Let's Tax The Rich!!!

[Westernskies]

LOL, I missed this the first time! But now that Greg's pointed it out, I'm also very, very interested in how to turn $0 into $10 million. Turning $1 into $10 million is certainly very impressive, but $0? That's just amazing! That's some pretty incredible compounding!

Actually, it is the basis for the phrase "I started out with nothing, still have most of it left"

 

[Texas Proud]

What?

I was giving an alternative to the estate tax... let's just tax the deferred income of the deceased and leave it at that... so if you had a basis of $0 in an asset that was worth $10 mill, you have a $10 mill cap gain to pay taxes...

It will never get off the ground...

 

[Texas Proud]

LOL, I missed this the first time! But now that Greg's pointed it out, I'm also very, very interested in how to turn $0 into $10 million. Turning $1 into $10 million is certainly very impressive, but $0? That's just amazing! That's some pretty incredible compounding!

You can have a zero basis in a Sub S corp (or for that matter in other assets)... Say you buy Sub S corp shares on the cheap... and you get distribution in excess of income... that distribution reduces your basis... and it can reduce it to zero....

The strangest I saw when I did taxes was a family partnership... it was establised in the 1800s... they sold land for $15 million and the partnership had a basis of $20,000...

 

[Texas Proud]

Well...we may be beating this to death. What is difficult is to get all the nuances into one post. Going back to my original thoughts when posting along these lines...is...often the wealth of family businesses and/or generational farms is tied up in the hard assets. The wealth may not liquid. The government wants liquid money.
Another point is that it often is only the first generation that has the primary wealth. As the family business is inherited thru the 2nd and 3rd generations...that wealth is diluted.
Often you end up with shareholders that do not have the liquid means to pay the tax ....so the business must be sold. They may or may not be wiped out...it really depends on the situation. I do know of family businesses that sold and turned most of the proceeds over to the IRS.
My point...is somewhat similar to part of the health care debate. People think it a travesty that anyone in the U.S. loose their house or go bankrupt to pay for health care. The same thing can happen in family businesses and farms...to pay the tax man. With the exemption now at 5 million it will not happen like before but....who knows what the exclusion will be going forward. Hey...that's what we need for health care.!!! A lifetime exclusion!!!!

I am not trying to beat the dead horse... but by the simple math they can not be wiped out.... the exclusion is now $5 mill... there is no way someone that has an estate greater than $5 mill can get less than $5 mill... (well, I guess with the 401(k) issue they could, but we are talking about farms and businesses)....

Even back in the day, someone could not get less than $600K... plus at least half of the rest of the estate...


One other comment... it is the estate that has to pay the tax... so the kids etc. only get what is left... sure, the result is the same, but in a way it does matter who is paying what... it is incumbent on the person who is planning for their estate to take into account this tax that will be due... failure to do so can be costly...

 

[Independent]

Independent....the executor or trustee if that be the case can elect to pay it out over a certain number of years. But...in our case, the accountants advised against it. One has to obtain a surety bond or security against the debt. There are also guidelines regarding ownership percentages in relation to the overall gross estate. This may work well for first generation owners who own 100% but not so well for 2nd and 3rd generation who may own fractional percentages. Maybe Texasproud can shed some additional light on this.

I see a requirement that the value of the business is at least 35% of the value of the entire estate. So you're saying that you were in a situation where the business value was 30% of the entire estate, but there wasn't sufficient liquidity in the other 70% to pay the estate tax, which was only __% of the gross estate?

Or maybe you're saying the deceased only owned 15% of the entire business, so the whole deferral idea didn't apply because the business was no longer "closely held"?

 

[sheehs1]

I see a requirement that the value of the business is at least 35% of the value of the entire estate. So you're saying that you were in a situation where the business value was 30% of the entire estate, but there wasn't sufficient liquidity in the other 70% to pay the estate tax, which was only __% of the gross estate?

Or maybe you're saying the deceased only owned 15% of the entire business, so the whole deferral idea didn't apply because the business was no longer "closely held"?

I'm not saying that happened to us. What I am saying is that it can happen and the other 70% or so may be made up of hard assets that are difficult to sell, sold under fire sale conditions...etc.
To my knowledge...closely held still applies even if it is 15 % or less. I'd have to look up the IRS definition for closely held...but am assuming.."still held within the family is closely held" regardless of 5%, 10%..etc.)

