Seth's Rant for November 21st, 2002

Who's money is it anyway?

I've been following the ongoing debate about the Estate Tax and have recently had an epiphany. Some people want to repeal the "death tax" citing examples of family farms and businesses that have to be liquidated and destroyed to pay the taxes. Other people say the tax should stand because deductions target it at only really wealthy people and why shouldn't their kids have to pay taxes on newly acquired wealth just like everyone else does?

Typical of any political debate, there's been a lot of rhetoric on both sides, most of which seems aimed at perpetuating rather than resolving the debate. (Remember, politicians get paid to argue, not to solve problems.) Today it occured to me just exactly how both sides have managed to miss (or avoid) the real issue.

As with any income tax debate, it is really about what constitutes income, who earned that income, and when they earned it. With regard to inherited wealth, the real question that never seems to be asked is

Was the wealth originally earned/owned/managed by the individual, or by the family of which the individual was a part?

Historically speaking, I believe that the point of exempting "inherited" wealth was the idea that the wealth belonged not to the individual but to the family as a whole. The title "head of the family" might change, but the family itself remained the same, hence inheritance did not constitute income.

Of course, this is an anachronistic view. Family run enterprises, or cohesive family organization for that matter, are now rather rare. What is needed is a distinction that allows such instances to be fairly exempted.

I therefore suggest a relatively simple solution. At the time of inheritance, only liquid (cash) assets would be taxed as income. Other assets would be tax deferred, much like a Roth IRA, until such time as they are liquidated. As long as the inherited wealth remains in it's original form and is not sold, traded, bartered, or otherwise transferred (except by another inheritance), it isn't taxed. Assets inherited multiple times without liquidation should only be taxed once upon liquidation.

This has several societal benefits. Families with associated organizational structures (like farms or businesses) would not be forced to liquidate/destroy those assets just to pay the taxes. (Remember that many successful businesses, especially farms, have capital assets whose value far exceeds the cash on hand and whose liquidation would mean cessation of the business.) This preserves jobs and overall economic stability. On other other hand, families who just divide up the wealth and go their separate ways would get taxed just like everyone else.

As long as the inherited assets stay in their original form and in posession of the heirs, they aren't taxed. The heirs could vote stock, collect (taxable) dividends, or otherwise run a business, but they could not liquidate the assets without paying taxes. Any sort of conversion, sale, or trade would count as "liquidation" and be subject to income tax.

Over the course of generations, the value of these sequestered assets might grow quite large. But since it must all be invested (in a bank at the very least) and is not being spent on yachts or ice-sculptures, the wealth will be contributing rather than detracting from the good of the overall economy. Any wastrels, spendthrifts, or even speculative investors would have to pay the tax before they could have their fun. But true family assets (businesses, farms, or even homes) could be passed on without disruption.

I doubt our politicians will never implement anything this simple. It would take some of the steam out of their lucrative fund raisers. But that's a rant for another time.

This rant solely reflects the opinion of the author, probably while he was half asleep, drunk, or otherwise incapacitated. It does not necessarily reflect the opinion of his employer, his friends, or possibly the author in a more conscious state. Hate mail will be prosecuted. Constructive criticism may be posted or ignored. Have a nice day.

Seth B. Noble - Rant - - November 21, 2002