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The Jewish Ethicist: Estate Taxes

The Jewish Ethicist: Estate Taxes

Is it time to abolish estate tax?

by

Q. Are estate taxes a fair form of taxation?

A. I have been studying the topic of estate taxes for some time, and after looking at all the research and the ethical arguments, I have concluded that this form of taxation is underused.

Currently the inheritance tax in the United States applies only to rather large estates, so the majority of families are completely exempt. On very large estates the tax is very large, unfairly so; this is compensated by a variety of loopholes, which guarantee that a clever wealthy person (or a wealthy person with clever lawyers) often pays virtually nothing. For this reason the US estate tax is sometimes called an "idiot tax," due to the perception that large estate taxes are paid only be people who don't take the trouble to avoid it. A smaller but more consistently enforced tax would be fairer and less wasteful.

Currently there is a powerful movement in America to abolish the estate tax altogether, and in Israel there is only a nominal tax on inheritances.

The arguments in favor of an inheritance tax are simple. The most important things economists look for in a tax are equity (fairness) and efficiency. Taxes are considered fair when everyone pays their fair share. Most people consider a tax fairest when those with the most means pay a larger fraction than others; this is known as "progressive taxation." Since most people have income, an income tax is considered a fair tax, and it is not surprising that a progressive income tax is the main source of revenue in virtually all advanced economies.

Inheritances are a very important source of income, meaning that equity considerations should encourage taxing it, so that we don't have two people with the same income where one pays taxes and the other escapes. Furthermore, since rich people tend to have offspring who have obtained significant advantages during the parent's lifetime, most children of people with significant estates tend to have above-average income already. It seems strange to give them a tax-exempt source of income when working people with far less income are paying taxes on all of their income.

Inheritance taxes are progressive even if there is a flat rate, since the poorest citizens don't have significant wealth when they die, and so they would pay virtually no estate tax, especially if we maintain the exemption at some reasonable level.

Taxes are efficient when they don't discourage productive activity or encourage unproductive activity. Very high income taxes have been shown to discourage earnings, and so the over-50% rates which were common a generation ago are now rare. But moderate estate taxes have not been shown to be a significant disincentive on productive activity. Much wealth is not accumulated with any intention to bequeath it. Some is just left over from what was saved for what was hoped to be a more prolonged old age. Other wealth is accumulated because it gives power and prestige to the owner, even if he or she never intends to spend it. I don't condemn this motive because often people use this power and prestige for admirable ends, for example to promote charitable projects. Building a large business provides an immense benefit to society, and if the incentive for doing so is the standing it provides I think this is a fair tradeoff. Many large fortunes are accumulated by people who were never thinking of the next generat on when they acquired them.

However, research supports the view that many people are very interested in passing wealth to the next generation (not only to their children), and that this is an important incentive in their saving. It's true that taxing these estates will give such parents less incentive to save, but if the tax is not excessive I don't see any reason this effect will outweigh the other benefits of the tax. Besides, the inheritance tax will give the children much more of an incentive to work and save.

Very high estate taxes combined with significant loopholes means that much effort is invested in avoiding taxes. I don't fault professionals who engage in such elaborate estate planning since they're only doing their job, but I don't see why the tax system has to encourage wasting the considerable talents of these dedicated individuals in what is essentially a socially wasteful activity. A modest estate tax without loopholes would not significantly discourage productive activity and would avoid encouraging wasteful efforts by estate planners.

It has been argued that an estate tax is a double tax, since the parent has already paid taxes on the money as he or she accumulated it. This is certainly true, but it is true of many other taxes as well. Sales taxes are paid out of income which was already subject to income tax; corporate dividends paid to individuals are taxed even though the income of the company already went to corporate taxes. Double taxation does present a problem, but it's not the sole consideration in creating a tax system. In the case of estates it's not clear if the tax should be considered double at all. If the estate is only an "afterthought" or if they are viewed as a kind of payment from parent to child, then we could say that the bequest is an entirely new transaction.

In Jewish communities, bequests have generally been treated like ordinary income for various kinds of levies. One source of communal funds is the private tithe; noted authorities such as Rabbi Yeshayahu Horowitz (1) Shelah, charity and tithes) and Rabbi Yechiel Michal Epstein (2) rule that inheritances are subject to tithe, even though the parent already separated tithes from his own income. Rabbi Horowitz writes: "Now that the son has acquired [the funds], why shouldn't he tithe what God has provided him? It's not germane to argue that the son is merely in place of the father, since the son is an independent owner." And mandatory community taxes have also often treated inheritances like ordinary income. (3)

A modest, simple and consistently applied estate tax is a fair levy and makes a contribution to having an equitable and efficient tax system. And such a system is in harmony with the practice of many Jewish communities.

SOURCES: (1) Shnei Luchot HaBrit, laws of charity and tithes (2) Arukh HaShulchan, Yoreh Deah 249:6. (3) Responsan Mayim Amukim II:63 – Raanach

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The Jewish Ethicist presents some general principles of Jewish law. For specific questions and direct application, please consult a qualified Rabbi.

