How Does the Estate Tax Work? George Soros & Bill Gates, Sr. on Financial Reform (2003)

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The estate tax in the United States is a tax imposed on the transfer of the "taxable estate" of a deceased person, whether such property is transferred via a will, according to the state laws of intestacy or otherwise made as an incident of the death of the owner, such as a transfer of property from an intestate estate or trust, or the payment of certain life insurance benefits or financial account sums to beneficiaries. The estate tax is one part of the Unified Gift and Estate Tax system in the United States. The other part of the system, the gift tax, imposes a tax on transfers of property during a person's life; the gift tax prevents avoidance of the estate tax should a person want to give away his/her estate. In addition to the federal government, many states also impose an estate tax, with the state version called either an estate tax or an inheritance tax. Opponents of the estate tax call it the "death tax".[1] If an asset is left to a spouse or a Federally recognized charity, the tax usually does not apply. In addition, up to $5,250,000[2] can be given by an individual, before and/or upon their death, without incurring federal gift or estate taxes. In the 2006 documentary, The One Percent, Robert Reich commented, "If we continue to reduce the estate tax on the schedule we now have, it means that we are going to have the children of the wealthiest people in this country owning more and more of the assets of this country, and their children as well.... It's unfair; it's unjust; it's absurd." Proponents further argue that the economic impact of an estate tax should be less disruptive than other types of taxes which directly target economic activity. To lower taxes on earned income while raising taxes on inheritance, for instance, would provide a greater net return on time and effort spent working (excepting, perhaps, instances where the primary motive to work is to pass on wealth and the estate tax is very high). To the extent that an estate tax also increases the incentive to give to charity, rather than to pass wealth to individuals, this is also seen by proponents[citation needed] of the estate tax as a reason to favor it over other taxes. In response to the concern that the estate tax interferes with a middle-class families' ability to pass on wealth, proponents point out that the estate tax currently affects only estates of considerable size (over $5 million USD, and $10 million USD for couples) and provides numerous credits (including the unified credit) that allow a significant portion of even large estates to escape taxation. Proponents note that abolishing the estate tax will result in tens of billions of dollars being lost annually from the federal budget.[35] Proponents of the estate tax argue that it serves to prevent the perpetuation of wealth, free of tax, in wealthy families and that it is necessary to a system of progressive taxation.[36] Supporters argue that many large fortunes do not represent taxed income or savings, that wealth is not being taxed but merely the transfer of that wealth, and that many large fortunes represent unrealized capital gains which (because of a step up in basis at the time of death) will never be taxed as capital gains under the federal income tax.[37] Moreover, some argue that allowing the rich to bequeath unlimited wealth on future generations will disincentivize hard work in those future generations.[35] Winston Churchill argued that estate taxes are "a certain corrective against the development of a race of idle rich". This issue has been referred to as the "Carnegie effect," for Andrew Carnegie. Carnegie once commented, "The parent who leaves his son enormous wealth generally deadens the talents and energies of the son, and tempts him to lead a less useful and less worthy life than he otherwise would'." Research suggests that the more wealth that older people inherit, the more likely they are to leave the labor market.[38] A 2004 report by the Congressional Budget Office found that eliminating the estate tax would reduce charitable giving by 6--12 percent.[39] Proponents of the estate tax tend to object to characterizations it operates as a double or triple taxation. They point out many of the earnings subject to estate tax were never taxed because they were "unrealized" gains.[37] Others note double and triple taxation is common (through income, property, and sales taxes, for instance) or argue the estate tax should be seen as a single tax on the inheritors of large estates. Proponents consider this argument, like reference to the tax as a "death tax" and claims about the loss of family farms, to be a disingenuous attempt to cloud the issue by individuals wanting to bestow unlimited advantages on their offspring without regard for broader social vitality. http://en.wikipedia.org/wiki/Estate_tax_in_the_United_States