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Fighting to end destructive double taxation

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Archive for the ‘Death Tax’ Category

On Death Tax, the U.S. Is Worse than Greece, Worse than France, and Even Worse than Venezuela

Posted by Dan Mitchell on July 29, 2012

Considering that every economic theory agrees that living standards and worker compensation are closely correlated with the amount of capital in an economy (this picture is a compelling illustration of the relationship), one would think that politicians – particularly those who say they want to improve wages – would be very anxious not to create tax penalties on saving and investment.

Yet the United States imposes very harsh tax burdens on capital formation, largely thanks to multiple layers of tax on income that is saved and invested.

But we compound the damage with very high tax rates, including the highest corporate tax burden in the developed world.

And the double taxation of dividends and capital gains is nearly the worst in the world (and will get even worse if Obama’s class-warfare proposals are approved).

To make matters worse, the United States also has one of the most onerous death taxes in the world. As you can see from this chart prepared by the Joint Economic Committee, it is more punitive than places such as Greece, France, and Venezuela.

Who would have ever thought that Russia would have the correct death tax rate, while the United States would have one of the world’s worst systems?

Fortunately, not all U.S. tax policies are this bad. Our taxation of labor income is generally not as bad as other industrialized nations. And the burden of government spending in the United States tends to be lower than European nations (though both Bush and Obama have undermined that advantage).

And if you look at broad measures of economic freedom, America tends to be in – or near – the top 10 (though that’s more a reflection of how bad other nations are).

But these mitigating factors don’t change the fact that the U.S. needlessly punishes saving and investment, and workers are the biggest victims. So let’s junk the internal revenue code and adopt a simple and fair flat tax.


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Milton Friedman Talks Inheritance Tax

Posted by Brian Garst on November 5, 2011

Milton Friedman was never one to shy away from debate, but was a master at answering hostile questioning with persuasive economic reasoning. Here’s his take on the death tax:

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Explaining the Perverse Impact of Double Taxation with a Chart

Posted by Dan Mitchell on September 28, 2011

Whether I’m criticizing Warren Buffett’s innumeracy or explaining how to identify illegitimate loopholes, I frequently write about the perverse impact of double taxation.

By this, I mean the tendency of politicians to impose multiple layers of taxation on income that is saved and invested. Examples of this self-destructive practice include the death tax, the capital gains tax, and the second layer of tax of dividends.

Double taxation is particularly foolish since every economic theory – including socialism and Marxism – agrees that capital formation is necessary for long-run growth and higher living standards.

Yet even though this is a critically important issue, I’ve never been satisfied with the way I explain the topic. But perhaps this flowchart makes everything easier to understand (click it for better resolution).

There are a lot of boxes, so it’s not a simple flowchart, but the underlying message hopefully is very clear.

1. We earn income.

2. We then pay tax on that income.

3. We then either consume our after-tax income, or we save and invest it.

4. If we consume our after-tax income, the government largely leaves us alone.

5. If we save and invest our after-tax income, the government penalizes us with as many as four layers of taxation.

You don’t have to be a wild-eyed supply-side economist to conclude that this heavy bias against saving and investment is not a good idea for America’s long-run prosperity.

By the way, Hong Kong’s simple and fair flat tax eliminate all those extra layers of taxation.

That’s the benefit of real tax reform such as a flat tax. You get a low tax rate, but you also get rid of double taxation so that the IRS only gets one bit at the apple.

Posted in Capital Gains Tax, Death Tax, Dividends Tax | Comments Off on Explaining the Perverse Impact of Double Taxation with a Chart

Warren Buffett’s Fiscal Innumeracy

Posted by Dan Mitchell on August 15, 2011

Warren Buffett’s at it again. He has a column in the New York Times complaining that he has been coddled by the tax code and that “rich” people should pay higher taxes.

My first instinct is to send Buffett the website where people can voluntarily pay extra money to the federal government. I’ve made this suggestion to guilt-ridden rich people in the past.

But I no longer give that advice. I’m worried he might actually do it. And even though Buffett is wildly misguided about fiscal policy, I know he will invest his money much more wisely than Barack Obama will spend it.