I was also inferring that the tax election to defer estate taxes over a number of years is probably "more applicable" when the decedent owns 50 to 100% of the stock or the stock value in the estate makes up more than 50% of the gross estate...and/or there is no or vey little liquidity to pay the estate tax up front. The IRS was allowing for just this situation.

Texasprouds point is well taken in that the exemption amount now is 5 million. But that has been a fairly recent increase. It was not in affect when my parents passed away or the last 10 plus years which did affect a lot of family businesses and generational farms. I
I haven't talked a lot of specifics regarding my family business because we ended up o.k. but the IRS got well over a million on the estate tax issue. For the record, our family business is 56 years old with some now 3rd generation owners.
I see potential pitfalls...waiting for some in the 2nd generation(who haven't saved) and the 3rd generation...IF Congress decreases the exemption.

 

[sheehs1]

I am not trying to beat the dead horse... but by the simple math they can not be wiped out.... the exclusion is now $5 mill... there is no way someone that has an estate greater than $5 mill can get less than $5 mill... (well, I guess with the 401(k) issue they could, but we are talking about farms and businesses)....

Even back in the day, someone could not get less than $600K... plus at least half of the rest of the estate...


One other comment... it is the estate that has to pay the tax... so the kids etc. only get what is left... sure, the result is the same, but in a way it does matter who is paying what... it is incumbent on the person who is planning for their estate to take into account this tax that will be due... failure to do so can be costly...

Your definition of wiped out is not the same as mine (joking!!)
But I suppose my view is more in line when the exemption amount was not 5 million....since things did not happen in our family business when it was.

But I get your point going forward with the now 5 million exemption.
Problem is ...is that it can be reduced ...by Congress at any time...meaning it is not a given.

 

[Independent]

I'm not saying that happened to us. What I am saying is that it can happen and the other 70% or so may be made up of hard assets that are difficult to sell, sold under fire sale conditions...etc.
To my knowledge...closely held still applies even if it is 15 % or less. I'd have to look up the IRS definition for closely held...but am assuming.."still held within the family is closely held" regardless of 5%, 10%..etc.)

I was also inferring that the tax election to defer estate taxes over a number of years is probably "more applicable" when the decedent owns 50 to 100% of the stock or the stock value in the estate makes up more than 50% of the gross estate...and/or there is no or vey little liquidity to pay the estate tax up front. The IRS was allowing for just this situation.

(

I guess the claim is that "many" family businesses have to be broken up due to the estate tax. I think lots of voters wouldn't like to see a situation where a family business is lost because the entrepreneur who spent a lifetime building a business didn't spend much time thinking about liquidity for estate taxes. Reading the reg, it seems that current law makes reasonable allowances for that situation.

Now, after the founder dies, and eventually the founder's children start dying, and the business ownership has been spread among a lot of people, it looks like somebody needs to plan for the taxes. That doesn't seem unreasonable to me.

 

[photoguy]

I agree kombat. What a person has built up after decades of work and toil they have been taxed on many times over. So why should it be taxed again...just because that person dies.? That gross estate should be considered net of tax money/assets. When one really thinks about this....there is no justification moral or otherwise....other than the government wants the money.

Isn't it the same as the justification for all taxes? the government needs a certain amount of money to maintain society/ the country. That money has to come from it's citizens and necessarily from those who have an ability to pay. People receive a large inheritence obviously have the ability to pay taxes on that windfall.

 

[sheehs1]

Isn't it the same as the justification for all taxes? the government needs a certain amount of money to maintain society/ the country. That money has to come from it's citizens and necessarily from those who have an ability to pay. People receive a large inheritence obviously have the ability to pay taxes on that windfall.

I suppose as this thread shows...there is an argument either way. For now that is how the government views it. But you have to admit.(or not) ..taking taxes from a live person to support society is a bit different than taking it from a dead person.
Put another way....he or she certainly isn't enjoying society anymore.

Alas...it is the system we have....so...

 

[youbet]

That doesn't seem unreasonable to me.

