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April 15, 2005

Putting a Face on the Estate Taxpayer

Nestegg: April 15, 2005

Editor's Update: 4/15/05 9:22 pm: A computer error by the editor caused this post to disappear for several hours this afternoon.  Apologies.

Yesterday, the House of Representatives again voted to repeal the estate (or death) tax.  I won't argue the merits of having or repealing this tax here.  Instead, I want to give a brief "profile" of one family affected by the estate tax, my own.  Because I come from a family that does not like to talk about money, I am using a pseudonym in this posting in order to prevent embarrassment to my relatives.
  We've read stories, mostly apocryphal, about families forced to sell their farms or small businesses in order to pay the estate tax.  It's proven hard to find real examples of such families, but their plights have been described to us.  More often, we hear (mostly from critics of repeal) that this tax affects only the very wealthy.  Who are these people?  And how would the estate tax affect them?  Well, I've never thought of myself as among "the richest sliver of Americans" (as The Washington Post recently put it), but my family does have a stake in the estate tax, and I'd bet that my situation is more similar to the majority of those who would be affected by this tax than is the situation of the farmer or small business owner.
  First some figures.  To estimate the effects of repealing the tax, it is misleading to compare it to the current tax, which declines until it disappears in 2010 and then is reborn in 2011 Venus-like, in its full original amount.   Repeal should be compared instead to the Pomeroy alternative proposed by the Democrats, which exempts the first $3.5 million of an estate from taxes ($7 million for a couple), and taxes the remaining amount at a rate of 45%.  That tax would affect only .3% of estates, but the effect on those estates would be signifcant, large enough to offset between a quarter and a half of the projected 75-year Social Security shortfall.  For my own family, based on the current value of my mother's estate, it would mean that Uncle Sam would take in excess of $3 million before the remainder is passed on to my brothers and me.

  What does that mean to us?  My father grew up poor and was a successful businessman and investor.  His was a typical "greatest generation" story.  He suffered through the depression, dropped out of college to go to war, put his brother through school, married and raised three sons, and lived modestly.  He never talked about the war or about money, and I never knew until after he died how much he was worth.  My father's greatest satisfaction came from being able to to provide security for his family.
  And provide he did.  My two brothers and I never received any allowance or spending money.  We had to work for whatever we wanted to buy, and we learned to live within our means.  We've all had successful careers, no debt, and we've never asked our parents for any money along the way.  But we were also well provided for.  Our parents paid fully for our undergraduate educations; we were each given a (used) car for our 21st Birthdays; we were each given a substantial gift intended to help us buy our first homes; and much later in life our parents began to give each of us the tax-free allowable gift of $10,000 each year.  We in turn used those gifts (with added money from our own savings) to help create funds that are now paying for our children's college educations.  We have also each managed to create other funds for our children to help them buy their first homes.  And so it goes.
  My father died eleven years ago, and my mother recently moved into a comfortable retirement community.  My older brother was a successful businessman who retired last month (at age 61) in order to spend time flying his two planes and resuming his earlier life as a ski instructor, as long as his knees hold out.  He lives in a very affluent suburb and vacations at his beach house when he is not going to fishing in Alaska or Argentina.  My younger brother is a successful lawyer who doesn't much like travelling.  He spends his weekends at his lovely cabin at a mountain lake two hours from work, and he spends his spare time working for social causes he believes in. I am an academic who enjoys work, travels often, and has enough money saved for a comfortable retirement, although I currently have no desire to retire.  When my mother dies, her estate will be split between the three of us.  Whether we get the full amount, all but $3 million of it, or nothing at all will make no appreciable difference to any of our lives.  It won't affect how we work, when we retire, how we spend our spare time, or what we will give before we die to our own children.  I suppose that with my share I will set up a foundation or something, provided the administrative burden is not too great. 
  As I said earlier, I'll bet that my story is the common one for people who will be directly affected by the repeal of the estate tax.  It will have a noticeable effect on my net worth, but none at all on my quality of life.  I said that I wasn't going to present an argument here, but I can't resist ending with a question.  Can this same claim be made by those who will be affected by an increase in payroll taxes?