In a front page article today, the New York Times has a story on the federal death tax and the impact its 2010 expiration has on a recently deceased billionaire. The article is riddled with errors, but the title of the article encapsulates perfectly the story’s biggest flaw: “Legacy for One Billionaire: Death, but No Taxes.”
Billionaire Dan Duncan died in March of this year and left his family a considerable estate. Because the death tax does not apply for 2010, the New York Times wrongly claims that his heirs are getting the estate tax-free. This could not be further from the truth.
Under current law, even though there is no death tax this year, Duncan’s heirs will owe a considerable amount of taxes on the assets they receive from the estate. That’s because they will still owe capital gains taxes on all the assets they acquire. The major difference is they will pay the capital gains taxes on the assets when they choose to sell them instead of now so soon after Duncan’s death.
When they calculate the amount of tax they owe the heirs will have to use Duncan’s original basis (the cost of the assets when he purchased them) to determine the amount of capital gains taxes they owe. That mean’s no portion of Duncan’s estate will go untaxed. It is a question of when the heirs will pay the tax, not if.
The New York Times article also fails to point out that Duncan paid substantial amounts of taxes during his life, including: income taxes, corporate income taxes, capital gains and dividends taxes, property taxes, sales taxes, payroll taxes, excise taxes and countless others. As did the workers he employed for years at his businesses. This is not a man that didn’t pay his “fair share” during his life.
The New York Times article makes one other egregious mistake. It claims “the one year lapse in the estate tax was signed into law by President George W. Bush in 2001, an accounting quirk in his package of tax cuts.” This is flat out wrong and sloppy reporting. The 2001 and 2003 tax relief packages phased out the death tax by reducing its tax rate and increasing its exemption through 2009. In 2010 the tax relief bills repealed the death tax. Hence it is the expressed policy of both Congress and the President, and has been since 2001, that the death tax should die once and for all in 2010.
The quirk is actually the resurrection of the death tax in 2011. The 2001 tax cuts were passed under budget reconciliation rules that we learned so much about during the healthcare debate. Policies passed under reconciliation cannot extend outside a 10-year budget window, so current law has always called for the death tax to come back in 2011 (ten years after passage of the 2001 tax relief legislation) despite Congressional policy that called for its permanent expiration.
The repeal of the death tax is Congressional recognition at long last that the death tax has a profound negative impact on the economy, destroys jobs and lowers wages. Nor does it serve the purposes Congress originally passed it to serve. The New York Times reiterates the tired, old incorrect argument that the death tax is necessary to close the gap between the rich and the poor and to be a “recycling program for economic opportunity.” The facts are that the free market works well-enough on its own to guarantee all Americans the opportunity to earn high incomes and accumulate vast sums of wealth throughout their lifetime. And according to the research on income mobility, Americans also have an equally high probability of moving down the income scales during their lives as up it. The death tax is not needed to equalize opportunity.