My condolences go out after the death of long-time owner of the New York Yankees George Steinbrenner. But, the death of the Yankee's mogul brings an important topic of debate into the arena: the Estate Tax.
In 2008, the owner of the St. Louis Rams Georgia Frontiere died and left the organization and her assets to her two children. Valued at over 900 million, the heirs were required to pay over 300 million in taxes to the Federal Gov. With obviously no way to pay the money required, the two sons had to sell the team to just pay the taxes for their mother leaving it to them!
Same thing has happened to the Kansas City Chiefs, the New York Jets, and the Miami Dolphins.
Compare that to the deceased George Steinbrenner. Bought the Yankees for 8.8 million in 1973 and has now grown it to be valued over 1 billion dollars. Due to the Tax Cuts in 2001, the estate tax is 0% this year. Fortunately for the sons of Steinbrenner, they will not have to pay 500 million in taxes to the Feds and get to retain ownership of the team.
Lets get into some specifics:
People of all political persuasions and centuries have been debating the validity of a tax on property or assests. Here are a couple comments:
President Teddy Roosevelt: "The man of great wealth owes a peculiar obligation to the State, because he derives special advantages from the mere existence of government."
Former Treasury Secretary and Advisor to Obama Lawrence Summers: "the evidence put forth by lawmakers advocating the repeal of the tax is as bad as it gets. There is no other case than selfishness."
NY Times Writer Paul Krugman: "It is a moral issue"
Harvard Economist Greg Mankiw: Consider the story of twin brothers – Spendthrift Sam and Frugal Frank. Each starts a dot-com after college and sells the business a few years later, accumulating a $10 million nest egg. Sam then lives the high life, enjoying expensive vacations and throwing lavish parties. Frank, meanwhile, lives more modestly. He keeps his fortune invested in the economy, where it finances capital accumulation, new technologies, and economic growth. He wants to leave most of his money to his children, grandchildren, nephews, and nieces.
Now ask yourself: Which millionaire should pay higher taxes?... What principle of social justice says that Frank should be penalized for his frugality? None that I know of.
My Take on the Foundation Issues
The intent of the estate tax was to render to the government a "tax" on the transfer of property or wealth to their children or heirs. Some of the big arguments centered on the fear that wealth would get concentrated in a couple families in the country and that wasn't fair. All the questions in your head can be reduced down to one simple question: Who has the right of property?
It is my opinion that the right of property is the right of use and disposal: just as a man who produces wealth has the right to use it and dispose of it in his lifetime, so he has the right to choose who shall be its recipient after his death. No one else is entitled to make that choice. The right goes to the original producer of the wealth. Others claim that the heir did not work to produce the wealth, so he has no inherent right to it. That may be true. But, if the future heir has no moral claim to the wealth, except by the producer's choice, neither does anyone else--certainly no the government or "public."
Policy Solutions and Issues
I know I have already written a very long blog post, but I think it highlights a greater issue at play: government's goals of redistributing wealth and addressing income inequality. Many wrongly see the tax as a mode of redistribution from the wealthy to the not-so-wealthy. But in reality, the death tax punishes middle and low-income Americans by discouraging new hiring and stifling new growth.
I support the full repeal of the tax on a couple grounds:
1) It kills small businesses and potential for hiring.
Here a couple testimonials:
General Contracting Co.
Grande Harvest Wines
2) Create 1.5 million jobs
Former CBO Director published a study
3) Only affects 2% of Federal Revenue
It could actually be negative revenue because families pass down fortunes early that are then taxed at much lower rates. This study outlines it.
Conclusion
I have a feeling that lots of people will disagree with me, but that is what the "Arena" is for. I would love to talk about the foundational issues of property or the policy implications of a certain tax rate or full repeal. In the words of my man Milton Friedman:
He told a young man once: "The challenge of my generation was to build an intellectual defense for freedom...The challenge of your generation will be to keep it."
Blake
8 comments:
George, or should I say his children, just got extremely lucky. I am against double taxation, but in this case the Steinbrenners by passed all taxes on gains of over a billion dollars.
