As everyone in the world who follows either baseball or current events has heard, Yankees owner George Steinbrenner died last week. Steinbrenner was a mercurial man who demanded perfection in his employees and harshly punished failure regardless of culpability. He was also an incredibly generous man who gave of himself and his vast fortune without need for the public adulation some philanthropists crave. His passion and his uncensored nature put him squarely in the love him or hate him category. Regardless of our feelings for the man or the Yankees, I'm sure everyone here offers condolences to Steinbrenner's family.
Condolences, however, only go so far. But it seems Steinbrenner's family is getting much more than that.
As most here are probably aware, one piece of the tax cut legislation enacted during the Bush presidency was a reduction and ultimate repeal (for one year-2010) of the estate tax. As a result, anyone who dies in 2010 can pass his/her estate to his/her heirs free from tax liability. The Steinbrenner family are huge beneficiaries of this one year repeal. Because of the value of Steinbrenner's estate, his heirs are estimated to save $600 million that they would otherwise have to pay in estate tax.
The arguments against the estate tax vary; but the principle argument is that the estate tax constitutes unfair double taxation. For a couple of reasons, this argument is complete bunk.
First, double taxation is neither unfair nor unusual. Everyone's money is taxed multiple times as it makes its way through our economy. Many people pay both state and federal income tax, as well as taxes for social security, medicare, unemployment, etc., directly from their weekly pay. Those same people will pay property taxes if they own a home, sales tax on most things they purchase, and additional taxes on items such as cigarettes, alcohol, gasoline, or high priced luxury items. In other words, it's fairly certain that every dollar you earn is taxed at least twice before it ever becomes part of your estate.
Second, and most importantly, the argument is factually incorrect. The estate tax only affects rich people--those with estates valued in excess of $1,000,000 for individuals or $2,000,000 for couples. Frequently, a significant portion of the value of those estates consists of unrealized capital gains. In other words, property that has increased in value since it was purchased, but has not yet been sold; therefore that increased value has not been taxed. The reason this is a big deal is because the U.S. Tax Code contains a provision allowing that when someone inherits property, they inherit it at the value it has at the time they receive it. In other words, if someone purchased a bunch of stock for $5,000 and that stock is worth $1 million at the time of the owner's death, his heirs will take that property as if they had purchased it for $1 million, avoiding any capital gains tax liability if the stock is ultimately sold for $1 million or less.
What does that mean for Steinbrenner's heirs? Well George bought the Yankees for approximately $8 million in 1973. Let's suppose that the Yankees are now worth $1 billion (a not unreasonable estimate). That means George's heirs could sell the Yankees tomorrow for $1 billion and not pay one cent in capital gains tax. As a result, there is $992 million in earned [cough] income, that is not only not taxed twice, it's not even taxed once! This is a huge loophole that was one basis for the creation of the estate tax in the first place.
As I have described before...
It's a Zero Sum Game
What people need to realize is that every tax cut leads to one of three consequences: funding for a program in the government is cut; a different tax is raised to replace the lost revenue; or more is added to the national debt (already in excess of $12 trillion). So when the Steinbrenner family saves $600 million in taxes, that money needs to be made up somewhere else.
Federal Estate tax revenue
Year $ billions
2006 26.1
2007 26.0
2008 25.7
2009 26.3
2010 0.0
So what does that tax cut for millionaires mean in the practical sense? Well, it may mean that your state tax burden goes up because some of the things in the state budget that used to be paid for with federal tax dollars are now up to the states to fund. So you may see a corresponding increase in your state income tax or your state or local sales tax or your local property taxes because, as they say, shit rolls down hill--every dollar that isn't coming from the folks at the top needs to be made up by the folks in the middle and at the bottom.
Or maybe taxes aren't increased to make up for the budget shortfall. After all, it isn't politically safe to raise people's taxes in most circumstances. Well then we need corresponding spending cuts. Usually one of the first things to be cut is spending on infrastructure. Infrastructure. That doesn't sound like much, does it? Because we can always afford to wait a couple of years to do those improvements, right? But some of the things that can happen when we fail to invest in infrastructure are bridges falling down and levees being breached. But even on a smaller scale, it means that potholes don't get filled, which may be only a minor annoyance until they mess up the alignment on your car and require several hundred dollars to repair.
Another consequence of cutting infrastructure spending, or any other items in the budget that are often referred to as "earmarks" or pork barrel projects" is that it costs jobs. People make fun of government funded projects to build a bridge to an island with nobody on it or some dopey museum in Nowheresville, Middle America, and they are usually somewhat wasteful, to be sure. But these projects also create jobs--somebody has to build that cheese museum, after all.
Let's then assume that taxes will not be increased and spending will not be cut from the budget, so that the politicians can all keep their jobs--that leaves the deficit. Some people don't seem to care that the U.S. is now over $12,000,000,000,000 in debt. After all, as Dick Cheney once said, "Reagan proved that deficits don't matter." But that's only if one assumes that the debt never needs to be paid off. It's pretty unreasonable to think that lenders would simply write off $12 trillion they've lent, especially since the debtor is still (for the moment) economically viable. But for the sake of argument, let's assume that we won't ever have to pay that money back. It doesn't just disappear. Just the fact that the $12 trillion debt exists causes interest rates to rise and the value of the dollar to fall. In turn, those events increase the cost of pretty much everything that Americans buy, like food and gasoline, and increase by even more the cost of things that Americans finance, like their cars and their homes.
So when the Republicans whine about the unfairness of the estate tax (the "death tax", as they like to call it), remember that the money is likely to come out of your pocket in some other way. The Steinbrenners don't care about that, because they aren't taking advantage of some of the programs that might get cut--like subsidies to help senior citizens pay their heating bills (LIHEAP) or health insurance for children (SCHIP).
George Bush once tried to argue that increasing taxes on people making over $200,000 per year would end up hurting middle class taxpayers:
[John Kerry] said he's only going to raise the tax on the so-called rich. But you know how the rich is: They've got accountants. That means you pay. That means your small business pays. It means the farmers and ranchers pay.
Bush had it exactly backwards. When you cut the taxes of the rich, it means that people in the middle class pay because someone has to make up that revenue and/or bear the burden of the spending cuts and/or suffer the excessive increases in their cost of living...and that someone isn't the rich.
Because it is, after all, a zero sum game. And the middle class isn't winning.
Next year, the estate tax is supposed to kick back up to 55%, with a $1 million exemption. The best thing Congress can do to address that impending tax increase is nothing.