I am starting to feel a bit better about the estate tax. It appears that the government is actually serious about putting a new law in place. If nothing is done, the estate tax reverts back to the 2001 law as part of the Bush tax cut sunset provisions. This means that every person gets a $1,000,000 federal estate tax exemption. This means that $1,000,000 of each person’s property is exempt from estate taxes. After the million dollar level, the estate tax kicks in with a tax rate as high as 55%.

No matter where you stand on the estate tax issue, one million dollars is not much. Take an average retiree who is not wealthy. Maybe the retiree has a paid off mortgage on a $350,000 home, a $250,000 life insurance policy, a $350,000 investment portfolio, and $50,000 in cars, personal property, and money markets. This retiree is right at the million mark and any further appreciation will subject the person to the estate tax.

If this person is married, he or she could use a bypass trust to ensure the estate does not come close to the million dollar mark, but I find so many couples who don’t do any estate planning. Upon the first spouse to die, the living spouse’s estate instantly borders or surpasses the million dollar mark. This example is not a wealthy person. They cannot live an exorbitant life. Yet, this person could pay taxes at death on their assets.

If a person owns a small business or farm, the estate tax will probably certainly affect them.

From what I am reading, the general estate tax exemption appears to be headed for a  $3.5 Million per person limit. Some Republicans want the estate tax abolished while others desire a $5 Million exemption. However, those who desire an estate tax are using $3.5 Million as their benchmark so I think we will end up somewhere in that limit.

Of course, the Senate and House took this issue up last December, but they were unable to reconcile the $3.5 and $5 million mark. Considering Congress’ inability to achieve anything, we may look at the $1 Million mark due to their ineptitude.

The Wall Street Journal has some great articles today regarding the estate tax. In case you don’t know, the estate tax is set to go back to the 2001 levels on January 1, 2011 as the Bush tax cuts sunset. This means that all estates greater than (cue Dr. Evil) $1Million dollars will be taxed at tax rates as high as 55%. On the surface, $1 Million sounds like a lot of money, but it will hit thousands of average Americans because the estate tax tallies all assets including your home, any life insurance you own, cars, and that 1955 Mickey Mantle card you own. In today’s world, it is easy to get to the $1 Million mark, especially with a paid off home.

The Journal featured a pro/con article on the estate tax. After reading the pro-estate tax article, I had to write a post if only to vent. The article was written by Michael Graetz, a professor at Columbia Law. It is your usual progressive, government-is-good-and-impartial equalizer argument. I just don’t think it holds water. As with most pro-tax arguments, Professor Graetz first point to fairness.

Indeed, that’s what the case for the estate tax boils down to: basic fairness. The tax affects a small number of people who inherit large amounts of wealth—and who can afford to give up a portion of their windfall to help finance their government. In 2008, for instance, the estate tax collected about $29 billion from fewer than 20,000 estates—the wealthiest 1% of the 2.5 million people who died that year.

Is it fair to target a small minority of people due to their race, creed, religious belief, or sexual orientation? Of course, not. So why is it equitable to target a small minority due to their wealth, whether earned or inherited. If it isn’t fair for the government to impose special rules or laws for a white man over an asian woman, then why is it fair to impose separate laws for the wealthy as opposed to the middle class. This country was created based on individual liberties. Many on the left fight tirelessly for social equality, which I wholeheartedly agree. Yet, they are the first to impose inequitable economic rules on the wealthy. True freedom only comes when a person has social and financial freedom and equality. Our lives should be a clean slate for us to paint the picture. We should not have the government impose different rules for anyone on either the social or economic level. Maybe we can make an argument for an estate tax, but it cannot be made on the basis of fairness.

Professor Graetz continues:

Opponents like to say the estate tax isn’t fair because it’s a “double” tax—hitting assets that have already been taxed before. Of course, we all pay double or even triple taxes: both income and payroll taxes on our wages, and sales taxes when we spend our earnings. But, for the wealthy, that’s often simply not the case. Social Security taxes stop at just over $100,000 a year. And if you hold assets until your death, you don’t pay capital-gains taxes on them. So, the gain in the value of George Steinbrenner’s Yankees never faced a tax hit.

