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Tuesday, May 21, 2024

Death tax an unfair triple tax that government should eliminate from code

After the release of President Obama’s budget a few weeks ago, I was struck at the massiveness of federal spending.

Total federal revenues are close to $3 trillion.

However, the death tax, which is the tax most targeted at the “1 percent,” brings in about 1 percent of total federal revenue.

It is high time that this triple tax be eliminated from our giant tax code.

The estate tax was started in 1916 in an effort to get the wealthy to pay more for the expansion of the military before World War I.

By 1940, revenues from the tax accounted for about 5 percent of all federal revenue.

Since then, the tax code has exploded with loopholes and clever tricks, along with high-powered lawyers that make the estate tax look like a joke — except for the massive legal bills and lost investment it causes.

I am amused when progressives say that many of the wealthy members of our society only pay a 15-percent tax rate.

The capital gains tax is applied on the earnings from securities that have already been taxed at the corporate income tax rate that goes up to 35 percent.

In a worst-case scenario, $1 of corporate earnings passed through to the owner and taxed twice is only $0.5525 — a number that is far from the 15 percent tax rate that the Occupy folks assert.

Even for famous tax-dodgers like General Electric, the corporate tax rate is not 0 percent forever.

They do, in fact, pay corporate income taxes.

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Even low corporate income tax levels result in a much higher tax rate for the capitalist class.

With this understanding of taxes, it seems grossly unfair to tax people who are successful and want to pass on the value of their life’s work to their offspring when they die.

The death tax is a triple tax, hitting money that’s already been hit twice.

The most dangerous effect of the death tax, though, is what it does to decisions about investments that create far more jobs on a permanent basis than the stimulus did temporarily.

The current exemption is $5 million. Imagine you are a car dealership owner with a worth of $10 million.

You have a choice.

Would you purchase another dealership, which would likely increase your net-worth by $5 million over the course of the next 10 years?

You know the government will take 35 percent of it from your heirs when you die.

Does it start to change your mind about taking this enormous risk with your personal assets?

I once spoke with an executive of a large wealth-management firm who told me a story about how the ultra-rich very rarely pay the full 35 percent on their estates.

They hire six- and seven-figure lawyers who make sure they don’t pay.

Instead, it is the merely wealthy — those who are more concerned about the health of their concrete business — who are impacted by the estate tax the most.

It is the merely wealthy — those who are more concerned with the yield of their strawberry crop — who are impacted by the estate tax the most.

These people don’t have the incentive or inclination to hire expensive lawyers.

And it is their children who pay for it dearly when they die.

Why should you be concerned?

It is estimated that baby boomers (our parents) will inherit $8.4 trillion from our grandparents over the next few decades.

Much of that will be passed on to the boomers’ offspring (us).

If you want to take over the family business one day, you might be out of luck if you owe $1.75 million in taxes from inheriting that car dealership posed in the earlier example.

It is time for this inefficient and distorting tax to be eliminated.

It does little to accomplish the redistributive effect its liberal proponents wish it could.

Travis Hornsby is a statistics and economics senior at UF. His column appears on Mondays.

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