Recently two people I know and respect were apparently upset over a proposal from the Clinton campaign to raise the top rates of the federal estate tax*, one of whom wrote: "That money was already taxed and most likely at the highest rate possible and now they want to take MORE at a time when children/heirs are grieving?!?! Pfffttt...how in the hell is double taxation constitutional in the slightest?"
One of the political shenanigans which confounded me during the 2002 off year elections was the Republicans making the estate tax- which they renamed the "death tax" for political reasons- an issue during that year's campaigns. I was incredulous at the argument that this was "double taxation," referring to the Republicans' contention that the estate tax taxed the money when it was earned during the lifetime of the deceased, then taxed the same money again when the heirs received the estate. Another objection- and this was used in Republican campaign commercials- was that the estate tax would "destroy small businesses and family farms." And a lot of people who never could have been subject to the estate tax (anyone who wasn't a millionaire) were fooled into thinking that Democrats were going to take their money before it could pass to their children. Apparently that misrepresentation still works in 2016, mainly because the media and the Democrats haven't figured out how to meet those lies head on. Here's one way to deal with the issue:
1. THE MYTH THAT EVERYONE- INCLUDING SMALL BUSINESSES AND FAMILY FARMS- PAYS THE ESTATE TAX: The only estates subject to the tax at the time (2002) were in excess of $600,000.00. That number was quickly raised to well over a million dollars, which meant that under current federal law estates under a million dollars had no federal tax whatsoever. Hillary Clinton's recent proposal to raise the top rate to 65% would only hit the estates of about a hundred or so people in the entire country- billionaires all. Actually, her proposal would start the tax at 50% for those with estates valued at $10 million, and go to 65% for those with estates starting at $500 million- $1 billion for married couples.**
2. THE MYTH OF DOUBLE TAXATION: The most oft heard complaint is that the estate tax is "double taxation" because the money was taxed when earned during the lifetime of the deceased, then taxed again when it passes to the heirs. Ignoring for the moment the assumption that a billionaire (like a Hilton or Wal-Mart heir or a stock market speculator) actually earned that money by the sweat of his or her brow, as opposed to acquiring it through inheritance, capital gains, interest, or dividends- all of which are taxed at lower rates than ordinary wages for a factory worker or laborer- the complaint ignores the fact that EVERY WAGE EARNER'S money is taxed more than once. And that money is taxed while he or she is still living and actually needs the money to feed or clothe his or her family.
As noted, the inherited wealth (remember- starting at $10 million) was probably taxed before- but that paled in comparison to a wage earner's wages, which aren't double taxed before he or she receives a pay check- they are quadruple taxed (!!!), and the wage earner also pays taxes on the money that he or she paid in taxes! Here's the analysis: A wage earner works 40 hours in a week at $12.00 an hour and earns $480.00 gross. However, that wage earner pays 4 taxes on that $480.00, even though after paying the first tax (I'll arbitrarily put them in order as: Social Security (roughly 8%), Medicare (about 1%), Federal (say 10%) and State (say 6%)), the second, third, and fourth taxes are all taxed on the now mythical $480.00. But after the first tax is taken out (8% of $480 is about $38), the second tax isn't taken out of what's left- $442- but out of the $480! And so on for each of the other taxes. The last tax actually taxes money that has been taxed three times before, without ever subtracting anything from the $480, so it is a tax of a tax of a tax of a tax. So if a person is going to be angry and upset and vote against a Democrat who proposes taxing the estates of the top 100 or 200 billionaires in the country (out of 330 million people), then why not oppose the taxes on tens of millions of wage earners being hosed four times over? My answer is: if someone is going to pay more in taxes, it's hard to argue that dead billionaires and their offspring who may have never worked a day in their lives should somehow be treated better than living wage earners who in many cases risk (or lose) life, limb, or their health to feed their families.
SIDE NOTE: In early 2002, when this issue first arose, I spent about an hour on the phone with the then legislative director and later the campaign manager for (then) Georgia U.S. Senator Max Cleland. My argument was that instead of jumping on board the Republicans' faux concern for small businesses and family farms to disguise their efforts to protect the wealth of dead millionaires and billionaires, the Democrats should join together and dedicate all proceeds of the estate tax to a cause that would be unassailable. For instance, take the billionaires' estates and dedicate the taxes to prescription drugs for the elderly poor who need those drugs to survive, or dedicate them to the care of injured veterans and the families of deceased veterans. If the Democrats had done that one simple thing- dedicate all proceeds of the estate tax to an unimpeachable cause like that, it would have reversed the political effects of the Republicans' pernicious campaign ads. Max didn't buy my argument, he supported the Republican efforts to defang or repeal the estate tax, but he ended up losing anyway to a Republican candidate (Saxby Chambliss) who ran the then most infamous television ad in Senate campaign history, linking Senator Cleland to pictures of Osama bin Laden and Saddam Hussein.
* "The Clinton campaign changed its previous plan—which called for a 45% top rate—by adding three new tax brackets and adopting the structure proposed by Sen. Bernie Sanders of Vermont during the Democratic primaries. She would impose a 50% rate that would apply to estates over $10 million a person, a 55% rate that starts at $50 million a person, and the top rate of 65%, which would affect only those with assets exceeding $500 million for a single person and $1 billion for married couples." WSJ
** In 2014, just 223 estates with a gross value exceeding $50 million filed taxable estate-tax returns, according to the Internal Revenue Service. WSJ