But Buffett goes beyond guilt-ridden rants in favor of higher taxes. He makes specific assertions that are inaccurate.

Last year my federal tax bill — the income tax I paid, as well as payroll taxes paid by me and on my behalf — was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income — and that’s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.

His numbers are flawed in two important ways.

1. When Buffett receives dividends and capital gains, it is true that he pays “only” 15 percent of that money on his tax return. But dividends and capital gains are both forms of double taxation. So if he wants honest effective tax rate numbers, he needs to show the 35 percent corporate tax rate.

Moreover, as I noted in a previous post, Buffett completely ignores the impact of the death tax, which will result in the federal government seizing 45 percent of his assets. To be sure, Buffett may be engaging in clever tax planning, so it is hard to know the impact on his effective tax rate, but it will be signficant.

2. Buffett also mischaracterizes the impact of the Social Security payroll tax, which is dedicated for a specific purpose. The law only imposes that tax on income up to about $107,000 per year because the tax is designed so that people “earn” a corresponding retirement benefit (which actually is tilted in favor of low-income workers).

Imposing the tax on multi-millionaire income, however, would mean sending rich people giant checks from Social Security when they retire. But nobody thinks that’s a good idea. Or you could apply the payroll tax to all income and not pay any additional benefits. But this would turn Social Security from an “earned benefit” to a redistribution program, which also is widely rejected (though the left has been warming to the idea in recent years because their hunger for more tax revenue is greater than their support for Social Security).

If we consider these two factors, Buffett’s effective tax rate almost surely is much higher than the burden on any of the people who work for him.

But this entire discussion is a good example of why we should junk the corrupt, punitive, and unfair tax code and replace it with a simple flat tax. With no double taxation and a single, low tax rate, we would know that rich people were paying the right amount, neither too much based on class-warfare tax rates nor too little based on loopholes, deduction, preferences, exemptions, shelters, and credits.

So why doesn’t Buffett endorse this approach? Tim Carney offers a very plausible answer.

For more information about why class-warfare taxes are misguided, this video may be helpful.

Posted in Capital Gains Tax, Death Tax, Dividends Tax | Tagged: , , , , , , , | Comments Off on Warren Buffett’s Fiscal Innumeracy

George Will: Eliminate Estate Tax for Economic Recovery

Posted by Brian Garst on August 12, 2011

In the midst of explaining how to fix the economy in an interview with PBS’ Charlie Rose, George Will had this to say about the death tax:

“I would eliminate the death tax. I don’t know why death is a taxable event in this country. No more estate taxes. Eliminate — go back to the classic — no taxation without respiration, that’s right. Go back to the classic Bill Bradley/Ronald Reagan tax reform of 1986. Lower the rates by eliminating loopholes and exceptions.”

Posted in Death Tax, Economic Growth | Comments Off on George Will: Eliminate Estate Tax for Economic Recovery

DeMint Amendment Would End Death Tax

Posted by Brian Garst on June 10, 2011

Senator DeMint is proposing an amendment that would eliminate the death tax. The death tax repeal is being included in an amendment that also ends ethanol mandates. According to DeMint’s office:

“Unfortunately, Washington’s bad ethanol policies don’t end with just subsidies and tariffs, we must also repeal the mandate, which my amendment would do,” said Senator DeMint, whose amendment will also permanently repeal the death tax.  “The best way to help family farmers is not with mandates, subsidies, and protective tariffs.  We can help farmers and stimulate the economy by repealing the unfair death tax, which cripples family farms and small businesses all over this country.”

In the previous Senate, and due to Majority Leader Harry Reid’s obstinance, DeMint was forced to use a procedural move – which would have required 67 votes – in an effort to prevent the death tax from returning for 2011. It didn’t matter really matter, though, as only 39 Senators supported the bill. That number will certainly increase with the new Senate, but it will still require some who previously voted down the idea to change their minds in order for DeMint’s new amendment to pass.


