"Membership in the family of God is neither inconsequential or something to be casually ignored. The church is God's agenda for the world. Jesus said, "I will build my church, and all the powers of hell will not conquer it." The church is indestructable and will exist for eternity. It will outlive this universe, and so will your role in it."
- Rick Warren
Thursday, June 10, 2010
Dan L. Duncan, a soft-spoken farm boy who started with $10,000 and two propane trucks, and built a network of natural gas processing plants and pipelines that made him the richest person in Houston, died in late March of a brain hemorrhage at 77.
Had his life ended three months earlier, Mr. Duncan’s riches — Forbes magazine estimated his worth at $9 billion, ranking him as the 74th wealthiest in the world — would have been subject to a federal tax of at least 45 percent. If he had lived past Jan. 1, 2011, the rate would be even higher — 55 percent.
Instead, because Congress allowed the tax to lapse for one year and gave all estates a free pass in 2010, Mr. Duncan’s four children and four grandchildren stand to collect billions that in any other year would have gone to the Treasury.
The bonanza in tax savings for Mr. Duncan’s descendants is sure to be unsettling to those who have paid estate taxes on more modest wealth — until Jan. 1 of this year, it applied to any estate valued at more than $3.5 million, taxing only the money exceeding that threshold, or $7 million for a couple’s estate.
The one-year lapse in the estate tax was signed into law by President George W. Bush in 2001, an accounting quirk in his package of tax cuts. Although Democrats pledged to close that gap and reinstate a tax for 2010 when they took control of Congress, they failed to reach an agreement last December.
The Treasury collected more than $25 billion in estate taxes in 2008, the most recent year for which data is available.
OK, so there it is. Super rich guy dies, and due to a loophole, his estate won't pay taxes this year. First time that's ever happened. Now what's your reaction?
A. Hmmmm. That's interesting.Can't believe the Democrats let that one slip by.
B. That's great! Good for his heirs! After all a loophole is just a right they haven't taken from you yet.
C. That's outrageous! That money could have fed the poor or paid for healthcare, and instead this fatcat's money is being passed on to his kids perpetuating American Aristocracy that stay rich and won't let anyone else have a piece of the pie.
Does answer C surprise you? Read on dear friend...
Advocates of the tax say it is unconscionable that Congressional leaders have allowed the richest Americans to reap a new tax break at a time when deficits are soaring and the income gap between wealthy and poor citizens remains near historic levels.
“The ultrawealthy in this country will still be able to pass on enormous wealth to the next generation,” said Chuck Collins, who studies income inequality and has worked with billionaires like Warren E. Buffett and Bill Gates to promote an estate tax. Mr. Collins argues that the tax is a “recycling program for economic opportunity.”
What?!?!?! A recycling program for economic opportunity? Seriously? What is Mr. Collins thinking? That as long as a wealthy person is hoarding money, poor people don't have access to that same money, so when the gazillionaire dies, estate tax is the way that the hoi polloi have a shot at it?
You've got to be kidding me. It's like the image that people who think like that has is like a desert island, where there is a limited supply of food. And one guy has 90% of it, and the rest of us have 10%. And so when he dies, it would be wrong for his son to get all that food. It should be redistributed to the rest of us. (After the jump at the bottom you can read how stingy Mr. Duncan was with his wealth.)
Except that's not how money, the economy or how opportunity works. Because someone else has a lot, does not mean you automatically can't. It's as though Collins thinks that Mr. Duncan had all of his money buried in the back yard somewhere, and now that he's dead, we all want a shot at it.
They are acting like the dwarves, elves and men fighting over the gold stash after Smaug dies in the end of "The Hobbit". Everybody wants what they think is their rightful share of the gold now that the dragon who was hoarding it is dead.
But that's not how money works. Other than pile it under the mountain with a dragon guarding it, or put it in the vaults at Gringott's Goblin Bank, wealthy people can only do one of three things with the their money:
A. Spend it.
B. Invest it.
C. Give it away.
That's it. There are no other choices.
Both of which helps the economy and spreads the wealth around. Why can't people understand that?
Mr. Duncan’s eldest daughter, Randa Duncan Williams, is serving as executor of the estate and is a voting member of the family trust that will now control her father’s interest in Enterprise GP Holdings.
Ms. Williams, who has served as a director and general partner at the family’s energy businesses for years, was deeply involved in her father’s philanthropic efforts and is expected to continue much of that charitable work.
