Let's Tax The Rich!!!

[Westernskies]

Don't have time to look it up now but as I recall revenue from estate taxes is small. Estate taxes aren't revenue generators so much as "get even" taxes where the non-payers feel better seeing the "rich" dole out chunks of their residual wealth at death.

It's the last chance the feds get for their pound of flesh before the body is carted away...

 

[sheehs1]

Mathblaster....the only point I was trying to make...and I think the post was way back in this thread.....is that in some cases the $250,000 tax the rich level would actually hit families where both spouses work in some areas of the nursing profession or in other professional capacities....that don't necessarily equate to them being wealthy or even "income rich". More to the point was ....my point was the $250,000 income level was too low because it would catch these up and comers in the middle or upper middle class. When I stated "nurses" as being one of these professions in my original post...I was not talking about the LPN or RN right out of college and I was not ruling out Nursing Practicioners or Physicians Assistants either...both of which I call "middle class or upper middle class professions. I have long thought the "Tax the Rich" level should be higher. Texas proud disagreed about the salaries in the nursing profession...so I posted some.
But hey...it's just my opinion.

 

[traineeinvestor]

Only 50% of tax return filers pay income tax, and the lowest strata may not even file.

So how could you cut taxes for these people who pay no tax anyway? In fact, many of them get payments. We have a situation where 50% of the population is all for raising taxes, since they will never pay them. And the another large % is all for raising taxes, as they work for governments and will get more in salary and benefits than they will ever pay in increased taxes.

If you earn good money, and are not a government worker, best to emigrate because the die is cast for us here in the land of the free.

Ha

+1

And within the 50% who actually pay taxes, the majority of them won't be affected by tax increases for high income earners as they pay relatively little.

Most of us are very good at wanting someone else to bear the burden.

Higher taxes won't fix anything on their own - spending needs to be addressed as well.

I'm happy to say that after I FIRE I will cease to be a US tax payer (except to the extent that I voluntarily invest in the US and get stung with withholding taxes).

 

[youbet]

sheehs1, I agree with you. It seems strange that the administration wants to put a relatively low level professional couple, such as a dentist married to a teacher, making just over $250k total family income in the same marginal tax bracket as Bill and Melinda Gates. It seems like there should be some additional brackets in there.

 

[sheehs1]

+1 youbet...exactly right and exactly my point. Neither are they the Wall Street rich or the legal partner rich...etc..etc..

BTW...I've tried to use the quote button ....many times....but for some reason it doesn't like me or I'm message board illiterate.

 

[clifp]

Just curious, since you seem to be in favor of the estate tax, why did you choose such a gentle tax level? I would have thought you would have gone for something closer to 100%. You die and will $3 mil to your fortunate nephew. After taxes, the gov't gets the $3 mil and distributes it to the less fortunate through the usual outlets. Your nephew gets a certificate of appreciation. Everyone's happy!

I didn't chose the rate, Congress did at 35% after the 5 million exemption. (I thought the exemption was 3.5 million). Hence the reduction of $3 million to $2 million to pay for the $1 million in estate taxes. I guess I'll leave the first $5 million to my cats...

Historically estate taxes have been between 1-2% of the budget and the CBO is estimating 1.2% going forward. Which doesn't sound like a lot but was $28.8 billion in 2008 which makes somewhat less than foreign aid expenditures and considerably more than NASA $18 billion.

Personally, I'd rather have an estate tax than eliminate either NASA or Foreign Aid. Although, if I was king I keep the estate tax, outsource/privatize NASA, and slash the foreign aid and apply the revenue to reducing the deficit.

 

[MasterBlaster]

sheehs1, I agree with you. It seems strange that the administration wants to put a relatively low level professional couple, such as a dentist married to a teacher, making just over $250k total family income in the same marginal tax bracket as Bill and Melinda Gates. It seems like there should be some additional brackets in there.

Keep in mind now, that the highest brackets only apply to income above the threshold. Don't confuse a marginal tax rate with an average rate. So if you make exactly $250k then you'll pay at the lower bracket. But yes each additional dollar you earn gets taxed at the Bill and Melinda rate.

