Why the rich love the death tax.

On November 14th, 2007, according to CNN, Warren Buffett (3rd richest man in the world) testified before the United States Congress in support of the so called Death Tax. He was speaking in support of reinstating the full inheritance tax, which at death, taxes the estate at the rate of up to 55%. Apparently George Soros, and hundreds of other multi-millionaires and billionaires also support reinstatement of the inheritance tax.

Why would all these millionaires and billionaires be in favor of such a tax - it's simple - because it benefits them.

When you listen to all those rich folk asking for higher taxes - they are asking for higher taxes for you, not for themselves. They love this tax for 3 reasons:
a) they do not pay the tax themselves
b) it keeps the competition down
c) they make cold hard cash from the tax

First reason: Rich do not pay the inheritance tax. What do you think all those charitable family foundations and trusts are for? They allow the rich to pass control of their wealth to future generations without paying taxes. Yes, technically those assets are no longer theirs - they belong to the foundation or a trust - but whose children do you think will control those foundations? As Robert Kiyosaki is fond of saying - " I want to own nothing, but control everything". If you got to run the Bill and Melinda Gates foundation - with its tens of billions of dollars - do you think you would do OK financially? And the assets in the foundation will grow tax free - while the working stiff (you and I) has to cough up taxes every time he gets a paycheck.

Second reason: Inheritance tax keeps the competition down. Nobody likes competition. Competition for being rich is fierce. If you want your family to stay on top of the heap, or at least close to the top, you gotta stop others from getting too rich. Now, obviously now and then, you will get someone who in a single lifetime will acquire a billion or two - that's unavoidable. But you don't want tens of thousands of millionaires having children who will inherit and expand this wealth to tens of millions, and grandchildren who will turn it into hundreds of millions - that's direct competition to the current multi-millionaires and billionaires. In the olden days, you would just send a bunch of soldiers to kill off the upstarts. Today societies frown on such adventures. So why not use the power of the government to strip all those children and grandchildren of the money - most first time millionaires don't know about foundations or proper tax planning - it's the "old money" that knows all the tricks. So you go to Congress and ask for higher taxes - "for the benefit of the poor", of course.

Third reason: Rich make money thanks to the inheritance taxes. As we mentioned before, most of the first generation millionaires do not do proper tax planning. Many are not even aware of the existence of inheritance tax. Imagine following scenario - Dad had a knack for business, built it up to about 20 million dollars. Sadly, he worked himself to death. Kids get together with the accountants, only to find out that having inherited 20 million dollar business, they owe 11 million dollars (55% of the value of the estate) in taxes. IRS does not like to wait for its money. The only solution is to sell the business. Guess what - here is someone like Warren Buffett - someone with deep pockets, all willing and ready to buy the business - at a suitable discount from the true value, of course. Remember, the heirs are in weak negotiating position, since IRS is after them, and everybody knows it. All because of the inheritance tax - if it weren't for the inheritance tax, they would never have to sell the business in the first place.

Now, for the record, we have not checked if Warren Buffett or his company ever bought a business from distraught heirs - maybe he never did. But even if he never did, he still benefits. How? Because such forced, low value sales lower the value of all small businesses. Warren Buffett's company buys many businesses outright. Just like house values will be depressed by having multiple foreclosure sales in the neighborhood, so small business values are depressed when many businesses have to be sold to pay taxes.

And that's the long and short of why the rich love the inheritance tax. Remember - "Taxes are never levied for the benefit of the taxed."




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