Paul L. Caron

Wednesday, July 5, 2006

WaPo: Tax Inheritance, Not "Death"

Interesting op-ed in the Washington Post:  Tax Inheritance, Not "Death," by Maya MacGuineas & Ian Davidoff:

Something is missing from the current debate over the hundred-year old estate tax. Instead of eliminating it or merely scaling it back to a point beyond recognition, we should instead be considering expanding the tax on money passed from one generation to the next....

A far better approach would be to tax people equivalently on all the income they receive, whether it be from earned or inherited income, by replacing the estate tax with an income tax on inheritances. Under such a tax, inheritances would be treated the same as other forms of earned income and taxed in the same manner.

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To stephen karpa,

I suspect that Maya pays taxes on the $110,000 salary.

And if the New America Foundation were for profit, it would pay taxes on its net profit which, I suspect, is zero.

Posted by: john | Jul 7, 2006 11:59:03 AM

Interesting food for thought.

MacGuineas & Davidoff wrote in the article you linked:

"The result would be much fairer. The housekeeper and the wealthy niece who each receive a $50,000 windfall would pay taxes based on their own different tax rates."

Under current law, if the housekeeper is a single parent earning about $18,000 a year with a couple of kids, she might well face a much higher marginal tax rate than the wealthy niece.

Considering a $15K inheritance illustrates the point quite effectively. At an $18K income, the housekeeper faces at least a 40% marginal tax rate, due to the phasing out of EITC. Indeed, when all is said and done, taking into account whether she lives in a state with its own EITC, number of kids, etc., her marginal tax rate could well be more than 50%.

The wealthy niece, on the other hand, might already be subject to AMT and facing a much lower marginal tax rate than the housekeeper, 26%.

Yet another wrinkle, even under current law, if the elderly employer gives her housekeeper an $15K gift BEFORE her death, perhaps it would be considered a "tip" and therefore subject to FICA as well as income subject to the housekeeper's (very high) marginal tax rate? The combined tax bit in that case might be well over 60%.

Tax consequences of giving $15K to the niece before death, under current law, are of course quite different. None at all on the first $12K, and quite possibly none on the remaining $3K, since the lifetime gift exclusion is $1 million.

Lots of interesting wrinkles here.

Posted by: Mary O'Keeffe | Jul 6, 2006 9:11:45 AM

Perhaps Maya would be in favor of taxing revenue received by nonprofit organizations such as her New America Foundation. This organization claims the tax loophole for nonprofit organizations and avoids paying income taxes on its $4.7 million of revenue in 2004. Maya's $110,000 salary is subsidized by hard working US taxpayers.

Posted by: stephen karpa | Jul 6, 2006 6:41:26 AM