Should death be taxed? Congressional supporters
claim that this is the issue that was at the core of the failed
legislation to repeal estate and gift taxes. Certainly this
type of an exit tax would seem not only morbid but unfair. But
estate and gift taxes are hardly a tax on death; most people
who die don't pay them, and some people who are living do. Clever
marketing, starting with the label "death tax," would have you
believe otherwise and has successfully diverted attention from
the real question: Should unearned income be taxed?
The Republican-sponsored bill to repeal estate and gift taxes
is a boon for the heirs of wealthy benefactors who are already
exempt from paying taxes on what they inherit. Under current
law an estate can transfer up to $675,000, untaxed, with unlimited
exemptions for charitable giving and gifts to spouses. Additionally,
individuals can give tax-free gifts of up to $10,000 a year
to as many people as they like. Beyond exemptions, estates and
gifts taxes are levied on the donor at rates ranging from 37
to 55 percent. Due to the large exemptions, most estates aren't
touched, and fewer than 2 percent pay any tax. As a result,
their lucky beneficiaries can receive hundreds of thousand of
dollars in tax-free income, and with a bit of estate planning,
they can receive much more.
Critics of the estate tax decry it as the unfair double taxation
of income--a red herring if ever there were one. First, the
estate tax catches a substantial amount of income that has never
been taxed before. Capital gains income that is passed on at
the time of death is exempt from taxation due to the "step-up-basis"
at death. This oddity of the tax code allows unrecognized capital
gains to go untaxed forever. While estate tax repeal legislation
would eliminate this exemption for extremely large gains, most
of the exemption would remain in place. Second, the argument
of double taxation is meaningless in a system where many workers'
earnings are already taxed multiple times through the income
and payroll taxes when earned and then by sales taxes when consumed.
Double and even triple taxation are a reality of the tax code,
which, unless greatly simplified to, say, a single consumption
tax, are here to stay.
Meanwhile, complicated and arguably arbitrary estate and gift
taxes do indeed need to be reformed. But the objective should
not merely be to reduce taxes for millionaires and billionaires.
Under current estate and gift taxes and proposed reforms alike,
recipients can receive a $10,000 gift, a $675,000 bequest or
even $1 million from an estate and are not taxed on a single
dollar of that income. This fundamental exemption of unearned
income represents one of the greater inequities in the tax code.
A far better approach would be to ensure that people are more
fairly taxed on all the income they receive. This could be achieved
simply by scrapping estate and gift taxes entirely while replacing
them with the existing income tax.
Sure, some will argue the recipient's parent, or great-uncle,
or whoever originally earned the income already paid income
taxes. But at the time of its transfer it is transformed into
income for someone new and should be taxed as such. Why should
one person owe a payroll tax on the first dollar they earn while
another pays no taxes on the first million they don't? If beneficiaries
were taxed on the transfer of wealth, when they received $10,000
from a relative, it would be included in and taxed with the
rest of their income. The same would be true for someone who
inherited $10 million or $10 billion.
The revenue gains from taxing inheritances would be significant
since most gift and estate income that currently goes untaxed
would be included in the income tax. This widening of the tax
base would in turn allow marginal tax rates to be decreased.
Not only would the change make taxing estate income simpler
and fairer, it would provide the means for an across-the-board
tax reduction for all Americans, not just the richest few.
Favoring unearned income over that which is earned should not
be the policy in a country where the ethic is that an individual
should work hard, be rewarded accordingly and enjoy the fruits
of their labor. And while that goes for their heirs as well,
the emphasis should be on working hard and being rewarded accordingly,
not merely enjoy the fruits of their benefactors' labor.
While death should not be taxed, income should.