Editor's Note: The following argument supporting the existence for the estate tax was submitted to The Wealth Strategies Journal as a response to Professor Richard Epstein's article entitled "Let the Estate Tax Die a Merciful Death."
While I'm glad Richard Epstein spelled out his arguments rather than a "Death Tax" sound bite, I believe the arguments are for the most part flawed. Point by point:
First, I'm surprised that Mr. Epstein, as someone that teaches the history of law would call this a "new" tax. The people who are in favor of its repeal would like us to believe that. In fact the legislation that got us to where we are today had to be designed to allow the tax to return after a "holiday" in order to meet budgetary considerations. There is nothing new about this tax, just the cynicism that was used to pass the "holiday" legislation in the first place. Mr. Epstein's thoughts about a stable tax system are Utopian. Does he believe our elected officials are capable of giving us a system like you propose? Turn on the TV, surf the net, or read what those officials have to say and then tell me this is possible.
Second, starving the beast has proven to be ineffective. The very people who advocate that approach are the same people who enact legislation that creates additional expenditures. We can't protect them from themselves, nor can we protect us. What each of them want is for the other guy to stop spending so that they can spend on what they want.
Third, it is not just an estate tax. Mr. Epstein should know better than that. It is a transfer tax. Even in this "holiday" year with no estate tax there is still a gift tax. In fact, the gift tax exemption was kept at $1,000,000 while the estate tax exemption was raised to $3.5 million over time. That was quite deliberate to minimize the budgetary impact. No where do I see him advocating the repeal of the gift tax part of the transfer tax. Why is that?
Mr. Epstein's last sentence in that paragraph doesn't seem to make sense. In his explanation in the subsequent paragraph it seems as though he is saying that people's spending and investing behavior is controlled by the estate tax. To the extent that it is estate planning, that is true. But I've yet to meet anyone that didn't want more wealth and wasn't willing to invest or spend to get it because of the estate tax.
Fourth, he is correct. The way people do estate tax planning is the same way they do income tax planning. Should we repeal the income tax as well because it affects people's behavior?
Fifth, Mr. Epstein's point doesn't seem to make sense. How do you get $700,000 of benefit to each individual from $3.5 million of wealth not subject to tax? I assume he is presuming that the decedent has five non-spousal beneficiaries. He doesn't mention the fact that a husband and wife can leave a combined $7,000,000 without tax using minimal planning. I don't know what the price of NYC real estate has to do with the amount the beneficiaries receive. Also, he talks about only the incremental $1,000,000 above the exemption. Relative to $1,000,000, $110,000 ($550,000 total) doesn't seem like a lot. What about the incremental $10,000,000, 100,000,000 or billion. Is $1,100,000, $11,000,000, or $110,000,000 per beneficiary not meaningful? And as for me I'll be happy with each $700,000 and incremental $110,000 I would receive.
Sixth, with the recent rulings about "free speech" not limiting the amount of dollars one can spend for a political campaign, the US has become more of a plutocracy. The funding for the repeal of the tax comes from some very wealthy people who don't want to see their estates diminished. If you want to perpetuate this plutocracy and have a society in which your class is decided by how much money you have, do away with the tax. I thought greed is considered to be a sin, especially when it disregards others.
As for Mr. Epstein's Keynesian comment, let's have everyone individually decide what services they want to pay for. For the billionaires who are backing the Tea Party, they can wall themselves off from the rest of society and pay for any services they want with all that money they'll save by not having to pay taxes. As for the rest of us, including Mr. Epstein, how are we going to educate and protect our families?
Another difficulty one always gets into when talking about economics is that it is a social science. If what are considered to be meaningful correlations in the social sciences were a standard for hard science or medicine, a witch doctor's advice would be as good as that of an MD. And many of economics' conclusions are based on the assumption that we are all rational and will all make rational decisions. Really?
Seventh, I don't know what Mr. Epstein means when he says "small business". With a $3.5 million exemption a husband and wife can successfully pass $7 million to the next generation without tax. How many businesses are worth more than $7 million? In my 40 years of experience in the estate planning field I have only once seen a "small business" suffer, and that was for lack of planning. Small businesses do die, but that usually happens because of inter-familial issues and lack of proper succession planning. Gratefully, he left out the family farmer. When the people advocating a repeal of the estate tax went looking for a family that lost its farm because of estate taxes, they couldn't find one.
Finally, if Mr. Epstein expects Congress to do something sensible about taxation, I'd like to live to see it.