The Jewish Ethicist is a joint project of Aish.com and the Business Ethics Center of Jerusalem. To find out more about business ethics and Jewish values for the workplace, visit the Business Ethics Center of Jerusalem at www.besr.org.

Published: June 3, 2006


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Visitor Comments: 6

(6) Anonymous, July 6, 2006 12:00 AM

Family Businesses

The key lies in your last statement: modest, simple and consistently applied. Unfortunately, the current estate tax, in the US at least, is none of these things. In far too many cases parents work all of their lives to build up a business, and the bulk of the value of their estate lies in the business. Upon their deaths, the heirs are forced to sell the business, toward the running of which they may have also dedicated their entore lives, just to pay the estate tax. Where is the justice in this?

(5) Anna from New Zealand, July 6, 2006 12:00 AM

Not in New Zealand



Why not come and live in New Zealand ? We haven't paid 'death duties' as they used to be laughingly called ( you have a duty to pay for dying ? Spare us.) for many, many years.

They tax you when you're alive and then you are taxed again for the privilege of dying-how grossly unfair.

I thought our taxes were bad, but yours are appalling.Our top tax is a fraction of yours & under a certain amount you pay none at all. Mind you, our petrol prices are far higher than yours & I weep when I see how little you pay for L'Oreal and other cosmetics.

I don't blame people who avoid this iniquitous tax by any means they can : so would I. I have heard of cases in England where death duties-especially where two people die close together-have bankrupted the unfortunate legatees. It's like that maddening Monopoly card where you have to pay taxes on the houses & hotels that you have just spent every last dollar on placing on your properties ( I never get this when I haven't got any) and have to sell them to pay it-unless you slide it back into the pack and pretend it was something else. In the case of entailed properties that cannot be sold, this daylight robbery has led to disastrous consequences, even suicide.

Why not lobby to abolish it altogether? This must be the most unjust tax ever invented; it's not as if you haven't paid tax all your life. NZ abolished it; why can't America ? After all, as the legatees will be spending & investing it, the government will be getting it anyway.

(4) BOBBY YANOVER, June 6, 2006 12:00 AM

ESTATE PLANNING....YOU MISSED THE POINT

ESTATE PLANNING ALSO AFFECTS STATE AND ADMINISTRATION.....LAWYERS GET AN AUTOMATIC 5%....DO YOU ONLY GET YOUR INFORMATION FROM LAWYERS???
THERE ARE OVER 100 ESTATE PLANNING TOOLS, EVEN MORE FINANCUAL AND TAX TOOLS
WHICH LAWYERS RARELY TOUCH.
AT THE SMALLEST POINT ...A SIMPLE INHERITANCE FROM A HUSBAND TO HIS WIDOW COULD MAKE THE NEW DRUG BENIFIT PROGRAM INELIGABLE....THERE ARE HUNDREDS OF THESE LOOPHOLES....YOU HAVE ONLY THE LEGAL POINT OF VIEW OF ESTATE PLANNING...YOU ARE MISSING THE BIG PICTURE, YOU ARE MISSING THE ABILITY TO STOP A 1000 HEADACHES, BY NOT ADDRESSING THEM....YOU HAVE HELPED TO CREATE PROBLEMS TO THE GENERAL POPULATION THEY DON'T KNOW EXIST.
ONCE YOU HAVE SEEN A LAWYER....YOU HAVE JUST BEGUN.....NOT FINISHED....THE SIZE OF YOUR ESTATE IS NOT THE ONLY FACTOR.
YOUR STUDY OF THE TOPIC...JUST BEGAN. HOW MANY HEADACHES HAVE YOU LEFT YOUR FAMILY??? R U SURE? Y NOT B?
WHAT ARE YOUR CHOICES AND ALTERNATIVES??
BOBBY YANOVER, PA AEP CSA
570.947.9329 YANTHEMAN@AOL.COM

(3) Bob Burg, June 5, 2006 12:00 AM

Taxes upon Taxes Upon Taxes upon . . .

With all respect to Rabbi Meir, a man who has shown his wonderful wisdom in this column for years, I was dismayed to read his answer to this week's question.

If I were to go over today's column point-by-point it would be much too long.

So, very briefly, Rabbi Meir is operating out of a premise that taxation (past the minimum a government needs in order to carry out its constitutinal functions) is a good thing.

Taxation, at it's best, is a necessary evil to keep society functioning. But today, we pay taxes on top of taxes on top of taxes, both overt and hidden. On everything! At this point, most people work more than half a year just to support their government!

Let the government control the money and it will either be wasted outright, or used to benefit those with more political power than you and I have, or used to buy the votes of special interest groups.

I wish the Rabbi would re-consider his counsel in this case.

(2) robert honeyman, June 4, 2006 12:00 AM

double taxation

a significant portion of wealth buildup in large estates may have never been taxed. bill gates is one of the wealthiest individuals in the world. but most of that wealth is derived from the value of his holdings in Microsoft. The bulk of his holdings were acquired at prices orders of magnitude less than their current value. If Gates were to sell his holdings, he would have a massive taxable gain. Is it right that by passing away, his estate should not also be liable for that tax?

This situation applies to many, if not most, large estates.

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