Dorf on Law

Mostly law-related musings by Cornell Professor Michael Dorf and some of his lawyer/professor friends

Thursday, May 17, 2007

Make Mine a Double

In my post on Tuesday morning, I quoted from a recent interview in which Rudolph Giuliani made some cryptic and misleading comments about the estate tax, which he of course insisted on calling the "death tax" -- a phrase that was focus-group tested to be as unappealing as possible to average voters, even though over 98% of all people's deaths do not result in any estate tax liability. (In fact, even "estate tax" is an inaccurate description of the tax. For a person's estate to be liable for the tax, a person must die with an exceptionally large estate that the decedent did not reduce through gifts to charities, etc. But the title "tax on exceptionally large estates of uncharitable decedents" wouldn't fit on the forms, I guess.)

Because it was not the focus of my Tuesday post, I merely noted parenthetically that "there is no 'death tax,' and the estate tax is not a double tax." The notion of double taxation has become such a key talking point for so many conservative politicians, though, that it's important to revisit a few simple points that are too often overlooked when the term "double taxation" is invoked:

-- Double taxation is a technical concept. It means imposing tax more than once on the same "base." A tax base is the economic activity or other objective concept used to determine tax liability, such as property, income, consumption, wealth, miles driven on a highway, population, etc.

-- The estate tax is not a double tax. The usual argument is that incomes are taxed, after which prudent savers deposit after-tax dollars in the bank and accumulate estates, at which point the estate is taxed. Even if this were true (and it almost never is, since that is not how sufficiently large estates come into being), that is still not a double tax. The tax base for the income tax is annual income. The tax base for the estate tax is undistributed wealth held at death. (One easy test is this: Can I earn income and not pay the estate tax? If so, then it's not a double tax.) That some of the wealth held at death might have been accumulated by saving from income doesn't mean that there is double taxation.

-- One could argue that this technical argument is beside the point. If a person saves their money and their estate pays taxes on the accumulated estate, that "feels" like double taxation, in Stephen Colbert's think-from-the-gut style of logic. If you want to be truthy about it, though, then everything is double taxation. Follow a dollar of income long enough, and it will be used in different transactions that qualify for different tax bases. I earn income in a year, some of which (depending on exemptions, etc.) is subject to the federal income tax, some to state and local taxes, FICA/Medicare, sales and excise taxes, etc. If everything is double taxation, though, then what is unique about the estate tax that makes its type of truthy-double-taxation especially bad? Why not repeal sales taxes for being double taxation? If you really want to have nothing but an annual income tax, let's talk about what that would require. Our current mixture of taxes on different bases might start to look pretty good.

-- There is nothing good or bad about double taxation. I'm hardly the first person to say that I'd rather pay tax on the same base at 10% twice than 50% once. Sometimes, we might choose to impose a tax twice to reduce cheating, since it's less likely that a person can evade paying taxes twice than once. The administrative costs have to be weighed against the taxes collected, along with respect for the law, etc. The point, though, is that "it's a double tax" -- even if a true statement -- tells us nothing about efficiency or fairness.

I once wrote up a slightly longer version of this argument in a FindLaw column. There is plenty out there written by other tax scholars as well. I don't expect the term "double taxation" to go away, because it is simply too juicy rhetorically. Even by our loose political standards, though, this particular bit of rhetoric is uniquely meaningless.

16 Comments:

  • At 10:19 AM, Blogger KipEsquire said…

    "even though over 98% of all people's deaths do not result in any estate tax liability..."

    The lower 50% of households by income have no federal income tax liability, yet that doesn't mean that "there is no federal income tax."

    You die, you are subject to a tax computation. That's a death tax -- all else is sophistry.

    The fact that the death tax computation may almost certainly result in zero tax liability is utterly irrelevant: it simply doesn't mean that "there isn't a death tax."

     
  • At 10:20 AM, Blogger Kenji said…

    You wrote:

    "In my post on Tuesday morning, I quoted from a recent interview in which Rudolph Giuliani made some cryptic and misleading comments about the estate tax, which he of course insisted on calling the "death tax" -- a phrase that was focus-group tested to be as unappealing as possible to average voters, even though over 98% of all people's deaths do not result in any estate tax liability."