During his life, Mr. Duncan contributed to a wide assortment of wildlife foundations and community institutions like the Houston Zoo and Houston Museum of Science, and an assortment of medical institutions. The various medical centers at Baylor College of Medicine received more than $250 million from Mr. Duncan and his wife, with more than $100 million used to found the Dan L. Duncan Cancer Center.
Mr. Duncan’s will designates a handful of nonprofit groups and charitable foundations that will receive donations, all of which would have been tax-exempt even in years when the estate tax was in effect.
An avid big game hunter — Mr. Duncan has more than 500 entries in the Safari Club International record book for killing animals including polar bears, rhinoceroses, bighorn sheep, lions and elephants — he made a $1 million donation in his will to the Shikar Safari Club International Foundation.
The will also directs that any money or assets not otherwise specified for a relative or charity be deposited into two family charitable trusts, which can be used to donate to causes deemed worthy by his heirs.
Oh, well, OK, maybe he is Smaug the dragon. After all, he is a Texas Billionaire and kills polar bears for fun. If that doesn't fit the Hollywood definition of a villian, I don't know what does. Could be worse, I guess. The only thing that would make him more evil is if he made his money from oil instead of natural gas.
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Comments on "News Bulletin: Rich People Don't Bury Their Money In The Backyard":
2. Dave
- 06/10/2010 2:10 pm CDT
Most people seem to believe that money is a zero sum game. It is a simple, but incorrect, concept that some like to use to advance their political and social agenda. With this mindset, one ends up believing the defeatist notion that economies don't/can't grow, they just shift.
3. Andrew
- 06/10/2010 2:33 pm CDT
Back in the day, Andrew Carnegie argued for a very heavy death tax on estates worth a certain amount (much heavier than 55%). His idea was that there be a baseline (hypothetically, 50 million), and that everything exceeding that should be taxed (at say, 70%). The estate keeps 50 million, plus 30% of everything exceeding that.
I don't know how I feel about death taxes on estates. I'm fairly anti-dynasty. If I'm all about the free-market, individualism, hard work, etc., it's hard for me to look at rich kids in Manhattan sitting on inheritances 5000x what I'm worth, and be happy with it. I want people to be able to spend money the way they wish, but I admit I would have a hard time being angry or sympathetic if a few billion dollars were lopped off the end of a 9 billion dollar estate. I imagine whatever is left will still eclipse the sum total of all the money I've made and am going to make several times over.
In short, while I could make a few arguments from principle against taking a chunk out his estate, I wouldn't lose much sleep either way.
4. Evan
- 06/10/2010 5:40 pm CDT
Like most press stories, this is superficial and doesn't explain the context of what is happening. Although with the average American citizen largely uneducated in business and finance, anything more complex wouldn't get published.
However, I will say this. The end of the estate tax in 2010 is not some loophole or accounting quirk. The Republicans and Bush intentionally tried to kill the estate tax, which they phased in through annual increases in the exclusion and incrementally lower rates each year prior to 2010, culminating in the complete repeal of the tax in 2010.
However, due to political reality at the time, as well as the real accounting gimmick needed to not remove those taxes from future budgets; like most of Bush's other tax cuts, the estate tax cuts also sunset after 2010. Which means we go back to 2000 estate tax rates, which are 100 basis points higher than the 2009 rates, plus drop the annual exclusion from $3.5 million all the way back down to $600,000. At $600,000 there will be several million more people that will be subject to the estate tax, usually just on the basis on their home value and retirement accounts.
And the key thing that this article merely mentions but doesn't explain, is that even eliminating the estate tax doesn't really let people avoid all tax on an inheritance. In fact for some people, it will actually mean higher taxes, as the inherited assets do not receive a step up to current value, and therefore become subject to capital gains tax rather than the estate tax. Now it is true that the estate tax has throughout history been higher than the capital gains tax, but there are ways you can avoid the estate tax (life insurance being the most prominent) that you can't use for avoiding capital gains taxes.
And in response to Jonathan's otherwise reasonable points in #1, I would say that I fear far less the power of a few family dynasties with a few billion in wealth passed down to future generations, than a massive central government with the unlimited power to tax and spend (trillions) absorbing those extra billions and further cementing it as the sole source of power in the country.
5. Dave
- 06/10/2010 7:28 pm CDT
Yes. Who decides who "should" get the money and who "shouldn't?" And why "should" the government get it? If influence is directly tied to wealth, then should we automatically move more wealth toward a government that has clearly whacked out? Carnegie gave away most of his money himself during his retirement, around 350 million. The final 30 million was willed away at his death. It was part of his personal agenda for his own money. -- Of course the government wants the money. Who wouldn't. The core issue is how we respect ownership and handle things in a free society.