Of course not, you don't have a dog in the fight........

 

[youbet]

Isn't it the same as the justification for all taxes? the government needs a certain amount of money to maintain society/ the country. That money has to come from it's citizens and necessarily from those who have an ability to pay. People receive a large inheritence obviously have the ability to pay taxes on that windfall.

Actually, FIRE'd folks have the resources to pay taxes to keep the politicians going. Those assets should be taxed and used for "the greater good!"

Why be a hypocrit? Turn your FIRE portfolio over to the gov't ASAP!

 

[missionfinder]

Actually, FIRE'd folks have the resources to pay taxes to keep the politicians going. Those assets should be taxed and used for "the greater good!"

Why be a hypocrit? Turn your FIRE portfolio over to the gov't ASAP!

There have been undercurrent hints from unions and politicians implying that sort of thing will be done: using things like 401ks to bail out failing union pensions. Some of the political speeches are down right scary when you read between the lines!

 

[sheehs1]

Let me see if I can come at this topic from another direction. Say you have a sub s family business and the 1st generation decedents estate is worth 7 million. Say there are 7 heirs to the estate who are not considered "wealthy" and own fractional shares of the business and want the business to continue.
Because the estate is worth 7 million, the IRS is owed close to a million in estate taxes. That one million comes out of the decedents estate (sub s corp). So that is 1 million his heirs did not get. That 1 million could have helped the 7 heirs feel more wealthy - in the very least give them some breathing room. If the heirs who own fractional shares in the business feel more wealthy - they are more inclined to "leave money" in the business for continued growth...creating more jobs and growing the business. As long as owners do not feel personally wealthy, they are more inclined to take money out of the business ...out of profits each year.
In this type of situation...the estate tax...stifles entrepreneuship.

 

[Katsmeow]

Isn't it the same as the justification for all taxes? the government needs a certain amount of money to maintain society/ the country. That money has to come from it's citizens and necessarily from those who have an ability to pay. People receive a large inheritence obviously have the ability to pay taxes on that windfall.

To me this is just different. Let me first say that I will be upfront and say that I would prefer to have better services and higher taxes. I am OK with taxes being increased. I do think there is unnecessary spending in the budget but by and large would prefer to raise taxes than do draconian cuts to services I think are needed.

But, I have just never thought the inheritance tax was fair. The money was already taxed and I just don't think there should be tax on leaving your money to others.

 

[Independent]

Let me see if I can come at this topic from another direction. Say you have a sub s family business and the 1st generation decedents estate is worth 7 million. Say there are 7 heirs to the estate who are not considered "wealthy" and own fractional shares of the business and want the business to continue.
Because the estate is worth 7 million, the IRS is owed close to a million in estate taxes. That one million comes out of the decedents estate (sub s corp). So that is 1 million his heirs did not get. That 1 million could have helped the 7 heirs feel more wealthy - in the very least give them some breathing room. If the heirs who own fractional shares in the business feel more wealthy - they are more inclined to "leave money" in the business for continued growth...creating more jobs and growing the business. As long as owners do not feel personally wealthy, they are more inclined to take money out of the business ...out of profits each year.
In this type of situation...the estate tax...stifles entrepreneuship.

I look at this as a trade-off. That $1 million of taxes is going to be collected from somebody. If not the heirs of this business, then somebody else will pay it. I have no reason to believe these heirs will "create more jobs" than the other people who would pay taxes if the heirs don't.

On a separate thread, I got into a discussion of the whole "create jobs" claim. It seems to be the standard line for anybody pushing some gov't policy, but I don't think it stands up to careful thought.

 

[lets-retire]

To me this is just different. Let me first say that I will be upfront and say that I would prefer to have better services and higher taxes. I am OK with taxes being increased. I do think there is unnecessary spending in the budget but by and large would prefer to raise taxes than do draconian cuts to services I think are needed.

I can see that. My question to you is do you think the government provided good enough services in 2008 or do you think the extra trillion in spending has been a trillion dollar improvement in services?

 

[Westernskies]

To me this is just different. Let me first say that I will be upfront and say that I would prefer to have better services and higher taxes. I am OK with taxes being increased. I do think there is unnecessary spending in the budget but by and large would prefer to raise taxes than do draconian cuts to services I think are needed.

