Friday, September 28, 2012

Why Not Just Repeal the Estate Tax?

In a Stanford Law Review Article, Professor  Edward J. McCaffery wrote an interesting piece discussing  Estate Tax (Death Tax) Reform and had the following to say:
"neither Obama nor any other Democrat is going to call for a stronger tax, for the simple reason that he or she would be tarred and feathered by the upper-middle class mobs who, in a time of falling stock markets and evaporating home equity, would suddenly be hearing from every business reporter that they just had to go see a lawyer or other planner to avoid this deadly tax. 
Why not just repeal the tax then, as Republicans have been seeking for decades by now? Because if that ever happened, the spigot would turn off, and the money from campaign contributions would dry up. It is important to understand that TRA 2010 had a very big winner—the financiers who perpetuate “Dynasty” and “Perpetual” trusts. A 2005 study estimated that such trusts held roughly $100 billion in assets, mainly in South Dakota, an early mover in eliminating the rule against perpetuities (okay, so some good might be coming from this story). These trusts are set up to limit distributions and to last for a very long time. Who benefits? For one, a very large class of trust companies and other financial intermediaries. Take a small piece of that enormous pie (say, 1% or 0.5% per year) in fees for assets under management, then lock the underlying assets up into perpetuity, and you will do very well for yourself. The increase in the current gift tax exemption to $5 million greatly helped this group of financiers. Wealthy families, like those of the Facebook founders, can get the dynasty-trust game going now, using their families’ $5 to $10 million in exemptions. The rich setting up dynasty trusts are willing to pay their advisers for the privilege of avoiding transfer taxes forever. Those advisers and financial intermediaries, in turn, are willing to pay Congress to keep the fear of a death tax—and hence their lucrative business model—alive (forever). Congress is happy to cash the checks.
On the estate tax, then, it is easy to predict what will happen: not much. We will not see a return to year 2000 levels, and we will not see repeal. The one cautionary note I must add is that, going back to the game, something has to happen sometime, or the parties paying Congress and lobbyists will wise up and stop paying to play. But that has not kicked in yet, decades into the story, and it may not kick in until more people read this Essay, and start to watch the watchdogs. Fat chance of that happening, too, I suppose. In the meantime, without a meaningful wealth-transfer tax (the gift and estate taxes raise a very minimal amount of revenue and may even lose money when the income tax savings of standard estate-planning techniques, such as charitable and life insurance trusts, are taken into account), one fundamental insight of the special interest model continue to obtain. Big groups with small stakes—that is, most of us—continue to pay through increasingly burdensome middle class taxes for most of what government does, including stringing along those “lucky” enough to be members of a special interest group. It’s a variant of a very old story, and it is time to stop keeping it secret."

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