31 July 2014

The Absurdity of the Estate Tax

John Oliver rather brilliantly explains American wealth and how it is compounded by the estate tax here. He misses one little point though, when refuting a Fox commentator who says that while she doesn't have $5 million she would really like to someday and why should she then have to pay tax on it?

First, let's assume that she is married and she and her husband don't just accumulate $5 million each but accumulate $6 million. Each. A total of $12 million. And further, let's assume she makes it before year end and then dies this year. (The exemption is going up every year. By the time she's 80 it's hard to know what it would be.)

So her heirs are going to get $12 million. She's worried about the tax they'll pay.

Well, first of all, the first $5.34 million of her inheritance will be exempt from taxes. And the first $5.34 million of her husband's wealth as well. So, there is $10.68 million with marginal tax rate of 0. Nothing.

Now, after that, the tax rate is 40%. (And actually, 40% is the top rate. It might be lower for the first few million but I couldn't find that information. So this is worst case.) So, the remaining $1.34 million of the $12 million will be taxed $528,000.

For the whole $12 million, that  works out to an average tax rate of 4.9%.

To put that in perspective, a person who actually worked to earn only a tenth of that  - say $1.2 million - would pay about 34%. If they made 1/10th as much money, they'd pay 10X the tax rate. And of course if this TV commentator leaves behind ONLY $5.34 million, the heir's average tax rate is 0, considerably lower than the rate paid by working stiffs.


Anonymous said...

I've toyed with the idea of replacing our current tax system with just one tax: a 100% "death tax."

While you're alive, you're allowed to accumulate all the stuff your greedy little capitalist heart desires, but when you die it all goes back into the kitty to give everybody a free education, free health care, and an equal chance at the pie.

Wealth is no longer an accident of birth, but becomes a direct consequence of work.

Ron Davison said...

Thomas - I've toyed with the same idea. I also like the idea of the rich working to make sure that they are leaving a good society for that one grandchild unable to make a good living who, as a result of this policy, will have his or her quality of life determined by general conditions rather than what they could inherit from grandma. You might see a very different energy put into policy for the poor.