6. Bill
- 06/10/2010 7:56 pm CDT
Two things:
1) I don't understand why dying gives the government a shot at the dying persons money. It doesn't matter (to me, at least) if his or her descendants are stellar citizens or ne'er-do-wells. And it doesn't matter (to me at least) whether it's a lot of money or a little. To most people in the world, I'm very wealthy. To most of you who live in America, I'm middle class and drive ten year old cars. It's all relative.
I find the whole topic distasteful. It's too close to envy: "That old geezer was a billionaire and his kids obviously don't deserve to keep all of his money" - who's business is it anyway?
I'm sure there's a rationale of some sort behind estate taxes. Someone can explain it to me and if it makes sense I'll admit I'm wrong.
2) Evan, you are sure you don't have a blog?
8. Jonathan W.
- 06/10/2010 8:08 pm CDT
Regarding your last point, Evan, which is a reasonable enough concern: With the federal budget deficit for FY2009 at $1.42 trillion -- and with federal budget creep largely independent of tax rates (see below) -- I don't think we can assume that reinstating estate taxes, or adopting other forms of more progressive taxation, will necessarily do anything to increase the power of the federal government. We're already spending the money, having determined to fight two wars, expand the social safety net, and curb a recession. Since we're spending, it would be better to spend money we have now than to spend the money+interest of our descendants.
G.W. Bush budgets grew steadily from $2.0 trillion in 2002 to $3.1 trillion in 2009 despite significant cuts in top marginal tax rates. Conversely, the top marginal tax rates in the 1950s were around 90 percent -- and federal spending as a percentage of GDP was only around 17-20 percent, as opposed to roughly 25 percent now.
Dave, I have a fairly simple response. The government "'should' get the money" for the same reasons any government should get any money. It's a government. It requires revenue to operate, no matter what its operations are. The options are (a) a government that gets money or (b) no government. Assuming we're going to have any government at all, then we're going to have to tax somebody. So what are our options regarding whom to tax, and how much?
To me, it makes more sense to tax those with great wealth at a higher rate than those with little. For wealthy Jane Smith, being taxed 50 percent of a billion dollars still leaves her a cool $500 million; for poor Jane Jones, being taxed 15 rather than 10 percent of $15,000 could easily be the difference between taking her children to the dentist and not being able to. It's just reasonable to get the money from people who can afford it, and the prospect of $500 million rather than $1 billion is still plenty of incentive for most sane wealthy people to be entrepreneurial and create new jobs.
In the case of estate taxes, it's even simpler. The heirs of a great estate haven't earned that estate. It's not their work; it's not their insight; it's not their risk-taking that created or accumulated that wealth. In fact, the wage workers on the factory floor have a greater title to it than they have, since the wage workers actually contributed to the making of the fortune, and the heirs didn't.
There's a lot of philosophical writing regarding the right to property, actually. Most thinkers, including the philosophers most familiar to the American Founders, believe that the right to private property is ultimately founded in a person's right to enjoy and manage the fruits of his own labor. For example, if I plow a piece of land, plant corn on it, and harvest the corn, it would be wrong for other people to rob me of my corn or the land I have developed. But otherwise, I have no particular claim to that piece of land; God gave it to humanity, not to me. If I'm not using that piece of land, then other people have a right to use it and derive property from it. Our economy is now much more complicated than that; we have to consider forms of abstract wealth that are harder to trace to particular people. (If I start a factory, but 1,000 line workers each do as much labor as I do to make it succeed, who has the moral right to enjoy most of the profits?) But the basic principle seems to me to hold true: private wealth is supposed to be earned, not simply received.
9. Bill
- 06/10/2010 8:56 pm CDT
Jonathan
A few points:
To me, it makes more sense to tax those with great wealth at a higher rate than those with little.
I agree. I would add (in answer to your next point) that everyone should pay something if they have any earnings at all. Even if only 1% (I'm not counting FICA and Medicare here - I mean just regular income taxes).
For wealthy Jane Smith, being taxed 50 percent of a billion dollars still leaves her a cool $500 million; for poor Jane Jones, being taxed 15 rather than 10 percent of $15,000 could easily be the difference between taking her children to the dentist and not being able to. It's just reasonable to get the money from people who can afford it, and the prospect of $500 million rather than $1 billion is still plenty of incentive for most sane wealthy people to be entrepreneurial and create new jobs.
A few points. Keep in mind that I don't completely disagree with you.