 

[kombat]

It seems that, as I suspected, nobody can offer a rational, moral justification for an estate tax. The best anyone seems to be able to offer is, "they're dead so they won't miss it, and it's not fair that their hiers get to inherit money, because I don't have any rich relatives."

I reiterate that it seems entirely rooted in envy. Every penny in the estate (save funds in tax-shelters like a 401(k)) has already been taxed. It's what's left after a lifetime of taxing and saving. What possible moral justification can be made to tax the whole pile again?

 

[MasterBlaster]

Kombat:

Exactly what moral justification can you make on any tax.

Are progressive tax schemes not morally unfair ? Are even flat tax schemes morally unfair since I may pay more than you ?

You have it, they want it and will take it by force of law.

That's the way it is.

 

[Midpack]

Wealth and income can certainly be related but are indeed two different things. They are related more often than not, it's not an exception. But two different things indeed.

If we're going to climb out from under the mountain of debt we're in, the gov't is certainly going to have to invent new ways to tax wealth as well as income. I think we all know it's coming and I'm really curious to know what creative mechanism they come up with. Will they shoot me in the knee cap? Kick me in the balls? Hold my hand in a flame? Pull out my finger nails with rusty pliers? You know they're going to do something. But what will it be? Pulling the plow like a Georgia mule for 40 years, leading a responsible, LBYM life and trying to be a good citizen has to be punished in some way!

I expect income will be taxed, and probably at higher rates. Income including conventional wages as well as investment income in all it's forms.

But I can't believe we'll see taxes levied on base net worth assets or principal - the monies that have already been taxed at least once. If that starts, we'll have a lot of ex-pats at the very least. That is totally unfair, basically punishing LBYM and promoting excessive consumption...

 

[Texas Proud]

Don't have time to look it up now but as I recall revenue from estate taxes is small. Estate taxes aren't revenue generators so much as "get even" taxes where the non-payers feel better seeing the "rich" dole out chunks of their residual wealth at death.

I don't think it would take much of an alternative tax to replace estate taxes in terms of revenue. Giving the public that pleasant feeling of revenge without the estate tax might be more challenging. Perhaps the elderly "rich" could be forced to watch their grandchildren being tortured?

The real issue would be replacing the revenue lost to the estate planning industry. Tens of thousands out of work....... Desks with no paper to shuffle...... It would be a nightmare!

It was a long time ago... but I had read that net net the estate tax did not bring in money to the gvmt at all.... the cost of collecting and auditing etc. etc. was equal to the tax... so, not that efficient... but I bet it was not correct... still, it is not a high money generating tax...

 

[scrabbler1]

I see that taxing of estates passed down from one party to another as income to the recipients, no different than if the recipient had won the lottery and has to pay taxes on the winnings. Furthermore, we pay taxes on income multiple times already, from taxable dividends to cap gains to simple bank interest based on initial investments made with income which was already taxed. What makes the transfer of an estate so special that for the recipient it should be shielded from a second layer of taxation?

As for the level of the estate tax itself, I am flexible on the rate and the exemption amount as well as stretching out hte payment period so a business doesn't necessarily have to be sold to pay the tax. I do think the exemption should be indexed the way income tax brackets are so we don't have to revisit this in 20 years from now a.k.a. bracket creep.

 

[MasterBlaster]

This WSJ article claims that in 2008 the estate tax brought in $29B. That seems like chicken feed in the big scheme of things.

They also go on (and on) about why the estate tax is "fair"

Opponents like to say the estate tax isn't fair because it's a "double" tax—hitting assets that have already been taxed before. Of course, we all pay double or even triple taxes: both income and payroll taxes on our wages, and sales taxes when we spend our earnings. But, for the wealthy, that's often simply not the case. Social Security taxes stop at just over $100,000 a year. And if you hold assets until your death, you don't pay capital-gains taxes on them. So, the gain in the value of George Steinbrenner's Yankees never faced a tax hit.