    I'm not sure if Giuliani's logic is so problematic. Think about this statement: "100% of estate taxes result from death." Then, estate tax really does sound like a "death tax." I'm not sure if your characterization is necessarily superior to Giuliani's.

     
  • At 10:35 AM, Blogger Tam said…

    This is a great example of how framing is the whole ballgame. What does "double taxation" even mean? Is it the love child of Double Dipping and Taxation Without Representation? Perhaps those are the implicit associations that they want us to make. But as you demonstrated, it has absolutely no bearing on the question of whether it's good or bad, fair or unfair.

    The unfortunate thing is that so much time is wasted to debunk these myths that are so easily constructed - and perpetuated - by use of these catchphrases, even by those who should know better (the very experienced lawyer who taught my Estate Planning CLE class uses the term "death tax.").

    Cass Sunstein recently pointed out the lack of visionary liberals on the Court these days. I haven't read the article yet, and I realize I'm generalizing here. But when so much effort must be expended to debunk bad - but yet so politically effective - arguments like "double taxation," I can see why there's no time or energy left to write opinions that contain broad sweeping visions like Justice Brandeis's dissent in Liggett v. Lee.

     
  • At 11:02 AM, Blogger Tam said…

    Kipesquire & Kenji --

    It's also true that 100% of [federal] estate taxes result from people having estates of [at the current exemption level] $2M or more. So why not call it the "millionaires' tax" or "multi-millionaires' tax?" There is a choice in the matter.

    The same words can simultaneously have an accurate as well as a misleading interpretation. To the extent possible, we should avoid language that carry misleading interpretations that make it easy for people not to think about the underlying issues or to be confused. The term "death tax," is unquestionably misleading for most people because it causes them to mistakenly think that they will incur a positive tax liability at death, and causes them to vote against their own economic interest. This is bad for democracy and for capitalism because both those systems are effective to the extent that the participants hold accurate beliefs.

    As Martha Minnow would say, the use of labels carries "consequences while burying the choices and responsibility for those consequences." The main policy reasons for taxing estates at death is to mitigate the concentration of wealth and levels of inherited wealth. Because something like the "millionaire's tax" better reflects this policy, it is a more honest choice of phraseology than "death tax," which obfuscates the purpose.

     
  • At 11:17 AM, Blogger Kenji said…

    Tam:

    My main point, though, is that no one characterization of the estate tax is LOGICALLY superior to others. I have no problem with calling the estate tax "millionaires' tax." What you call depends on what you want to accomplish. Giuliani wants to get rid of it; so, he's calling it a death tax. Another politician with a more populist agenda would want to keep it; so, that person can fight back by calling it a "millionaires' tax." We just need to maintain a forum where different people can try to compete freely in the battle of ideas (and soundbites).

     
  • At 11:19 AM, Blogger Kenji said…

    "My main point, though, is that no one characterization of the estate tax is LOGICALLY superior to others."

    I should add: "To the extent it is factually correct."

     
  • At 11:36 AM, Blogger Tam said…

    By claiming no "logically" superior phrasing, I assume you mean something like "there are no reasons - from pure analytic reasoning, using only a priori knowledge and the conceptual relationships between the terms - for preferring one term over the other."

    But why is that the criterion for whether we should prefer one phrase over the other?

    Sure, the world didn't necessarily have to be such that "death tax" is misleading. But in fact it is. In such a world, if genuineness, sincerity, honesty, truth-seeking, transparency in process, and robust debate are virtues of a society (and we must think that they are, given our choice of democracy as a system of government), then why shouldn't we prefer not to use a phrase because it is empirically inimical to those goals, even if "logically" speaking, it didn't have to be?

     
  • At 1:32 PM, Blogger egarber said…

    kipesquire said:

    You die, you are subject to a tax computation. That's a death tax -- all else is sophistry.

    Whatever the semantics might be, I wonder if there's a component of truth that gets lost: is it death itself that's being taxed, or the transfer of wealth to the survivor?

    If upon dying somebody decided to bury stock holdings in the ground and transfer them to NOBODY, would any tax be due once the person dies? I'm just asking, because I'm not sure. But if NOT, then what triggers the tax is the transfer -- i.e., the heir is taxed on a windfall, just like they would be if some other type of wealth (unrelated to losing a parent, etc.) just fell into his / her lap.