First, as you know, the poor person who earns 15K isn't paying any income taxes. This is where my earlier point would kick in. Everyone should pay something.
Secondly - I agree that rich people should have a higher tax bracket. And maybe the 50s prove me wrong, but that's beside the point I'm about to make: If someone is an entrepreneur and they are taxed at, say, 80%, they will have 30% less money to invest with, buy things, etc, than if they are taxed at 50%. In your example, Jane may only build a company that hires 1,000 people than one that hires 2,000 people.
I'm not saying there shouldn't be a progressive tax rate. But I think we have to realize that higher taxes on people who create jobs will have an effect on how many jobs are created.
In the case of estate taxes, it's even simpler. The heirs of a great estate haven't earned that estate. It's not their work; it's not their insight; it's not their risk-taking that created or accumulated that wealth. In fact, the wage workers on the factory floor have a greater title to it than they have, since the wage workers actually contributed to the making of the fortune, and the heirs didn't.
How do you know this? What if it was a family business? What if the kids worked every day after school for Dad since they were in sixth grade?
I'm not sure if you have kids - I'm a dad and want my kids to be gainfully employed, launched out in the world, etc. But I also want to leave them and my better half what I have left when I pass away. (I actually don't know how high you have to go to qualify for the estate tax - I'm middle class, so this may be moot, but bear with me): If I, as a dad, didn't believe my kids deserved the money I earned, I can control that in my will.
Of course Governments need money, although for a lot of our history we didn't have an income tax.
Of course I'm glad to pay my taxes as a citizen of this country. But I think money earned by a family - which has already been taxed once - should stay in the family.
10. Jonathan W.
- 06/10/2010 9:44 pm CDT
I would add (in answer to your next point) that everyone should pay something if they have any earnings at all.
And I would agree with that. I suppose there might be situations where defining "earnings" would get tricky, but in principle, I agree completely. It's important that no one is excluded from the general public responsibility for the government.
What if it was a family business? What if the kids worked every day after school for Dad since they were in sixth grade?
In the case of a family business -- even a large one -- that genuinely involves the rest of the family, it seems to me that there should be a relatively straightforward way to assign a form of joint proprietorship or stock ownership that will protect everyone who was actually involved in building up the firm. (After all, when a majority stockholder in a public corporation like, say, Starbucks dies, that doesn't mean all the other stockholders lose their stakes.) The specific mechanism would, of course, be Byzantine and infuriating, but every tax scheme ends up being that way for somebody.
I don't think anyone is arguing that bequests should be entirely confiscated. That would be impractical and, in fact, unjust in most cases. The heirs of the deceased should be able to establish their independence after his or her death (to put this in the terms the Founders would have used, everybody should possess a "competency"). But many of the kinds of estates we're talking about make their owners independently wealthy, not independent.
I don't think there's any perfectly fair formula or rule. Property and tax laws have never been entirely fair. But we can't just assume that the right of possession is absolute; we gave that up when we started having governments at all. So it's reasonable to look for ways to make our social system more just, knowing that there's no panacea.
11. Bill
- 06/10/2010 9:55 pm CDT
So it's reasonable to look for ways to make our social system more just
Well, there's the issue, isn't it? No one agrees on what "just" means. :-)
Back to your original estate tax point - it's a good illustration of the different ways people think. Your assertion that heirs "don't deserve the money" was baffling to me. I'm not saying your wrong, but it's a completely different way of thinking (and a bit of large generalization, I'd say). Probably because I'd trust Warren Buffet to do more good with $1B of his money than I'd trust the Government.
13. Bill
- 06/10/2010 10:23 pm CDT
According to Wikipedia, Warren Buffet favors the estate tax.
Ha ha!
I also heard that he's already given his kids their money - when he passes he is going to give the remaining money away. It's his choice, which I think is cool.
14. Quaid
- 06/10/2010 10:42 pm CDT
Something else this article doesn't address is the moral implications of the tax code reverting back to the tax on January 1. (We have an estate lawyer in our small group and he brought this problem up a few weeks ago - we talk about everything in small group)
Moral Dilemma: Let's say that Great-Uncle Joe has a hundred thou in the bank and he goes braindead on Dec. 28. If he dies by midnight, Dec 31, he owes no estate tax. If he dies at 12:01, the amount owed jumps incredibly high. Does the family pull the plug (kill Great Uncle-Joe) to get more money? Is it wrong if they do?
What if Great-Uncle Joe learns he has three months to live on November 15 and wants his kiddos taken care of? Does he find Dr. Kevorkian and end it early or live life out?
