Guest post from Sam Richardson regarding estate tax in the US.
Property is a legal term that includes two categories. “Real property” is real estate, or land. “Personal property” is everything that is not land including money, investments, household property, and the like. Property ownership is based on the ability to do with one’s property what one pleases. Imagine owning property without being able to sell it or give it away. Is it true property ownership with such restrictions? The law of property is actually a “bundle” of rights controlled by society and its government. This bundle of property rights includes the right to possess property, give property, sell property, lease property, control what happens on property and pass property at death. Part of the debate concerning changing the estate exemption and raising estate tax rates is this: If the government is allowed to collect and redistribute property at a person’s death, did the decedent really own and control that property at all? If government taxation at death is too severe some argue, people will work less hard to acquire property and therefore reduce effort in the system of capitalism.
On the other hand once people begin to successfully accumulate wealth, the further accumulation of wealth becomes easier and easier. The odds become stacked in the favor of those with opportunity, and reduced for those who began with nothing. Wealth will be attracted to a few families at the exclusion of others and dynasties will begin, where generation to generation each person begins with more opportunity and accrues more available wealth to his or her family. Meanwhile, with fewer resources left for the rest of society. In the late 19th century and the early part of the 20th century, this phenomenon drew wealth to a few famous industrial, banking, and investment families such as the Rockefellers, while common workers toiled through sixteen hour workdays for all of their lives. Trust-busting laws and estate tax laws broke this cycle, made privilege and family less necessary to “make it” and returned capital to the system to be available to others.
These two principles compete against each other for dominance. If too many restrictions are placed on the ownership and use of property, citizens are less likely to invest and work hard in acquiring property, which slows down the economy. If there are too few restrictions on property ownership including a lack of estate taxes, wealth will become centralized around power, and those without power will find it difficult to break out of the class in which they were born.
Estate tax is one method of returning wealth to society at large and preventing wealth accrusing to itself. At death, a decedent’s estate is rated under the tax laws of the time and a certain amount is paid to the government to be re-distributed to society. In the Great Depression in the early twentieth century, estate tax rates reached as high as 74% of an estate. In effect, this broke up wealth concentrated into a few families and helped to relieve abject poverty. However, in a normal economy, this would prevent those with resources from investing in economic opportunities, depressing the economy. The United States legislature is in control of the federal estate tax exemptions and rates. The rate of tax varies from year to year by Congress’s dictate, of course, but the amount that is exempt from any tax changes from year to year as well, depending on the economic situation. Recently, the estate tax and gift taxes are a unified system. The exemption amount is currently five million dollars. Therefore, a person can give a combined total of five million dollars during life and at death without incurring any tax. The exemption amount has recently also been 3.5 million, and Congress is considering dropping it to one million. The constant policy battle between the individual and society ultimately determines the tax exemption and the tax rate.
About the author
Sam Richardson writes on taxation, finance, savings, loans and lending, business and trade, and other prominent topics; to learn more about taxation visit R&G Brenner.