But, I have just never thought the inheritance tax was fair. The money was already taxed and I just don't think there should be tax on leaving your money to others.

The Tax and Spend mentality is why we are facing a budget crisis today. The party's over, folks.

 

[sheehs1]

The Tax and Spend mentality is why we are facing a budget crisis today. The party's over, folks.

I believe you are correct Westernskies.

One last attempt. These are not my numbers. They are to make a point.

Estate is worth 7 million.
Of that 7 million, 5 million is the family business value. Another million for house, cars..etc. 1 million in liquid investable assets.

The decedent is going to pay "income tax" on all income every year including the year he/she passes away. That includes income tax on the "income, dividends and cap gains" generated by the liquid asset portion.
So income taxes have already been taxed on the liquid portion of the estate. Agree?

In addition to having already paid "income and cap gains", the value of the liquid portion is now taken into the calculation to determine the gross value of the estate. It is taxed twice... immediately. Whoopsie....thank god there is a million in liquid assets...because...it all goes to the Federal government to keep the business in the family.
So this liquid portion is taxed twice...by the very nature that it generates income and is also subject to estate tax. Agree?

Oh... But...there is no guarantee the business will continue to generate income. So ..the heirs "hope" they make the right call by trying to hang onto the business, save their employees jobs and their stakeholders interest. Otherwise selling the business would have been the better decision for them...personally.

 

[jdw_fire]

I believe you are correct Westernskies.

One last attempt. These are not my numbers. They are to make a point.

Estate is worth 7 million.
Of that 7 million, 5 million is the family business value. Another million for house, cars..etc. 1 million in liquid investable assets.

The decedent is going to pay "income tax" on all income every year including the year he/she passes away. That includes income tax on the "income, dividends and cap gains" generated by the liquid asset portion.
So income taxes have already been taxed on the liquid portion of the estate. Agree? no, the income produced by the "liquid asset portion" has been taxed. that doesnt mean the "liquid asset portion" has been taxed

In addition to having already paid "income and cap gains", the value of the liquid portion is now taken into the calculation to determine the gross value of the estate. It is taxed twice... immediately. Whoopsie....thank god there is a million in liquid assets...because...it all goes to the Federal government to keep the business in the family.
So this liquid portion is taxed twice...by the very nature that it generates income and is also subject to estate tax. Agree? no

Oh... But...there is no guarantee the business will continue to generate income. So ..the heirs "hope" they make the right call by trying to hang onto the business, save their employees jobs and their stakeholders interest. Otherwise selling the business would have been the better decision for them...personally.

see my embeded comments.

in this country all transfers of money (or monetary assets) from 1 person (or corp) to another that increases the monetary assets of the 2nd person is taxable. for example, in repayment of debt, the principle isnt taxable since it is already an asset of the person receiving the repayment but the interest is taxable. another example is wages; when someone receives a paycheck that person's monetary assets were just increased by the size of the wages so the wages are taxed. all inheritance is an increase of monetary assets to the ones receiving said inheritance so it stands to reason that it would be taxed also. even gifts are taxable, it just so happens that for gifts the tax code has some big exemptions (yearly, life time and to nonprofit orgs). the estate tax shares the gift tax life time exemption. if anything the unfair part of the estate tax is the sizeable exemption, maybe the exemption should be eliminated for fairness sake.

 

[jdw_fire]

Once again I see members in other threads here broadly proposing we first tax the rich more to solve our federal/state deficit problems. The rich already pay more taxes than most while getting fewer benefits (by design and universally accepted), the days of paying little to no taxes due to tax loopholes ended long ago.

So most here are very good with numbers, just exactly what would YOU propose for marginal rates for the top income level, or as many income levels as you care to modify?

If it's not obvious, while DW and I are nowhere near rich, I don't agree with the rich bashing. If you took 100% from everyone in the top bracket it would hardly make a dent in the deficit. Like some others, I'm afraid we are going to have to share the pain with considerably less spending (meaning fewer services & public benefits) AND considerably higher taxes for everyone.

