04/15/2005: As the last-minute filers scramble to get their tax returns mailed by midnight, Congress is debating over how to deal with the imfamous estate tax, otherwise known as the death tax. Currently, if you die, your estate is exempt from the “estate tax”, provided that the sum total of your entire estate is less than $1.5 million.
After that, Uncle Sam takes 45% of your cheeseburger (47% when that number hits $2 million). The death tax is supposed to completely go away in 2010, but it will come right back in 2011: and Uncle Sam will be licking his chops, aiming to eat 55% of that cheeseburger. Bush wants to kill the estate tax for good, while Democrats and some big-government Republicans want to “compromise” by keeping it alive, albeit at a lower rate.
The death tax needs to die. Permanently.
I know some people are thinking, “Big deal! If you leave a $2 million estate, and the government takes 45% of it, that leaves $1.2 million. With that kind of money, anyone can afford to lose $800,000!”
That line of reasoning has several faults, not the least of which are (1) a totalitarian attempt at determining what a person “needs” (that is hardly the job of the government), and (2) the assumption that the estate is liquid (cash).
If the bulk of the estate is not convertible to cash–i.e., if it involves land, a small business, a farm, or other tangible assets that are not easy to sell–the family may be forced into liquidation. This can lower the return on those assets (when one must liquidate, those assets often sell at a discount). After legal costs, you may be lucky to have half the value when the smoke clears.
This dynamic can force an upper-middle-class family into downward mobility. In addition to the government taking about half the amount that is liquidated, the sale eliminates the revenue streams that those assets were generating, and the benefits of compound interest growth from those revenues. If–for example–the business was netting the family $80,000 of income per year, the sale of that business causes the family to forego not only the sale value of the business, but also the compounded values of the future income from that business. Ditto for portfolios that provide regular cash flow.
That “45% tax” is starting to look pretty big now.
One must also consider a couple more important factors that will impact the Baby Boomers, and Generations X and Y.
(1) It will not be difficult to amass an estate of $1.5 million.
While you are busy saying, “Screw the rich!”, you might consider that you may be among the “rich” in twenty years. A $200,000 house can easily be worth $500,000 in 20 years. If you steadily invest part of your paycheck into a Roth IRA, a 401(k) account, and/or any other private investment account, even small contributions would likely compound into the high 6 figures over an investor’s life. For example, a steady $50 per month contribution to a 401(k) account, compounded at 10%, over the course of a 40 year career (age 18 to 58), would be worth over $600,000.
If you are frugal, and contribute $12,000 per year over a 40 year career. This comes out to:
8%: $1.75 million
10%: $3.18 million
12%: $5.95 million.
(2) A million bucks–or two million bucks–is not as much as you think.
In my childhood, it was not uncommon for kids to say they wanted to be millionaires. Back in the ’70s–and even the ’80s–a million dollars was a lot of money. Today, that million dollars does not go nearly as far as it used to. Compounding this, with the estate tax, you can work hard, invest wisely, and slowly build a strong nest egg, as your family is forced into downward mobility after you die.
Let’s say your father died, leaving an estate of $2 million. After liquidating and paying the taxes, you are left with $1 million.
If you–the survivor–are 65 years old and retired, you may live more than 20 more years. That $1 million will have to go a long way. That $1 million will have to cover such things as housing, food, income, eventual long-term care, health care, and prescription drugs. If you suffer any catastrophic health problems–heart bypasses, strokes, hip replacements, spinal fusions, knee replacements, cancer, diabetes–your nest egg will have to cover those eventualities, as insurance will cover only small portions thereof.
You might say, “Big fat hairy deal! If I invested it in T-bonds at an average of 5%, I would clear $50,000 just in interest income!”
That sounds nice, except that there is no guarantee that any investment–government bonds, munis, stocks, corporate bonds, or even mutual funds–will provide good returns every year. Sometimes, T-bonds yield less than 5%. (Do you think you can live on $30,000 per year if inflation kicks in big-time?) If inflation kicks in, bond prices will go through the sewer. Any increases in yield may not cover inflation.
You may also consider stocks. However, while stocks are historically good over long periods of time, they have suffered annual double-digit losses. How would you like to lose $200,000 in a year, or $600,000 in a year? If you had $1 million in a NASDAQ index fund, you would have lost more than half your money from 2000-2002.
In fact, had you invested heavily in such giants as Enron, Worldcom, Global Crossing, MarchFirst.Com, Anazon.com, you would have lost almost ALL of that million dollars. Instead of net income, you would have had a more than 60% LOSS! Stocks have also had 20-year periods of stagnation. (So much for your $50,000 per year in interest income!)
Now that nest egg is not looking so good, is it?
Now that $1 million the government took out of your cheeseburger is really starting to suck, isn’t it?
The estate tax is not about “sticking it to rich people”; it is about keeping poor people poor, keeping the ranks of the rich exclusive, and forcing you and me to become more dependent upon government.
It’s time to put an end to the financial tyranny of big government.
We must kill the death tax. Now. For good.