[image: Koch brothers]

The Truth about Death and Taxes in the U.S.

The wealthy want to get rid of the “death” tax. They say it is a huge burden on them for doing the inescapable—for dying. What's more, they say this tax ranges between 35 and 55 percent, the highest of all tax rates. Moreover, it is just another way of “soaking the rich” and forcing our most industrious segment of job creators to pay far more than their fair share of taxes. Do away with it and we will all be better off, especially the poor and the working class.

In this essay I will show: a) there is no such thing as a death tax; b) there is an estate tax that is imposed on the inheritors of wealth; c) inheritors do nothing to earn this wealth (except perhaps to choose their parents wisely); d) it is imposed but once in a lifetime and amounts to less than 0.5 percent of the wealth that is inherited even after allowing for deductions; e) it is the lowest real tax rate of all the rates; f) the wealthy are neither more industrious nor greater job creators than all others; and g) we would all be better off if the real tax rates on estates were assessed according to the estate tax schedule. Other than those clarifications, the assertions in the opening paragraph are all correct.

First, there is no such thing as a death tax. There is an estate tax that inheritors are subject to, but only if the net inheritance exceeds $5,340,000. Only the top 1 percent of wealth holders are subject to this tax, but most of them are able to avoid paying a tax altogether on this unearned wealth.

In 2013 tax revenues from the estate tax were $13 billion. Total tax revenues from all sources were $2,905 billion. Divide the first number into the second, multiply by 100, and the result is 0.4475 percent. If we use just the wealth left to inheritors, that rate is 1.3 percent, and it is still the lowest rate. The tax rate shown in the schedule is indeed 35 to 55 percent of inherited wealth after deductions and exemptions, but creative tax lawyers and CPA's have come up with a long list of ingenious ways to defer, exempt, and hide assets to make the real rate that is actually collected way down there at less than 0.5 percent.

If the federal government actually collected the average rate called for in the IRS tax code, the annual amount collected in 2013 would have been approximately $236 billion, or 8.15 percent of total federal revenues, far less than the tax rates on income, capital gains, or on corporations. The lawyers and CPA's were thus able to shield their clients from paying $223 billion in taxes.

Personal wealth is equal to a person's assets minus debts. Assets are major holdings such as stocks, bonds, and real estate. They do not contribute to GDP or to employment. More than 90 percent of GDP and employment are directly related to consumer and government spending. Personal wealth is essentially unproductive wealth that benefits only the holder. Thus we may deduce via probability analysis that the 98 percent of personal wealth held by individuals, that is passed on to others at the rate of 98 percent, means that 96 percent (.98 X .98 = .96) of the wealth pool is both unearned and unproductive. Think about those numbers the next time anyone says that the wealth holders are the job creators.

It takes some nifty detective work to unravel the numbers in this shell game. But any sharp 3rd grader can get the job done with a keen eye and a nose for dishonesty. Here is how I did it (I had to use informed estimates of how many rich folks expired last year):


Tax Data for 2013

$ 13,000,000,000
actual estate tax paid
0.44%
percent of total tax revenues

Estate Tax Estimation

$ 65,000,000,000,000
Wealth held by top 20 percent
$
32,500,000,000,000
Wealth held by top 1 percent
$ 1,083,333,333,333
Wealth left by those who died in top 1 percent
$ 3,120,000 1 percent of our population
$ 104,000
number in top 1 percent who died
$ 557,440,000,000
total of exempt inheritances
$ 525,893,333,333
wealth inherited less exemptions
$ 236,652,000,000
taxes that should have been paid
8.15%
percent of tax revenues that should have been paid

Method. Wealth is calculated as total household assets minus total debts. Those calculations are made by the Federal Reserve and reported quarterly in their Flow of Funds reports. The amounts collected by the federal government are reported in the 2013 U.S. Budget. I estimated that everyone dies but once per lifetime, and at about age 80. They leave their estates to either churches, schools and charities or to individuals. Individuals own 98 percent of all household wealth, while churches, schools, and charities hold 2 percent. Those percentages remain relatively constant over time according to data going back over the past 50 years.

When someone dies he/she leaves 98 percent of his/her wealth to their offspring who are approximately 50 years of age. When those inheritors die 30 years down the road, they also leave 98 percent of their wealth to their offspring, hence the 30-year cycle I estimated that 10 percent of our population are in the 50 to 80 age bracket, and 1 percent of them die every year, or about 104,000 died in 2013. This group held approximately $1 trillion in wealth. If inheritors were able to deduct $5,340,000 each, those deductions would come to $557.44 billion, on which they should have paid 45 percent in federal estate taxes, leaving them with $289,241 billion net for their trouble of having to wait to age 50 to collect their inheritances.

But instead of paying our Uncle Sam his $236.652 billion in taxes, the whole group paid only $13 billion in taxes, thus stiffing Uncle Sam a hefty $223 billion while riding off into the sunset.

What's more they complain to select members of Congress that they don’t want to pay that $13 billion while assuming that neither we nor our collective group of 3rd graders know how to add, subtract, multiply, or divide.

Addendum. The compound growth rate of U.S. wealth during the past 50 years has averaged 7.2 percent per year. At that rate wealth doubles every 10 years. Looking 50 years down the road, ceteris paribus (holding everything else constant), today's wealth held by the top 1 percent will grow to $1.04 quadrillion, and to $2.08 quadrillion for the top 20 percent. Those amounts are 32 times larger than today's holdings. Thus, the country with the most inequality of them all today will see its inequality get 3,100 percent worse in the next 50 years.

Why are NASA scientists, 3rd graders, and I the only ones who see a revolution coming?