    Or does a person have to settle with the state upon death, regardless of where the wealth goes?

    Somebody help me understand.

     
  • At 2:47 PM, Blogger Kenji said…

    Tam,

    I'm not sure if I agree with your point that calling the estate tax a "death tax" in the context in which we live is "misleading," unless you are using the term very broadly. The bottom line is that any attempt to succinctly explain something as complex as the tax system in layperson's terms is bound to be inaccurate in certain respects. If that's "misleading," then what politician's statement is not misleading? For instance, do you think Gore's Inconvenient Truth was misleading?

    In my view, it's more fair to say that Giuliani is simply focusing on certain attributes of estate tax. And others are free to come up with their own soundbites to refute him, based on their agendas (which I hope will happen, since I personally believe that repealing any tax today, given the fiscal condition of this country, is totally reckless).

     
  • At 5:04 PM, Blogger Craig J. Albert said…

    This post has been removed by the author.

     
  • At 5:05 PM, Blogger Craig J. Albert said…

    Perhaps the uncharitables whose estates are potentially subject to the estate tax should be reminded to consult with their accountants and lawyers, and then choose 2010 as the year to die.

     
  • At 10:04 PM, Blogger Neil H. Buchanan said…

    Is it accurate to call the estate tax a death tax because your estate is subject to the tax computation when you die? We refer to taxes by their base, not by the timing of the tax collection or computation. The sales tax, the property tax, the value-added tax, etc.

    The income tax is not called the "end of reporting year tax," even though it is the end of the reporting year that brings about the computation of tax liability. Selling a financial asset for a gain is also called an income tax, not a realization tax, even though it is the realization of the gain that triggers the tax liability.

    In other words, it is not simply a choice of two equally accurate -- or equally misleading -- descriptions of the estate tax. It really is a tax on estates (which is a particular form of wealth tax), not a tax on death.

    Because we have chosen to delay taxes on wealth accumulations until we are absolutely sure that the owner of the wealth doesn't need it for her own use, we have chosen to collect this tax on wealth at the point where the wealth has become an estate, i.e., at death. We could certainly choose to collect exactly the same tax at a date other than death, but it would still be a wealth tax.

    That's not sophistry. That is what the words actually mean. So even though I find Tam's argument persuasive, I don't think it's necessary.

     
  • At 10:17 PM, Blogger Neil H. Buchanan said…

    According to the conservative Tax Foundation, there were 130 million tax returns in 2004 with positive adjusted gross income, of which 43 million had no income tax liability. That's a lot less than half -- though I should say that I would be quite happy if the zero bracket actually exempted the bottom half of the population from tax. Unfortunately, that isn't true as of the most recent data available.
    http://www.taxfoundation.org/taxdata/show/250.html

     
  • At 10:21 PM, Blogger Neil H. Buchanan said…

    In response to egarber, it is the wealth held by the decedent that is being taxed. Under the current system, the decedent's estate must file an estate tax return. For the 1% or so that owe estate tax, it is due at that point (although payments can be stretched over 14 years).

    As I said in an earlier comment, though, the timing of the tax is not the relevant way to describe the tax. The estate tax could be changed to be triggered by something other than death without changing the nature of the tax.

     
  • At 11:18 PM, Blogger egarber said…

    So Neil, even in my example where stocks are buried and nobody is named a beneficiary, estate tax would still be due -- because the transaction is between the dead person's estate and the government (not the recipient and the state)?

    Forgive my ignorance. Think of this as teaching :)

     
  • At 11:51 PM, Blogger Neil H. Buchanan said…

    egarber:

    Yes, the estate tax is assessed based on the value of the estate, not based on the value of the amount of wealth received by any inheritors. (Of course, in your example, it's hard to see how the IRS would know about the buried wealth, but that's an evidentiary issue, not a legal issue.)

    The key is that there is a difference between an estate tax and an inheritance tax (though both are wealth taxes). The estate tax is assessed on the wealth in an estate, whereas the inheritance tax is assessed on the amount of wealth received by an inheritor.

    I, along with others, actually think that an inheritance tax would be a better way to tax wealth that the estate tax; but of course that's not what people like Giuliani have in mind.

     

Post a Comment

<< Home