able to keep everything that's left to them? Usually the debate is framed along whether it's fair to the recipient that they may have to lose land or a business or some other piece of the property that's been in the family for generations. I think it's time to reframe the debate.

One of the biggest criticisms of welfare to poor people is the notion this creates a culture of dependency. And certainly there is much validity to this criticism. One of the reasons getting welfare right is so difficult is precisely because even welfare's biggest advocates want programs for the poor to be a bridge to a better life or a safety net when people catch a bad break. I don't know of anybody who wants to create an entire culture of people who generation after generation do not know how to earn a living. Not only is this outcome bad for the nation that has to support the free-loaders, but it's bad for the dependent class themselves who never get the pride of achievement or the simple satisfaction of earning one's own way in life. Most people rightly condemn social programs that function to create a culture of dependency.

But why is that we are so concerned about a culture of dependency on the state, but I have never heard anybody express concern about the culture of dependency on the ESTATE?

I spent years living in mountain towns near ski resorts. In these areas was a high concentration of what were known as trustafarians. These were the beneficiaries of trust funds who would never have to work a day in their lives. Go hang out in any highly desirable vacation destination and you're bound to run across some trustafarians. (I'd recommend starting your search at a trendy bar or nightclub.) These people are typically quite smart, as their parents generally were talented and successful people. Yet despite whatever talents they may have, they contribute nothing to society except whatever unearned cash they toss around. Though they live lives most people would consider pure bliss, they often are rather unhappy people, hence high rates of drug abuse. Yet nobody seems much concerned and there is a highly vocal group of people who defend the institution that leads to their dependency.

It's time we look at inheritances for what they are: welfare. Abolishing estate taxes, or making them only applicable at absurdly high levels as we do now, only serves the idea that if people are given a bunch of money they didn't earn, they'll be happy. Handouts for the rich are just as destructive as handouts for the poor.

Of course, one of the main reasons people work hard to achieve is so they can give their children a high quality of life. There's nothing wrong with that. But let's consider what composes a high quality of life. A good education tends to correlate with a high quality of life, and wealthy people are certainly able to provide that for their children. Professional achievement and success are big contributors to a high quality of life, and wealthy parents can give their children tremendous advantages (besides education of course) in this area with insider knowledge and excellent connections. And then there's the more intangible (and important) things like quality relationships with friends and family. It's hard to see how inheriting mountains of money will help with this either; in fact, this may also be complicated by a massive inheritance as it can lead a person to question whether they are really liked for who they are or just what they have.

Something must be done with the assets of the deceased, and clearly letting enormous assets simply pass to heirs is bad from a public policy perspective and bad for the heirs.

Here's what I propose: Limit the amount of cash and highly liquid assets (stocks, mutual funds, etc.) that can be inherited tax-free to the equivalent of roughly one year's average salary. If an heir wants to take a year off to mourn the loss of their loved one, now they have the funds to do so. Beyond that amount, however, tax the hell out of it. Maybe implement a 100% tax at some point. Then there's the sentimental things. Valuable items that may have sentimental value should be allowed to be passed on, as long as they're not income-producing, and with one catch. The recipient gets no basis in the property. You can inherit the 1000-acre ranch that's been in your family forever and not pay any tax on it. But if you sell it, you're paying tax on the whole amount...and at ordinary tax rates, not long-term capital gain rates.

Finally, there's the issue of income producing property. Treat it like liquid assets. Allow a small allowance, and beyond that it gets taxed. Since it's producing income, heir can be given the option to pay the tax in installments which will be paid by the income-producing property. This won't work in every situation. But again, back to the point about earning one's own way. For the heir who just inherits a successful business, where's the sense of accomplishment? Shouldn't the heir have the opportunity to build their own business? For family businesses, it will be easy enough for the heir to simply establish their own business and rapidly build it with the clients of the decedent. For large businesses, it can be incorporated and the heir will have a chance to earn their way to the top (with a tremendous advantage of course).

It's time we stop the madness of encouraging a culture of dependency among those born into wealth. Both dependency on the state and dependency on the estate serve to rob society of human resources and individuals of dignity.


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