Warren Buffett’s huge gift-giving plan is making him the focal point of the nation’s estate taxAn estate tax is imposed on the net value of an individual’s taxable estate, after any exclusions or credits, at the time of death. The tax is paid by the estate itself before assets are distributed to heirs. debate. While announcing a multi-year gift of roughly $44 billion in stock to foundations run by his children and Bill Gates, Buffett has continued his campaign to prevent Congress from repealing the estate taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. .
His reasons for favoring estate taxation usually include the undesirability of inherited wealth and the virtue of higher tax payments.
Let’s briefly examine how the end-of-life decisions by wealthy people would affect tax revenue if the estate tax were totally repealed. We’ll assume two possibilities: a wealthy person dies and leaves everything to charity, or he dies and leaves everything to his children.
At first glance, without an estate tax, it would seem that the tax collector wouldn’t care – either way, no big check will be arriving at the IRS or at the state revenue department. But the tax collector should care because it affects the government’s bottom line quite a bit.
If all the money goes to charity, that money is tax-exempt forever, and all the money earned by that money is tax-exempt, and most of the purchases made with that money will be exempt from sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. .
But if that money passes to an heir, all those downstream revenues will be taxed. Returning quickly to Buffett, let’s say he changed his will and left $44 billion to his children personally, not to the foundations they run. And let’s say he died in 2010 when the estate tax is currently scheduled to be totally repealed. That $44 billion would escape estate taxation, but it would generate a lot of taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. for his children.
If $44 billion were invested in 2011 and generated a 7% return, that’s over $3 billion in income. Most of it would be taxed at the top rate, which is scheduled to be 39.6% in 2011. That’s well over a billion dollars in tax revenue every year. Within 20 years, if that huge fortune stayed in private, taxable hands, it would generate more income tax revenue than even the world’s second-highest estate tax (U.S.) could collect.
See the paper on the curious revenue-losing aspects of estate taxation by Tax Foundation’s former executive director and chief economist, J.D. Foster, Ph.D.
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