By Epstein, Richard A. | Chief Executive (U.S.), June 1, 2007 | Go to article overview


Epstein, Richard A., Chief Executive (U.S.)

CEOs are in the perfect demographic group to worry about gift and estate taxes, which today are lumped together under a uniform scheme of transfer taxation. Because CEOs have usually amassed considerable wealth, and they are near or past the retirement age, they face a challenge of finding ways to pass wealth to the next generation with the smallest possible tax burden. That's no modest undertaking when today's combined exemption for all transfers during life and at death maxes out at just $2 million, plus additional exclusions of gifts during life of up to $12,000 each year per donor per donee (meaning a married couple can give $24,000 tax-free to each child or grandchild). Worse yet, estate planning is now a game of roulette, because the current law raises that exemption to $3.5 million for 2009 only to repeal it entirely for 2010, reducing the lifetime exemption to the same puny $1 million exemption in force before inflation in 2002 and 2003.

These transfer taxes are commonly branded, albeit inaccurately, death taxes, which is a sure sign of their growing unpopularity. The reason for this widespread grumpiness is not hard to see. These taxes not only hit the billion-dollar estates, but can easily take a big chunk out of many upper middle class families' savings, especially those in urban areas where home values alone can exceed the tax exemption. Indeed, the system is worse than it seems because of the steep rise in tax rates once the exemption is exhausted.

The current transfer tax table is a mindless holdover from the 1960s, when the basic exemption from the estate tax was a paltry $60,000. The current law has six separate brackets for the first $100,000 of wealth in the taxable estate, and these climb from 18 to 30 percent. The top transfer tax bracket of 45 percent-higher than the top income tax bracket-is reached by a relatively modest taxable estate of $3 million or more. This combination of an indefensible rate structure and the tax flipflops in 2010 and 2011 should force Congress to revisit the subject. But do what?

The Social Critique

Navigating the maze is the most immediate concern for most CEOs, a pricey enterprise that requires balancing intelligent family planning with the heavy burden of the transfer tax. The high marginal tax rates encourage property owners to enter into perverse schemes to minimize their taxes. One common ploy, perfectly legal, is to transfer a vacation home into joint ownership with children, which reduces its value for transfer tax purposes because of the manufactured difficulty in selling the property to third persons.

This and other bizarre strategies again suggest the advisability of reconsidering the social soundness of a system that leads to a conscious destruction of wealth. However, that plea may fail to sway the many who think that death taxes are a way to equalize wealth across society by having the haves pay for social services consumed by the have-nots. Often they object that inherited wealth creates unequal opportunities for social advancement, even though the key educational expenses are typically incurred long before death, and are treated as support payments that fall outside the transfer tax framework.

Moreover, we should reject the populist drive for high transfer taxation because envy is always a poor guide to social policy. Soak-the-rich taxation schemes are always shortsighted because the high death tax regime creates private incentives for the premature consumption or destruction of wealth-not its transfer. But in this case, the populist argument is wholly misguided because any level of wealth transfer can be achieved more cheaply through the income taxation already in place.

In my own view, the income tax-or better yet a consumption tax that exempts savings and capital gains-should be flat. That system slashes administrative costs and eliminates any incentive to devise clever but counterproductive income-splitting schemes. The flat tax also allows for major but not unlimited amounts of redistribution, for the revenues collected from upper income individuals are often used to fund social welfare programs from which the bulk of the population derives most of the net benefits. …

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