I think the “double” tax is a fair argument both ways, but that is not the fairness I referenced. To me, having laws that target a minority is inherintely unfair. However, the professor is way off on his view of a double tax. First, paying income and payroll taxes is not a double tax. These are two entirely different taxes. One goes to fund the government’s spending. The other funds the social security system. A better double tax analogy would be income taxes followed by sales taxes. Both fund the government’s opertation so it is a double taxing the same dollar for the same purpose. The estate tax, by this definition, is a double tax. Professor Graetz also fails to understand the Social Security tax law. The tax stopping at just over $100,000 is not a benefit to the wealthy. Social Security pays a benefit relative to your salary averaged over your working lifetime. If you made $40,000 your entire working career, you receive a benefit based at that level. If the Social Security tax was not capped, then the wealthy would receive a benefit commensurate with their average income (and Social Security taxes paid) over their working career. A higher tax would not benefit those who made less.

Professor Graetz then goes after the next argument after fairness: a convouted tax system where the wealthy pay little in taxes due to write-offs.

What’s more, much of the money that the very wealthy leave behind hasn’t been heavily dunned by income taxes. The top income earners pay strikingly low income-tax rates, since they get a big chunk of that income from sources that either have low tax rates—such as capital gains—or aren’t taxed at all, such as interest on state and local-government bonds. In 2007, for instance, the top 400 taxpayers, with average income of $344 million, paid an average income-tax rate of less than 17%.

With this point, I tend to agree with the Professor. It isn’t because I buy his arguments that the wealthy are evil tax dodgers. It is that the tax law should be simplified. A simplified tax law would ensure fairness to all citizens regardless of income level. I agree that it is not right that passive income such as capital gains is taxed at a lower rate than active, earned income. I don’t agree with Professor Graetz’s point about municipal bonds though. The rates on municipal bonds is not taxed to attract income and allow the states to pay a lower interest rate. If this suddenly became taxable, the states would have to pay market rates, which would severely impact the states ability to borrow. I think the take away from this argument is we need a flat tax. All income is taxed at the same rate for all citizens regardless of how the income is earned – active or passive.

Professor Graetz continues:

Some argue the tax is too small to be meaningful, so why bother? But the amount raised is not chump change. In 2008, the tax contributed less than 1% of federal revenue, but it was enough to pay for about three-quarters of the total expenditures of the Department of Homeland Security that year.

Providing ample funding for Homeland Security is not the best argument if you look at the recent piece from the Washington Post. The Professor also ignores the cost required to enforce these laws. This gets to a bigger point. The government is not a good steward for our wealth. The money it takes from us is used inefficiently. Even the programs run by the government to help the needy are poorly run and structured. Usually, these programs ensure the recipients never leave the welfare payrolls, rather than provide a hand up. The various charities that address poverty tend to get the help to the proper individuals and usually have a component of the program dedicated to improving the lives of the despondent.

And the Professor journeys on:

Treasury economists have estimated that people with estates large enough to be subject to the tax die with about 90% of the wealth they would have accumulated if the tax were repealed. What’s more, there’s no evidence that wealthy people are blowing their money, or stopping work, in an effort to “die broke” and evade the tax.

This is the third argument that tax the rich folks make: the wealthy will still be wealthy even with the tax. This is true. If I make $1 Million a year, I will still live a good life even if my taxes are raised from 30% to 50%. Strong arguments can be made that money taken from the wealthy results in lower job growth as capital taken from the wealthy lowers their ability to expand their business. This also gets back to my previous argument that the government is not as effective as an individual at utilizing resources. There is only so much capital in the world and giving it to an inefficient organization like the government wastes it. Plus, who has more desire to use the money wisely – the person who earned it or a government bureaucrat? (We all know the answer here)

What also gets me about this argument is the tax the rich folks think the wealthy work only to accumulate assets. I have found this is not the case. Sure, building one’s wealth is a benefit, but most wealthy folks pursue interests because they enjoy them. It challenges them. It gives them a reason to get up in the morning. I can always identify someone who works only for the money because they can’t understand why a wealthy person would continue to work. They usually say, “doesn’t he (or she) have enough” or “how much is enough”. These folks don’t see a purpose of working past economic security whereas the wealthy are taking the challenge of building their business to the next level or finding new challenges in the business world. They love what they do, not just the money.