The Estate Tax Is Fair, and We Need the Revenue - WSJ.com

 

[Texas Proud]

TexasProud: "BUT, in your example it would seem that the business has grown in value over that long amount of time... and the father did not pay any cap gains on that growth... why should the business be given to the children and no cap gain paid And the kids would not have to pay it since there is a step up in basis..."

Part of the answer to that is this. The kids don't necessarily have it. The first generations estates may not have it either. Consider a situation where most of their wealth is tied up in the business. So....the business would have to be liquidated to pay the tax.
Tell me ...how does one pay the government? They want cash.

While the 1st generation may not have paid cap gains....they paid income taxes all along the way. In the case of a C corp...if dividends are declared they pay double tax. The corporation pays a tax on the profit and the people receiving the dividend pay a tax. The government gets their share all along the way.
If cap gains for a business could be calculated the way it is ...say for a house...which is when you invest back....it raises your basis...then I daresay there would be no cap gains in a small family business.

The taxes paid along the way was income taxes... it is money that is 'somewhere else', not in the business...

So lets get some agreements... first, the business has to be worth a good amount to be taxed... if it is a small business, then there is no value and no tax... correct?

Second, if a C corp, you are right... double taxation.... but if the corp has not paid out dividends... then it has only been taxed once where everybody else's dividends have been taxed twice.... so we still have something that has not been taxed with an income tax in the estate...

The value of the company is not just the cash... it is the ability to make more cash... so if the grand dad started it with $100 and built it up so it would be taxed (say it is $1 million value, but only $400K taxable since there was a $600K exemption back then)... there is $1 mill of gain that has not been taxed... the dad would take over the business and he could sell it the next day for $1 mill and pay no income tax... so there was never any tax paid on this gain... but, the estate paid tax on the $400K..

Now.. the gvmt allowed this to be paid over 15 years... (IIRC).... so now son has a $1 million business he did not pay for, but the estate has (lets just say) a $100K tax bill...

Dad now builds the business to be worth $10 mill... yes, paying taxes along the way on the income, but not the increase in the business... go through the same math etc. etc.... we have $9 mill of cap gain that has not been taxed with income tax...


Now... all this means nothing if grand dad had invested $10 mill and it was still worth $10 mill when he died... but had to pay an estate tax... and then dad died and it was still worth $10 mill.... and paid an estate tax that is where the estate tax is not fair....

 

[kombat]

I see that taxing of estates passed down from one party to another as income to the recipients, no different than if the recipient had won the lottery and has to pay taxes on the winnings. Furthermore, we pay taxes on income multiple times already, from taxable dividends to cap gains to simple bank interest based on initial investments made with income which was already taxed. What makes the transfer of an estate so special that for the recipient it should be shielded from a second layer of taxation?

OK, then it's a slipperly slope. If you accept that taxing estates is morally justifiable, then why the $5 million exemption? Why are dead middle-class people exempt, but dead rich people are gouged?

If it's a moral tax, then why isn't it applied evenly?

Because it's not actually about fairness - it's clearly actually about envy. It drives us nuts to think about Paris Hilton being set for life just because she came from the right uterus. So we make up all these rationalizations for taking her dad's money. But of course, our own parents aren't rich. So let's set the bar at, let's say "rich," as yet another tool to drag down successful people and redistribute their wealth to the lazy, less-successful proletariat.

 

[SunsetSail]

But I can't believe we'll see taxes levied on base net worth assets or principal - the monies that have already been taxed at least once. If that starts, we'll have a lot of ex-pats at the very least. That is totally unfair, basically punishing LBYM and promoting excessive consumption...

I completely agree with your statement. I think that if a person argues that it is fair to imposes higher rates on those who make greater income because they are more able to pay higher taxes, then their reasoning is better served by taxing wealth because it is a better measure of who can pay.

I absolutely do not think a tax on wealth is fair and I am completely against such a scheme. I just want to point out a flaw in the logic of one argument in favor of higher rates for higher income.