As someone who has done his part to pay his taxes, I do feel cheated as well as other tax payers should. The reason being in this case the heirs will receive a step up basis to the fair market value of the team today, and therefore by pass any capital gains tax EVER! The extreme wealthy do not need a ordinary income, and often times will not take one (hence Steve Job's $1 salary). The reason for not taking it is they can remove cash from their companies in the form of dividends and pay a 15% rate over paying the 40% rate you or I would have to pay if we received it as compensation. At the end of the day, the Estate Tax is where the government is able to try and get their share of these indiviual's profits that have never been taxed. I do not think you or I can argue that substantial profits like these should go without being taxed EVER! It just simply is not fair to hard working guys like us.
This situation exemplifies what the tax is for in my opinion. Is the tax effective in its purpose? In my opinion, no the exemption amount needs to be set higher and the tax rate should be the capital gains rate of 20% on long term capital property and the ordinary income tax rate on short term property. The trick to it is to only include property that has not been taxed already (ex. gains from appreciated stock not let liquidated), but I do not believe life insurance proceeds should be included in this.
Here is a video of self-avowed socialist Bernie Sanders who is a Senator from Vermont. Start the video at 2:20 to bypass his rambles
http://www.sanders.senate.gov/newsroom/media/view/?id=6b6eea9d-d0a7-460d-9e11-f6ee38bb17bf
His statement about 0% estate tax "cost[ing] the government over 1 trillion dollars" is that money is the property of the government - not necessarily ours.
All this talk about deficits is good, because we cannot continue financing huge portions of our economy with debt. However, the greater problem in my opinion is spending. Spending has to come down. Bernie Sanders decries deficits and uses the estate tax to impose an implied contradiction in the Republican caucus. This is a futile attempt. Especially since the revenue is only 2% of overall government take in.
The estate tax punishes capital investment and stymies small business growth. It creates uncertainty for family businesses and large corporations alike. It discourages expansion and encourages liquidation of assets by the "rich" before their death. It is a job killer, and I believe those videos and links about prove that - as opposed to the "government getting their fair share"
Me and Blake have discussed this topic in the past and I will simply repost what I said a few months ago. My thoughts may have changed a little bit but Im not altering anything so I may actually have some differing opinions on my own opinions (over time and with additional understanding of a topic, opinions change and adjust, sorry).
Also, I make a case for no long term tax rate and a 20% short term tax rate. The reason for a short term tax rate is to help prevent speculative short term trading that skews markets and not so much to enhance government revenue. Kinda like a speeding ticket fine is in place to reduce speeding, not necessarily to earn the government money. The fact that it does is an additional benifit to local governments.
We might disagree a little bit but I’m not for a zero estate tax rate. I think that some tax should be paid on monetary transfers of wealth. Definitely not 45% (or the original max of 55%). Much much lower. The government does need to get some income from somewhere, and I think that with a $3.5 million dollar exemption, 10 to 20%is not ridicules. But I also think that the short term capital gains tax should be capped at 20% instead of the current rate of whatever tax bracket the individual is in (and the long term capital gains rate should be eliminated). The reason I bring up the capital gains tax is because I wouldn't mind seeing gifts and estate inheritance be taxed at the short term capital gains tax rate with the reasoning that the gift or inheritance could be called a short term capital gain (meaning that the money received would be considered a capital gain of the total amount, the original investment is $0) I doubt my argument is making sense but I’ll continue.
The treatment between money and other assets would be treated differently. Nonmonetary assets such as land, buildings, stocks, bonds or say the St. Louis Rams would not be taxed until the asset is sold. However, no matter the length of holding, these assets would be taxed at the short term rate even if held for 30 years after inheriting the asset (this assumes the long term rate is eliminated and the short term rate reduced). Once the asset is monetised it can be taxed as a capital gain, but at the short term rate, even if held for more than a year (again the capital gain can be looked at as the total value of the sale minus any money invested into the asset since the asset was received for $0.)
This way, cash inheritance or cash gifts (they are taxed exactly the same) can be taxed at what I consider a fair rate, 20% max. The government gets its share and the individuals get to keep a large share. Keep in mind the first $3.5 million of estate inheritance is tax exempt. So, if I die and leave you $5 million in cash, you will pay $300,000 in taxes and keep $4,700,000. I think that’s expectable.
