Today President Obama signed the tax deal into law. Among its provisions are revisions to the federal estate tax, which applies to the assets of the dead. The law provides that wealthy couples with vast estates may pass the first $10 million to their heirs without any tax, with amounts over $10 million then being taxed at a 35 percent rate.
The estate tax is controversial. Many Democrats love it because it clearly taxes the rich. Those Democrats were appalled at estate tax deal because they believe that a $10 million exemption is too high and a 35 percent tax rate is too low. Many Republicans hate the estate tax. They feel it punishes farm families, small business owners, and productive Americans who already have paid taxes on the income that was used to accumulate their estates. Still others point out that arguing about the estate tax doesn’t make much sense, because it produces only a very small fraction of federal government revenue.
Notably, the estate tax gives wealthy people incentives to engage in abnormal economic activity. Most wealthy people who are subject to the estate tax don’t want the federal government taking a 35 or 45 percent chunk of any of their money — even if it is only the part above $10 million — away from their kids and grandkids, so they hire lawyers to devise methods of evading the taxes. Maybe they will establish a trust or two that will hold parts of their assets until they die while still paying them a comfortable stipend. Maybe they will move parts of their money offshore. Maybe they will establish a foundation with a goal of sponsoring NPR programming and bringing about a more humane and agreeable world, and then make sure that their kids and grandkids are paid to run it. The methods are limited only by the imagination and creativity of wily lawyers. Whatever approach the lawyers devise, it will be different from what the individual would have done with the money otherwise — which might have included investing the money in the United States and producing still more assets eventual estate.
What’s the ultimate lesson in all of this? Tinkering with the federal estate tax is good for lawyers, regardless of their political persuasions.