 

[scrabbler1]

OK, then it's a slipperly slope. If you accept that taxing estates is morally justifiable, then why the $5 million exemption? Why are dead middle-class people exempt, but dead rich people are gouged?

If it's a moral tax, then why isn't it applied evenly?

Because it's not actually about fairness - it's clearly actually about envy. It drives us nuts to think about Paris Hilton being set for life just because she came from the right uterus. So we make up all these rationalizations for taking her dad's money. But of course, our own parents aren't rich. So let's set the bar at, let's say "rich," as yet another tool to drag down successful people and redistribute their wealth to the lazy, less-successful proletariat.

The estate tax exemption is no different in principle from the standard deduction on an income tax return. It represents a 0% tax bracket for income, just on a larger scale. For me it is not a moral issue as much as it is money transfer issue, income obtained by one party from another. That is why I made the comparison to the lottery.

 

[sheehs1]

Now... all this means nothing if grand dad had invested $10 mill and it was still worth $10 mill when he died... but had to pay an estate tax... and then dad died and it was still worth $10 mill.... and paid an estate tax that is where the estate tax is not fair....

This is where I agree. From personal experience I can tell you we have invested back into our company many times over what our company is actually worth. That investment comes in many forms...capital investment, employee benefits, addition of new employees...etc. Let's say for example a company was started with $20,000 and today it is worth 5 million. Let's also say that over the last 10 years the company invested 5 million back into the business....I don't believe there should be cap gains either. So I think we agree here. Nor do I think it should be taxed or a tax factor with the estate tax...but it is. There is no way to get a credit against basis for this "reinvestment".
The problem many small business owners face is personal liquidity particularly if it is an S Corp. Many take out life insurance or "save their you know whats off"....specifically to protect their heirs against escalation of the value of the stock in their estates. Otherwise....their heirs inherit the problem of paying the tax bill with potentially no money to do so.

I do not know many successful small businesses who do not reinvest back into their company.
Now...I would also agree that if someone started a small business for $20,000, never put a dime back in and in 30 years the business is worth 5 million...there should be some sort of cap gain....but it is more than likely if the small business was run this way...it would have gone bankrupt in the first 3 years.

 

[MasterBlaster]

The worst are estates with large 401k/IRA balances in which estate tax is due with no other assets available to pay tax.

In that case the heirs must liquidate the qualified assets which then triggers income taxes. They could pay 35% Federal income taxes and then have to pay the estate taxes with whats left over. Note that estate taxes are due on the gross estate, not what's left over after income taxes. The net total Federal tax rate would then be well over 70%.

And then there is whatever your state wants in income and estate taxes. That could easily take another 20% of the gross leaving the heirs with maybe 10% of the total.

The net tax rate in this case is just short of confiscation.

 

[kombat]

The estate tax exemption is no different in principle from the standard deduction on an income tax return. It represents a 0% tax bracket for income, just on a larger scale.

I disagree. It's clear that people need a basic amount of income in order to buy food and shelter, but there's no "basic amount" people deserve/need to inherit tax-free in order to meet those same needs. Income is necessary to meet the basic needs of life, but inheritances are entirely gravy. The only explanation that makes sense to me for the estate tax exemption is envy.

 

[scrabbler1]

The worst are estates with large 401k/IRA balances in which estate tax is due with no other assets available to pay tax.

In that case the heirs must liquidate the qualified assets which then triggers income taxes. They could pay 35% Federal income taxes and then have to pay the estate taxes with whats left over. Note that estate taxes are due on the gross estate, not what's left over after income taxes. The net total Federal tax rate would then be well over 70%.

And then there is whatever your state wants in income and estate taxes. That could easily take another 20% of the gross leaving the heirs with maybe 10% of the total.

The net tax rate in this case is just short of confiscation.

I agree that the net tax rate is high but you are talking about two separate taxing events which happen to occur at the same time. You have the deferment of taxes on the 401(k) or IRA which was a choice by the account's owner (decendent) to not pay income taxes when the income used to fund those accounts was generated. Then, the estate tax occurred because there was a transfer of money from the decedent to another party.