My big issue with the estate tax is the immediate taxation on nonmonetary assets. This is what caused the owners of the St. Louis Rams to have to put the team up for sale, they couldn't afford the taxes. I think its fair to say that anything passed down to the next generation should be able to be kept in the family without the burden of large taxation that could force the sale of an asset. With property such as land and building, property taxes must still be paid and if the cost of that tax is too much then the asset should be sold but that is outside the realm of my current argument.
But anyway, if you disagree with me that’s fine, Ronald Reagan once said, "the person who agrees with you 80% of the time is a friend and an ally, not a 20% traitor."
(Posted 19 December 2009, the original had to be cut down to fit the max length of a comment)
Brett:
I agree with you on most of your points, however, I'm going to share with you my difference of opinion on few points too.
For starters there is no way our government can afford to do without the capital gains tax. I do not have stats to throw at you, but I am quiet sure the tax accounts for a substantial part of the federal government's revenue.
The problem with short term manipulative trading would not be halted with a minor tax rate of 20%. The tax system is fair on it I believe, because it makes trading securites be taxed at ordinary income when in fact most of the time that is what it is to the traders practicing in it. As most traders participating in the markets for retirement and such hold more of a long term approach. If we were to change the rate to only 20% it would in affect encourage short term trading because those who have the funds to manipulate markets are in a much higher tax bracket than 20% I can assure you. Mutual funds and private equity investors alike manipulate the markets with short term moves, because they can and no tax rate will deter them from doing it as long as they receive a profit of something at the end of the day (which they will regardless of tax rate). The method only works on a short term basis, as the markets will correct themselves given time, therefore the manipulaters will maintain the practice only on a short term basis.
I disagree with the arguement only cash should be taxed immediately with the estate tax. My reason for it is the investment sold to generate the cash most likely has been hit with a capital gains tax anyways. This is double taxation and I am against it as I think from your comments you are too. The real issue perhaps is the fairness in this method. By taxing a investment in currency and not a investment in capital property or real estate, you are punishing the heir to the currency by taking the growth they might have received from interest on the currency.
Also explain to me how you handle the tax if the estate includes $2 million in real estate, $3 million in capital assets, and $500 thousand in cash. My question is which assets do you include in the exemption, and as a result how much tax is owed immediately? You should be able to get my point on this issue if you do the math, as there is adequate cash there to pay the tax immediately.
Good post though...
Brandon,
Great point about the flaw in short term rates being less than the ordinary income tax rate. Never considered that point but it makes perfect sense.
I do believe that taxation on investment should be minimal. Too much tax on investments disincentives investing and would be counterproductive in enhancing the economy.
Another well placed point is about the taxation of estates that have a variety of assets from real estate to cash. I think we can both agree that cash inheritance should be taxed in some way immediately (the level of fair taxation could be debated for eternity). But how to deal with varying assets. You got me again, I’m really not sure. My only issue is that I hate to see assets having to be sold just to pay the taxes.
My grandmother will eventually pass down a large amount of oil rights to my family (hopefully not anytime soon) and if oil prices reach a certain level and depending who values the assets, it is possible they will be worth much more than $3.5 million. So, should my family have to sell a portion of the assets (which will be very hard to value) to pay taxes immediately or is it enough to tax the monthly dividends that the assets will pay at our families current income tax rate.
Also, in the case of the Yankees, the team was bought for $8.8 million and is now worth upwards of $1.5 billion. Quite the return on investment. But when arguing how this should be taxed, keep in mind the economic impact the Yankees have had over the past 40 years. They have been of great benefit to New York and have even paid millions in different taxes over the years and enhanced the overall New York economy. They have the ability to pay the likes of A-Rod $25 million a year, who in turn pays taxes. The Steinbrenners may have gotten lucky in that George died this year but the government will continue to get a large chunk of change from the Yankee franchise. Imagine if the Steinbrenners had to sell the Yankees to pay estate taxes and someone like Warren Buffet bought the team and decided to move them to Nebraska. Not that this would happen, but if it did, the city of New York would probably be willing to pay the tax for the Steinbrenners just to keep the team in New York just because of the benefit the team is to the city. Not to mention the charitable contributions that Steinbrenner made to the city of New York. While this case is different than other estate issues, I do not feel that the Steinbrenners are really getting off without contributing anything back to society. The Yankees will stay in the Stienbrenner family, as well it should, and the franchise will continue to enhance the economy and yes, pay more taxes.
