Pearls of Wisdom: Does Gary Cohn Even Understand the Estate Tax

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Gary Cohn, the director of the National Economic Council was just on CNBC talking about the necessity of repealing the estate tax.

Mr. Cohn said:

Well, look, we want that farmer to go out and buy the next piece of land, and the next piece of land, and the next piece of land, and create the economies of scale and be able to compete in the world. That makes sense to me. We want the small business to go double the production line and not have to worry about the size of his factory, worrying that, “Oh my God, I may incur estate tax and my family is going to have to sell this business.”

What he apparently does not know is that the estate tax rates are marginal. That means that increasing the value of your business to more than the threshold does NOT mean that your heir could be worse off.

For example if you and your spouse have a business worth $11 million (which is exempt for the estate tax) and through hard work you increase the value to $12 million — your heirs will still pay zero taxes on the first $11 million, and the tax rate is only applied to the $1 million excess. (So the amount your heirs could inherit will go from $11 million to $11.6 million when the value of your estate goes from $11 million to $12 million).

No rational business person or farmer (and Gary Cohn was certainly a rational business person when he was the president of Goldman Sachs) would decide not to increase the value of his business by $1 million because his family would only get $600 thousand.

Maybe a true idealog (like Steve Bannon) would say he wants his kids to inherit less, just because he hates contributing to the common good by paying taxes. But Gary Cohn and Donald Trump are both business people. They aren’t taking an ideologically principled stance, they’re just looking for themselves and their rich friends to save on taxes.

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