Today the Senate Finance Committee will hold a hearing on the death tax entitled, “Federal Estate Tax: Uncertainty in Planning under Current Law.” Well, that title certainly serves to both understate the absurdity of current law and the culpability of Congress for causing that uncertainty.
Some history: Back in 2001, Congress passed the first of what came to be known as the Bush tax cuts. Among other things, this bill “killed the death tax,” albeit slowly, by December 31, 2010. Due to arcane Senate budget rules that would have required 60 votes to waive (then-minority leader Tom Daschle was in no mood to accommodate this), prior law reasserts itself one day later, on New Years Day 2011.
In the case of the death tax, this “prior law” reassertion is enough to give you whiplash. Someone who dies in December 2010 will pay no death tax at all. Someone who dies just a month later in January 2011 faces a death tax with a top rate as high as 55 percent. Sammy Hagar may not be able to drive 55, but the tax code sure as heck can.
Waiting in the wings is Warren Buffett. At first blush, you might expect “the Oracle of Omaha” to be a big proponent of death-tax repeal. The CEO of Berkshire Hathaway is the third-richest person in the world (according to Forbes magazine) and is worth about $52 billion. Yet Buffett is one of the biggest proponents of the death tax. He’s testifying before the Senate Finance Committee today, where we will no doubt hear of his concern for other people’s accumulated wealth. But don’t be fooled. Buffett advocates the death tax because it has been so very good to him over the years.
To fully understand the depth of Buffett’s cynicism and self-interest, let’s take a look at how one might avoid paying the death tax. If you’re a wealthy person and want to steer clear of this tax, you have three options: Set up complicated trust arrangements, which mostly serve to enrich lawyers and merely delay and shift a tax that must eventually be paid; arrange for your estate to make tax-deductible contributions to charitable organizations; or plow your wealth into life insurance before you die. By law, when your heirs are paid the life-insurance disbursement, it’s tax-free.
It doesn’t take a genius to see how certain industries could make a tidy profit off these death-tax escape hatches. In fact, some of the most ardent opponents of permanent death-tax repeal are (surprise, surprise) estate lawyers (who set up the trusts), charities (who fear their spigots of money turning off), and the life-insurance lobby (which does all it can to preserve its tax loopholes).
Buffett has major investments in companies that sell life insurance. The death tax has helped make him rich while it has made other families poor. What’s sad and ironic is that it takes families with the resources of the Buffetts (and the Hiltons and the Kardashians) to set up the trusts and life-insurance schemes that are necessary to avoid paying the death tax.
And who ends up paying? Let’s say a farmer has worked the fields all his life and dies. He’s land-rich, thanks to the exurb that popped up next door, and his “estate” is worth several million dollars. But his kids are given a tax bill for a couple hundred grand. What would you do? Like millions of others, you’d sell the farm (and all the memories) just to pay the tax bill.
All the while, the lawyers, charities, and life-insurance salesmen leech off the family farms and small businesses that are faced with this situation.
The “Oracle of Omaha’s” wealth has come from making wise investments in three different business activities. First, he’s made substantial investments in major corporations that he believes will appreciate; second, he operates a huge casualty and life insurance business which provides massive reserves of cheap capital to support his other two investing activities; and third, he purchases family owned businesses at fire sale prices. The last two practices are directly dependent on the death tax, and it’s unlikely that Mr. Buffett would be the world’s second richest man without it.
Buffett has a conflict of interest. If the death tax goes away for good, so does much of Buffett’s wealth. He’s doing everything he can to make sure the death tax comes back in full force. It’s wrong, and somebody on the Senate Finance Committee needs to grill him about it.