Brandon and Brett:
Really productive exchange is going on right now. All of your points are making a lot of sense; however, I want to look at the unintended consequences of taxation on something like a capital gain or on estates.
It is important to note that revenues from the capital gains tax makes up between 2-3% of all federal revenue.
http://www.factcheck.org/askfactcheck/whats_the_percentage_breakdown_of_the_governments.html
It can be argued that looking at the very small percentage of revenue accrued, it may actually do more harm than good. In general, there is significant consensus that broad-based reductions in taxes on capital have the potential to boost economic growth over the long run. Reductions in capital taxation increase the return on investment and therefore the formation of capital. The resulting increase in the capital stock yields greater output and higher incomes throughout much of the economy. It is my fear that the capital gains tax in general has negative effects that doesn't justify because of low percentage of revenue.
I am not sure that the concern that the concern that Brett has about low or no capital gains rates will encourage too much speculation and a more volatile market. There may be a semblance of truth to it, but the tax itself creates uncertainty and diminishing wealth and capital in the market which reduces our capacity to expand.
In reference to the Estate tax, I do like the idea of not taxing non monetary assets, but I do not think it goes far enough. There is evidence out there that the estate tax actually reduces overall revenue to the government. The tax avoidance strategy of parents shifting assets and income to children which is taxed at a much lower rate is the effect. All in all, the estate tax “probably
reduces personal income tax revenue by more than the estate tax itself collects, causing a net decrease in total federal tax revenue,” according to Harvard University’s
Martin Feldstein.
My main point is that taxes on capital formation or wealth transfer just gives government more money to spend instead of allowing the potential of job creation by the private sector.
Looking forward to your thoughts.
Boothe:
My current take on capital gains taxing, is that for the most part it is fair. I am very much in favor of the preferrential rates awarded to long term capital gains and dividends. I hate to see the coming hikes to these rates we are surely to see in the coming years to serve the deficit we are faced with.
I am not necessairly in agreement with taxing currency immediately, but delaying the taxation of other assets. In your case, I can see and respect your point. Lets say though instead of oil rights, that might have the potential to increase in value, your grandmother has cash instead. So according to your stance, the oil rights should have delayed taxation and be given the opportunity to grow tax free as a investment in a tax favored 401k would? The issue here is you are punishing the heirs to cash by not giving their investments a chance to grow tax free and accumulate the interest earned. I hope that point makes sense..
As far as what should happen in your situation, I am not sure of all the facts but it appears the cash flow your family is generating off the oil wells is most likely more than enough to qualify for financing to cover the tax. This would enhance the economy by enabling the money multiplier effect to work like it should. Which is currently being stunted by bank regulators requesting classification of loans left and right (that's another topic though). The truth is though adequate trust planning would by pass the issue completly most likely. As a side note though, your exemption will not be $3.5 million it will only be $1 million unfortunately.
As far as the Yankees go, they owe the tax. How much money did they receive from tax payers' dollars to help build the billion dollar stadium they built again? Do you think that the stadium doesn't enhance the value of the team a little if they were to sell? They could set it up with the IRS to pay the tax over time I am sure, since the value of the team covers more than the 30% or 40% of the gross estate required to spread the tax out over 15 years I believe. Even if not I feel sure they could receive financing to help pay the tax if need be. If I have to pay it they should too is the approach I take on it. We both spend money and granted they spend more it both helps the economy...
I think the only way to really satisfy all sides is to lower the rates and up the exemption. I believe when it was originally set it was not indexed for inflation and that has a lot to do with the arguement today...
I seriously doubt Ol' Warren would be so arrogant to take the Yankees out of the New York market to Nebraska. I don't even think Buffet could make a return on that one, or break even ha. Point taken though...
http://www.slate.com/id/2261254/
When you read this article, how can you support the death tax haha?
Post a Comment