by Sheldon Richman
Sheldon Richman is the editor of The Freeman and In brief.
Back when Americans were arguing over whether they should trade the Articles of Confederation for the newly drafted Constitution, the people called Antifederalists (the real Federalists, that is) warned that a complicated centralized political structure would obscure what the government does and expose the people's liberties to usurpation. Simplicity and transparency, they said, were bulwarks of freedom.
I was reminded of that when I read this Washington Post article last Tuesday by business columnist Allan Sloan. The upshot of his column is that among people who expect to inherit property, those he calls the small rich would be worse off if the estate tax were repealed permanently in 2010 than if the 2009 tax rules remained in effect. How can that be? (A move to repeal the estate tax was killed by a Senate filibuster last week. See my analysis.) Here's how Sloan explains it:
Under the 2009 rules, estates of up to $3.5 million ($7 million for a married couple) would be exempt from federal estate tax. The tax rate on assets above that level would be 45 percent. Inheritors would be able to step up the basis of $3.5 million (or $7 million) of inherited assets to their value the day they inherit them. Fast-forward to 2010, when the estate tax is repealed. Yes, the estate tax would be gone. But heirs would be able to step up only $1.3 million in assets to their value on the day of death. (Don't ask why; that's just how it is.)Assets beyond $1.3 million would be valued for tax purposes at carry-over basis — their cost (for income-tax purposes) for the person who died. So any estate with $1.3 million to $3.5 million in assets ($2.6 million to $7 million for a married couple) is worse off under full repeal in 2010 than it would be in 2009. Inheritors in the $1.3 million-to-$3.5 million range would face higher taxes if they sold inherited assets than they would under the 2009 rules. At the very least, they would have complicated paperwork to deal with. They'd be much better off inheriting in 2009 than in 2010. But if you're dealing with an estate of $3.5 billion rather than $3.5 million, you'd be far better off inheriting in 2010. [Emphasis added.]
Yes, that is complicated; the eyes glaze over — which is my point. The tax rules are so opaque that only someone intimately familiar with the labyrinthine code could say if any given person would benefit or suffer from the repeal of a particular tax. Few taxpayers have the time to acquire that kind of knowledge or the resources to hire a tax expert to guide them through the hazardous maze. Besides, the experts themselves rarely agree.
An Outrage
Here, in what Mencken called the land of the theoretically free, this is outrageous. There are many sound economic (not to mention moral) arguments that can be made against any particular tax. But surely one of the most damning indictments is that the tax code as a whole leaves the taxpayer in the dark about how he might minimize his personal governmental burden. How is a person to arrange his financial affairs if before he knows the effect of a change in one tax, he has to know how that change will effect all the other taxes he is subject to?
This hair-raising complexity creates such a shroud around the machinery of state that the average citizen is hopelessly vulnerable to the special interests and their friendly tax-code writers — the group that the great classical liberal John Bright called the tax-eaters. What chance do the tax-producers have? And we wonder why government grows.
This malignant process is captured in Charlotte Twight's inestimable book Dependent on D.C.: The Rise of Federal Control over the Lives of Ordinary Americans. If you want to know how the federal government has gotten away with all that it has gotten away over two centuries, you should read this book. You will learn in detail how, through misdirection, smokescreens, misleading rhetoric, dishonest bill titles, and complexity, the feds have expanded their power at our expense, both financially and in terms of lost freedom.
In 1787 the Antifederalist Samuel Bryan, writing under the penname Centinel, rebutted James Madison's argument in Federalist 10 and 51 that the new government to be established by the Constitution would have sufficient checks and balances among the branches to safeguard liberty. Bryan wasn't buying it. He wrote:
The highest responsibility is to be attained, in a simple structure of government, for the great body of the people never steadily attend to the operations of government, and for want of due information are liable to be imposed on. If you complicate the plan by various orders, the people will be perplexed and divided in their sentiments about the source of abuses or misconduct, some will impute it to the senate, others to the house of representatives, and so on, that the interposition of the people may be rendered imperfect or perhaps wholly abortive.
With hindsight at least, we may want to conclude that Bryan was right and Madison was wrong.