Happy Tax Day!: The Return of the Death Tax

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Stan Collender notifies CNBC that the US doesn't tax death.  Though, it might be better if we did; it's the one thing we indisputably could use less of.

It's pretty surprising to see CNBC use that phrasing.  It obscures, rather than clarifies the tax incidence, and it's pretty clearly a political choice.  We tax estates. Estates used to belong to dead people.  But we're not taxing death; we're recognizing that when someone inherits, they're experiencing a material gain.  There's no reason that that sort of income should be exempt from tax.  So we tax the estate.

Now, in my opinion, we ought to tax the assets as income to the recipients.  A $10 million estate divided among 20 grandchildren gets taxed more heavily than a $1 million estate going to one child, even though that child is thereby made much better off than the grandchildren.

But that leads to the prospect of kids having to sell grandmother's engagement ring in order to pay the tax, and so instead we have a more inefficient, less progressive tax* that allows people to shield a very generous level of benefits from the tax man.  You could solve that problem by making people pay the tax when they sell the asset, but most people would, in practice, evade this, because the IRS is not going to come by asking you for the whereabouts of the ring.  On the other hand, that would leave us about where we are, with a generous practical examption, better progressivity, and greater efficiency.  In an imperfect world, I expect that's about the best we're going to do.


*  Middling estates actually pay a higher effective rate than really large ones, because they can't structure around the tax

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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