Tax lessons from Scrooge McDuck

How the Death Tax Hurts the Poor - It encourages the rich to pick extra fruit, leaving the trees a little barer for the rest of us.

Excerpts:

The death tax sends a powerful message to rich people: "You can't leave everything to your heirs, so spend now, before it's too late. Burn more fuel. Demand more timber for your mansions, more steel for your private planes, and more fiberglass for your yachts.''

Then all those resources—the fuel and timber, the steel and fiberglass—become unavailable to build factories, so the rest of us get worse jobs at lower wages. Those resources are unavailable to build farm equipment, so we all pay higher food prices. They're unavailable to build roads and schools and hospitals.

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We're all living on other people's inheritances and investments in our economy. Just five generations ago, the average American worked 60 hours a week, took no vacations, and earned less than the modern-day equivalent of $6,000 a year. He or she rarely traveled more than a few miles from home, had no central heat or running water, and died at age 50.
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... you don't need rich parents to be a victim of the death tax. You don't need to own a family business or family farm. You only need to be someone who works in a factory or shops in a grocery store or gets sick and goes to the hospital.

Now you might say that if we abolish the death tax, rich people will consume less but their heirs will consume more—so what's the point? To this there are two answers.

First, delayed consumption is still better than immediate consumption. If Scrooge McDuck forgoes a private jet so his nephew Huey can have a private jet 20 years from now, we get 20 years of additional production from the factories that can be built in the interim.

Second, don't be so sure Huey ever gets that private jet. He will, after all, be splitting Scrooge's estate with his brothers Louie and Dewey. A hundred million dollar inheritance, split among three children, and then nine grandchildren, and then 27 great-grandchildren, gets whittled down in just five generations to less than half a million per heir—and that assumes that nobody spends anything along the way! So when Scrooge forgoes his private plane, it's likely to be for the benefit of descendants who fly coach.

I'm not just making this up. One of the great insights of modern economics is that taxes are often most harmful when they encourage overconsumption.

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Every tax discourages work, and every tax discourages risk-taking. That's sad but true, and it's a reason to hesitate before you raise any tax. But the death tax is a double whammy, compounding the damage by encouraging overconsumption. (The same is true, incidentally, of taxes on interest and dividends.) So my message is this: If you must tax the rich, please do it in a way that minimizes the collateral damage to the poor.

Comment: A thoughtful article. I had never viewed the dangers of estate taxes in this way. On Scrooge McDuck

George Steinbrenner picked a good year to die

Too Rich to Live?

Excerpt:

When the Senate allowed the estate tax to lapse at the end of last year, it encouraged wealthy people near death's door to stay alive until Jan. 1 so they could spare their heirs a 45% tax hit.

Now the situation has reversed: If Congress doesn't change the law soon—and many experts think it won't—the estate tax will come roaring back in 2011.

Not only will the top rate jump to 55%, but the exemption will shrink from $3.5 million per individual in 2009 to just $1 million in 2011, potentially affecting eight times as many taxpayers.

The math is ugly: On a $5 million estate, the tax consequence of dying a minute after midnight on Jan. 1, 2011 rather than two minutes earlier could be more than $2 million; on a $15 million estate, the difference could be about $8 million.

Of course, there is a "death incentive" whenever Congress raises the estate tax. But it hasn't happened in decades; the top rate has held steady or fallen since 1942, according to tax historian Joseph Thorndike of Tax Analysts, a nonprofit group. In fact, the jump from zero to 55% would be "the largest increase in a major tax that we've ever seen," Mr. Thorndike says.

Steinbrenner's final business move - Billionaire's death ensured wife, four children millions more in inheritance

Excerpt:

By dying in 2010, the billionaire and long-time New York Yankees owner's wealth avoids the federal estate tax, likely saving his heirs enough money to field an entire team of Alex Rodriguezes.

Steinbrenner's death Tuesday came during an unplanned year-long gap in the estate tax, the first since it was enacted in 1916. Political wrangling has stalemated efforts in Congress to replace the tax that expired in 2009.

That deprives the government of billions of dollars in annual revenue but represents an unexpected bonanza for those who inherit wealth.

"If you're super-wealthy, it's a good year to die," said Jack Nuckolls, an attorney and estate planner with the accounting firm BDO Seidman. "It really is."

The death of the 80-year-old Steinbrenner, who had been in poor health for years, highlights a quirky tax situation that has drawn much scrutiny among the moneyed but little on Main Street. Only those with estates valued at more than $3.5 million had to pay under the old law.

Comment: Not minimizing the death of George Steinbrenner