While the decedent could not control dying, he and his heirs could have made different financial planning choices to spare his heirs more of the tax bite. He could have converted to a Roth IRA and paid the income taxes himself. He could have set up a Stretch IRA to stretch out the tax bite among his beneficiary(ies).

 

[sheehs1]

The worst are estates with large 401k/IRA balances in which estate tax is due with no other assets available to pay tax.

In that case the heirs must liquidate the qualified assets which then triggers income taxes. They could pay 35% Federal income taxes and then have to pay the estate taxes with whats left over. Note that estate taxes are due on the gross estate, not what's left over after income taxes. The net total Federal tax rate would then be well over 70%.

And then there is whatever your state wants in income and estate taxes. That could easily take another 20% of the gross leaving the heirs with maybe 10% of the total.

The net tax rate in this case is just short of confiscation.

Agree...100%. On the surface it may seem like a good problem to have..but there are pitfalls. You have mentioned a big one! Here is another. The family home. It's value at Date of Death was....let's say $400,000. That value was placed on the estate tax filing. That value helped escalate the overall value of the gross estate ..and some portion of the federal estate taxes owed was due to this value. Now consider that home is worth half of that. Heirs will never get the $400,000 but they paid the tax as if they would. There is something called "Income in Respect of a Decedent" that can come into play here..but we haven't gotten that far - house hasn't sold...

All in all how one is affected depends solely on what laws are in effect at that time. One family could have been wiped out 10 years ago....while another family today is made whole. Seems there should be some retroactive give back to the family that was wiped out. This would be the moral and ethical thing to do in my opinion. (we would not be one of those receiving any of these so called give backs- we ended up just fine ..meaning....my eye is towards those that were wiped out)

 

[MasterBlaster]

He could have set up a Stretch IRA to stretch out the tax bite among his beneficiary(ies).

A stretch IRA wouldn't work. remember that they have to liquidate the assets to pay the estate tax which is due.

 

[sheehs1]

I agree that the net tax rate is high but you are talking about two separate taxing events which happen to occur at the same time. You have the deferment of taxes on the 401(k) or IRA which was a choice by the account's owner (decendent) to not pay income taxes when the income used to fund those accounts was generated. Then, the estate tax occurred because there was a transfer of money from the decedent to another party.

While the decedent could not control dying, he and his heirs could have made different financial planning choices to spare his heirs more of the tax bite. He could have converted to a Roth IRA and paid the income taxes himself. He could have set up a Stretch IRA to stretch out the tax bite among his beneficiary(ies).

Scrabblers...the heirs in a lot of cases have no control over what their parents did or are doing. The elderly also have a hard time keeping up with the changes much less understanding some of the basics. My father ..never grasped that the value of my mothers marital trust would be includable in his gross estate....which triggered the estate tax. From his own planning...he planned well except for this tiny little detail (big). Yes it was explained to him many times. All of which begs a point....some of the final estate taxation planning and consequences comes at a time in life when many are incapcitated, perhaps not in control but haven't given up control....and is nothing more than taking advantage of the old and dying.

 

[Texas Proud]

OK, then it's a slipperly slope. If you accept that taxing estates is morally justifiable, then why the $5 million exemption? Why are dead middle-class people exempt, but dead rich people are gouged?

If it's a moral tax, then why isn't it applied evenly?

Because it's not actually about fairness - it's clearly actually about envy. It drives us nuts to think about Paris Hilton being set for life just because she came from the right uterus. So we make up all these rationalizations for taking her dad's money. But of course, our own parents aren't rich. So let's set the bar at, let's say "rich," as yet another tool to drag down successful people and redistribute their wealth to the lazy, less-successful proletariat.

I think we have one of the problems identified here...

What does morals have to do with taxes An estate tax is just as morally justified as income tax, property tax, sales tax, excise tax etc. etc. etc.

Your example is flawed... Paris Hilton would be rich even with the current estate tax... just not as rich... and I could care less about her being lucky...