Estate Tax and Double Taxation: Really?

A common argument against the estate tax is that it is unfair because it results in taxes on the wealth you have already paid taxes on – commonly referred to as double taxation. In theory, this can be true, particularly if wealth was acquired through cash wages - but with the estate tax rules currently exempting more than $5.5M of wealth from taxation, very few individuals acquire and save more than $5.5M of their cash earnings over their lifetime.

Instead, most people owing estate taxes do so because of the value of stock and other property they own at the time of their death. Take Jeff Bezos for example. He recently became not just the world’s richest man, but the wealthiest man ever in the history of the world with a net worth estimated to exceed $100 billion.

The vast majority of this wealth is in the form of Amazon stock, the company which he founded and built in an organization that has transformed electronic commerce throughout the world. As the company’s founder, he acquired this stock for little or no money. Instead, he was granted those shares at the time Amazon was formed and then went public.

Under most tax systems, including the US’s, a taxpayer does not pay income tax until a realization event occurs. Without getting too complicated, a realization event is usually the sale of the property (shares in this case) for cash.

Therefore, Mr. Bezos’ has avoided paying taxes on the vast majority of his wealth. If the estate tax did not exist, he would be able to transfer this $100 billion estate to whoever he wanted and have (legally) avoided ever paying taxes on it.

In no way do I begrudge Mr. Bezos' success. He is entitled to every penny of wealth he's created because Amazon has transformed the world. Mr. Bezos should be rewarded for his vision and leadership. But at the same time he shouldn't be able to avoid taxes forever, just because he acquired his wealth by forming companies, rather than a weekly paycheck. 

There are many problems with the estate tax, but it also serves a purpose as ensuring that some tax is paid when massive amounts of wealth are accumulated.