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Small Business Owner Cites Death Tax Burden

Posted by Brian Garst on May 22, 2011

The Oregon legislature has been debating whether to raise its state death tax. In response, small business owner Peter Nelson explains how the death tax affects their ability to increase employment:

My grandfather started Marc Nelson Oil Products as a one-man shop. Today we employ 30 in the Salem area. We’d like to employ more.

…Despite what some may think, family businesses are not awash in cash; our resources are tied up in equipment, salaries, facilities and the like. The more money diverted to estate tax planning and to estate tax payments when I die, the less resources for expansion and hiring today and in the future.

Posted in Death Tax, Economic Growth | 1 Comment »

Residents Flee Rhode Island Death Tax

Posted by Brian Garst on May 8, 2011

Looking at the migration of citizens out of Rhode Island for the Ocean State Policy Research Institute, J. Scott Moody found that the death tax played an instrumental role:

The most significant driver of out-migration is the estate tax, especially considering that the number one
destination state for former Rhode Island residents is Florida, a state with no estate tax (or individual
income tax).

…The data in this report shows that migrants have become especially sensitive to Rhode Island’s estate tax, or “Death Tax,” that is the 3rd worst in the country. As a result, income out-migration to Florida has dramatically accelerated since the elimination of their estate tax in 2004. Other analysis also shows a negative post-2004 effect on Rhode Island’s capital income (interest, dividends and capital gains) and high-income taxpayers.

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The Worst Places to Die: Comparing the States on Death Taxes

Posted by Brian Garst on February 26, 2011

SmartMoney compares how the states rank on death taxes.

With the new $5 million federal estate tax exemption for 2011 and 2012, most folks are blissfully free of any federal estate tax worries (for now). That’s the good news. The bad news: Twenty states and the District of Columbia impose estate or inheritance taxes that kick in below the $5 million mark, and some kick in below $1 million. If you live in one of these places, your estate can be exempt from the federal death tax but still exposed to state death taxes.

16 States and DC Have Estate Taxes

The sixteen states and the District of Columbia, which impose their own estate taxes (as opposed to inheritance taxes, which I will explain later) base their taxes on the entire value of an estate in excess of the applicable exemption.

The exemptions vary from a low of $338,333 to a high of $5 million. Specifically:

• Three states have exemptions of less than $1 million (Ohio at $338,333; New Jersey at $675,000; and Rhode Island at $850,000).

• Six states have $1 million exemptions (Maine, Maryland, Massachusetts, Minnesota, New York, and Oregon), and so does D.C.

• Three states have $2 million exemptions (Illinois, Vermont, and Washington)

• Two states have $3.5 million exemptions (Connecticut and Delaware).

• Two states have $5 million exemptions (Hawaii and North Carolina).

The lowest tax rates are 7% (Ohio) and 12% (Connecticut). The highest is 19% (Washington). The other 13 states and D.C. all charge 16%.

…The worst place to die is New Jersey with a combined effective estate and inheritance tax rate of 54.1%. Congrats to the Garden State! In second place is Maryland at 50.9%. Good try! In fact, none of the states mentioned here are good places to die, but some are significantly worse than others. Most of the states listed here are not good places to live either from a tax perspective because they sock it to you with income, property, and sales taxes while you’re still kicking.

Read the whole comparison here.

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President’s Budget Proposes Undoing Tax Deal

Posted by Brian Garst on February 15, 2011

Although he signed the bipartisan agreement in the lame-duck session that staved off major tax increases, the President’s heart was apparently not in it. ATR has produced a list of the tax increases in the President’s proposed budget for fiscal year 2012. Here some of the lowlights:

  • Raising the top marginal income tax rate (at which a majority of small business profits face taxation) from 35% to 39.6%.  This is a $709 billion/10 year tax hike
  • Raising the capital gains and dividends rate from 15% to 20%
  • Raising the death tax rate from 35% to 45% and lowering the death tax exemption amount from $5 million ($10 million for couples) to $3.5 million.  This is a $98 billion/ten year tax hike
  • See here for the full list.

    Posted in Capital Gains Tax, Death Tax, Dividends Tax | Comments Off on President’s Budget Proposes Undoing Tax Deal