Aside from how one feels about the death tax, it wouldn't be surprising to see a few more deaths than average the last week of this year for the sake of avoiding the IRS.
15. Karl
- 06/11/2010 10:32 am CDT
Estate planning is a big part of my practice. This guy isn't the first person to die in 2010 with an estate that would have been taxable last year (or in any year previous, since imposition of the estate tax). But he's by far the wealthiest.
It will be interesting to watch what congress does about this situation.
The Republicans would like to see the federal estate tax done away with completely, or (since that is highly unlikely to happen) at least have a very high exemption amount (aka the unified credit equivalent) in at least the $5 million range. The democrats would like to see a federal estate with a relatively low exemption amount (the exemption amount = the amount any one person can pass tax-free at death, before imposition of the federal estate tax).
When I started practice back in the 90's, the exemption amount was $600,000. The current law, passed by a republican congress, bumped it up gradually over time to $1 million, $1.5 million, $2.0 Million on up to the $3.5 million exemption that existed in 2009. Initially we expected congress would NEVER allow the estate tax to go away entirely in 2010 and would address the situation before that happened. But maybe a democratically-controlled congress sees one year of no estate tax as a worthwhile tradeoff for allowing the republican-passed law to continue to take its course, in which case the estate tax will be revived on January 1, 2011, with an exemption amount of $1 million and will result in many, many more estates being subject to the federal estate tax - and the current congress by doing nothing can achieve a lower federal exemption amount than they would ever have been able to pass in 2009 or 2010 without huge political fallout (cutting the exemption amount from $3.5 million to $1 million), and rather than take the heat themselves, they can point the finger at the republicans who passed the law.
16. Dave
- 06/11/2010 10:49 am CDT
Everyone understands that any government needs funds to operate. But anyone who thinks our government doesn't have enough of our money has a lot of explaining to do. There are many institutions in our society besides the government, and many of them are robbed of their ability to do what they should because the government has money that it shouldn't to try and do what it shouldn't. Our wealth has been monopolized by a central institution that has shown itself incapable again and again of handling what it has in an effective manner. No existing business or church or non profit would still be in existence if it had the same track record that the government does.
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This is going to be long .... For me, the problem is not just that people inherit a lot of money. It's that inheriting a lot of money means inheriting a lot of power.
Private spending or investment on a $9 billion fortune gives enormous influence to the people holding that fortune. Nine billion dollars is approximately the size of the 2006 state government expenditures of Alaska, Hawaii, or West Virginia; it is larger than the 2006 state government expenditures of Delaware, Idaho, Maine, Montana, Nebraska, New Hampshire, North Dakota, Rhode Island, South Dakota, Vermont, or Wyoming. (PDF source)
The power to spend or invest that kind of money is the power to shape a society to reflect one's own will. Any advocacy organization the heirs decide to patronize -- Planned Parenthood or Greenpeace, for example -- will get an enormous infusion of power without any public discussion. (Consider the career of George Soros as an example of the political power that comes with wealth.) Any company the heirs decide to establish will have an enormous and immediate advantage over smaller companies that their founders actually had to work to build. Any political candidate or cause the heirs decide to back will have an immediate advantage over one without the support of billionaires. (Many families have passed down political and social power over the generations -- even over centuries, in the case of leading New England families -- because they have passed down wealth. Prominent examples include the Kennedys, the Rockefellers, or the Bushes.)
The person who actually builds up a fortune through honest economic activity can, in most cases, be expected to care for that fortune and to recognize that it came as a result of cooperation with other people in the marketplace. This provides a small but important check on the corrupting influence of that kind of power. This, however, does not necessarily apply to heirs. Heirs may be perfectly responsible members of society. But they may also be Paris Hilton or Ivanka Trump. (I recommend the 2003 documentary Born Rich, in which the 20-year-old Johnson & Johnson heir interviewed other young billionaires in an effort to come to grips with the temptations they struggled with as a result of growing up with absolutely no need to work.) Furthermore, although the person who builds up a fortune through honest activity has a moral claim on it as the produce of her labor, her heirs do not. They are acquiring a fortune they did nothing special to earn.
Besides this conservative anti-power argument, consider another thoroughly conservative argument: The less tax money that comes from the inheritances of people who haven't earned their wealth, the more tax money will have to come from working people like you and me, who have.
By the way, the idea that inheritance is not a natural right is an old idea in America. Thomas Jefferson, for one, held that the deceased person's property belongs to society in general, according to this famous letter to James Madison in 1789: