Because most philosophies that frown on reproduction don't survive.

Thursday, June 27, 2013

The Left Discovers Inheritance Taxes Are Unfair

Ta-Nehisi Coates at The Atlantic has a post approving of yesterday's ruling on the Defense of Marriage Act. His jumping off point is a NY Times piece that explains the lawsuit with which the DOMA challenge originated as follows (I can't find this paragraph in the NY Times article he linked do, though I do find copies of that paragraph elsewhere, so the NYT may have edited the article since posting):
The case on the federal Defense of Marriage Act of 1996, United States v. Windsor, No. 12-307, concerned two New York City women, Edith Windsor and Thea Clara Spyer, who married in 2007 in Canada. Ms. Spyer died in 2009, and Ms. Windsor inherited her property. The 1996 law did not allow the Internal Revenue Service to treat Ms. Windsor as a surviving spouse, and she faced a tax bill of about $360,000 that a spouse in an opposite-sex marriage would not have had to pay. Ms. Windsor sued, and last year the United States Court of Appeals for the Second Circuit, in New York, struck down the 1996 law.
Coates's reaction to this is:
The state repossessing a couple's wealth because it finds them icky, is wholly unjust.
It is wrong to strip people of wealth because you are bigot. It is wrong to strip people of the right to name their caretakers because you are afraid. It is wrong to make war on people because you can not get over yourself. And though today we may say that we have advanced, through much of this country, the wrong continues unabated.
Now, this was kind of interesting to me. Generally speaking, when people on the left talk about inherited money, they talk about it in terms of society taking a fair share of money that one rich person passes on to another rich person who doesn't deserve it. I've even heard progressives suggest that the state should automatically confiscate all money on someone's death, allowing no inheritance at all. But here we have the claim that an inheritance tax is "the state repossessing [someone's] wealth because it finds them icky".

Let's think about that one for a moment. Say that I have a child who is dependent on me long term (lives with me, I support him, etc.) I die, and I've designated him as my heir. If the estate that I leave is large enough, the state will tax that estate. Does that mean that the state finds the parent/child estate "icky"? Not to my knowledge.

How does inheritance tax work different for spouses than for other heirs?

The normal way the estate tax works is that a certain amount of inheritance is "exempt" and then the remainder of the estate above that exemption is taxed at some rate. So, for instance, in 2009 (when the partner of the plaintiff in the DOMA case died, the exemption was $3.5 million (not counting life insurance and other fully exempt source of money) and the maximum rate of the table of rates charged against the inheritance above the exempt amount was 45%.

However, because spouses are seen as forming a single economic unit, the estate tax has normally exempted occasions in which the surviving spouse inherits from a deceased spouse.

So, what is it that Ms. Windsor suffered as a result of DOMA? If the IRS refused to recognize her as a spouse, she would have been taxed at some rate on the money in excess of $3.5 million. Apparently this would have resulted in a tax of $360,000. So, Ms. Windsor would have inherited some sort of amount over $4.1 million (assuming the top rate) but instead she apparently inherited some amount over $3.8 million.

Now, I actually agree this is unfair. Money which is inherited has already been taxed when it's earned, and the really rich mostly find ways to get around the tax anyway. I think we should just abolish the inheritance tax entirely.

Assuming that we keep the estate tax, any decision as to what sort of heirs are exempt and which aren't is going to be necessarily arbitrary. Is it fair that a financially independent spouse would be exempt while a financially dependent child would not? What about a sibling? Why can someone you live with be exempt only if you have an officially recognized sexual relationship but not a non-sexual relationship?

To an extent, I think the blanked amount exemption is meant to deal with these potential unfairnesses. Sure, the rules on who can inherit without paying tax may be arbitrary, but the first $3.5 million (back in 2009, now extended to $5 million in inflation-adjusted 2011 dollars) of your estate is exempt no matter who you leave it to. So even if you're impacted by the estate tax at all, you already have a fair amount of money in hand.


Art Deco said...

If I am not mistaken, the exemption for the federal inheritance tax is somewhere in the neighborhood of $5 million.

Darwin said...

Yeah, I'm not sure if I managed to express that very clearly:

In 2009 when the plaintiff's partner died, the exemption was $3.5 million.

It's now (and according to the tax deal passed back in January, permanently) set to $5 million in 2011 inflation adjusted dollars.

So people with same sex marriages and estates over $5 million are now have new legal protections. Hooray for the 0.0001% that fit both of those criteria!

Belfry Bat said...

Well, I'm both glad and saddened to have read this, because I hadn't read into how the suit first originated, but it confirms a particular fear I wrote about on Wednesday.

Just in the interest of refining the argument, unless you make your living off of interest (and even then), every lump of money that might be anywhere has been taxed repeatedly, potentially any time it does economic work, and I do think that is roughly as it should be; so if you do want to argue that an inheritance should be untaxed, an argument should probably be supplied that inheriting isn't doing economic work. The integral household seems to naturally meet that potential criterion, and so would a dependent child... I don't know how to complete such an argument; I think it would preclude exempting, say, a donation to the local Walmart (not that I can imagine anyone designating such a thing outside of perversity).