Sure, some people are all about the bling. They want the biggest yacht to feed their ego. They want more than anyone else (Larry Ellison anyone?). But, in America, shouldn’t we have the freedom to pursue our interests even if they aren’t understood by others and harm no others? I think so.

This gets to the final point the pro-estate tax folks make including the Professor:

large tax-free inheritances do encourage their recipients not to work. People who receive large inheritances are about four times more likely to drop out of the labor force than those who inherit only small amounts.Let’s be clear on this point. The tax burdens those who inherit the wealth, not those who produced it; it is a tax on Paris Hilton, not Conrad Hilton. And it does not conflict with the values of hard work, entrepreneurship and thrift.

The tax the rich folks have this mis-perception that the wealth lives in perpetuity. A permanent class of people who do not work or contribute are created from the wealth, and that average people will never be able to pull themselves up because the Paris Hiltons have all the money. The reality is 80% of inheritances are squandered within five years – even multi-million dollar inheritances. Just look at the wealthiest family names over time. The top of the wealthiest use to be the Rockerfellers or Vanderbilts. While these families still have a great deal of money, they no longer control the top spots. Today, it is the Waltons of Walmart fame who weren’t anywhere on the list in the 1980s. Twenty years from now, the Waltons will spend a great deal of their wealth and the top will be the kid from Facebook or some other corporate behemoth.  As further proof, Thomas Stanley, author of The Millionaire Next Door, points out 80% of the millionaires in this country today are first generation wealth. Wealth will continue to ebb and flow with or without the estate tax. It is not a great equalizer.

The last point here goes after Professor Graetz’s assertion that the tax affects those who inherit,  not those who produced the wealth. This is bunk. If I amass a fortune, I dictate how my assets move after my death. If I want to leave my children fabulously wealthy, then the estate tax affects my desires. It would be my money, and I should have the right to determine how it is disbursed, not the government.

The world is mourning the passing of George Steinbrenner, who changed the world of sports ownership. Love him or hate him, he had a huge impact on sports and made one of the best investments ever when he purchased the New York Yankees in 1973 for an estimated $8.7 million. It is worth an estimate $1.6 Billion today.

Shortly after hearing his passing, it crossed my mind that he picked the right year to die since there is no estate tax. However, I wasn’t going to post anything about this thought out of respect for George. Of course, I saw an article that addresses Steinbrenner’s estate tax a few hours after hearing the news. From the article:

The death of the 80-year-old Steinbrenner, who had been in poor health for years, highlights a quirky tax situation that has drawn much scrutiny among the moneyed but little on Main Street. Only those with estates valued at more than $3.5 million had to pay under the old law.

Without knowing the exact details of Steinbrenner’s holdings and estate plan, it’s impossible to say how much money will be saved. But estate planners and tax experts say it’s likely that the estate benefited hugely by the timing of his death.

A glance at some numbers suggests roughly how it may work.

Forbes magazine has estimated Steinbrenner’s estate at $1.1 billion. The federal estate tax in 2009 was 45 percent, with the $3.5 million per-person exemption. If he had died last year, his estate could thus have faced federal taxes of almost $500 million, depending on how the estate was structured.

That doesn’t mean his heirs permanently escape all taxes related to his assets. They will still have to ultimately pay a capital gains tax if and when assets are sold. And due to a change in tax law this year, the tax would be applied to the amount by which the assets have appreciated since Steinbrenner acquired them.

Even if the Steinbrenners sold the assets right away, the top capital gains tax rate is 15 percent. Worst-case scenario, depending on how much the assets appreciated after Steinbrenner acquired them: a $165 million tax bill.

That’s a tax break of about $328 million. A-Rod’s 2010 salary: $32 million.

This may motivate the Congress to address the estate tax issue. When people hear about Steinbrenner saving hundreds of millions in estate taxes, the anti-wealthy rhetoric might prompt Congress to act. As for me, I think it was the “Boss’s” master plan to get the better of the IRS, just to let them know who’s boss. Rest in peace, Mr. Steinbrenner.