It will be interesting to watch the reply to viewed ratio on this thread...

ok, how bout this:
1) repeal the Bush tax cuts for incomes over $200k for singles and $250k for married
2) a new bracket at $600k income with a rate of 47%
3) a new bracket at $1M income with a rate of 55%

and while we are at it lets remove the cap on FICA and put another knee in the the computation of benefits formula: only 5% of the average monthly wages above the $9k/mo level get added in the benefits formula

 

[MasterBlaster]

ok, how bout this:
1) repeal the Bush tax cuts for incomes over $200k for singles and $250k for married
2) a new bracket at $600k income with a rate of 47%
3) a new bracket at $1M income with a rate of 55%

and while we are at it lets remove the cap on FICA and put another knee in the the computation of benefits formula: only 5% of the average monthly wages above the $9k/mo level get added in the benefits formula

Well lets look at that plan.

In my state very high incomes like your #3 are taxed at 10.55 % income plus a few percent extra for state disability etc. ==> ~12.55%

So they would pay 55% federal + 12.55% state + 7.65% FICA = 75.2 %

if they are self employed they would pay another 7.65% ==> ~83%

Now is that an invitation to not work (or What) ?

Often these people have the businesses that allow the rest of us to have a job. Do we really want these people to not work ?

Have you really thought this through ? Are you setting up poverty for everyone ?

When you take away the income you take away the incentive to work.

In my opinion your plan will acheive the opposite effect of what you want. And that is to create more government tax income.

 

[Independent]

I believe you are correct Westernskies.

One last attempt. These are not my numbers. They are to make a point.

Estate is worth 7 million.
Of that 7 million, 5 million is the family business value. Another million for house, cars..etc. 1 million in liquid investable assets.

The decedent is going to pay "income tax" on all income every year including the year he/she passes away. That includes income tax on the "income, dividends and cap gains" generated by the liquid asset portion.
So income taxes have already been taxed on the liquid portion of the estate. Agree?

In addition to having already paid "income and cap gains", the value of the liquid portion is now taken into the calculation to determine the gross value of the estate. It is taxed twice... immediately. Whoopsie....thank god there is a million in liquid assets...because...it all goes to the Federal government to keep the business in the family.
So this liquid portion is taxed twice...by the very nature that it generates income and is also subject to estate tax. Agree?

Oh... But...there is no guarantee the business will continue to generate income. So ..the heirs "hope" they make the right call by trying to hang onto the business, save their employees jobs and their stakeholders interest. Otherwise selling the business would have been the better decision for them...personally.

There's only one thing I can say about the "taxed twice" argument, I know that I pay taxes twice or three times on the "same money". It happens.

But regarding the last paragraph. I don't know why the rest of us should care whether the heirs sell the company or keep it.

If somebody else is more optimistic about running it for a profit, let the heirs sell and the new owner will try some changes that may improve things. The heirs will take the sale proceeds and recycle them into the economy where they will "create jobs" one way or another.

If nobody believes the company can be run profitably, then it's time to close it down. The heirs will sell the hard assets and recycle the proceeds. The employees will have to find jobs with other firms with better profit prospects. That's unpleasant for everybody involved, but it happens every day somewhere in our economy. I can't see why the fact the company is changing hands due to a death means that the government should somehow try to keep it going if it doesn't look profitable to anyone.

 

[jdw_fire]

Well lets look at that plan.

In my state very high incomes like your #3 are taxed at 10.55 % income plus a few percent extra for state disability etc. ==> ~12.55%

So they would pay 55% federal + 12.55% state + 7.65% FICA = 75.2 %

if they are self employed they would pay another 7.65% ==> ~83%

Now is that an invitation to not work (or What) ?

Often these people have the businesses that allow the rest of us to have a job. Do we really want these people to not work ?

Have you really thought this through ? Are you setting up poverty for everyone ?

When you take away the income you take away the incentive to work.

In my opinion your plan will acheive the opposite effect of what you want. And that is to create more government tax income.

are you so sure? maybe people making that much money arent working for the money anymore, maybe they are working because they love to work or love the power.

 

[Midpack]

ok, how bout this:
1) repeal the Bush tax cuts for incomes over $200k for singles and $250k for married
2) a new bracket at $600k income with a rate of 47%
3) a new bracket at $1M income with a rate of 55%

and while we are at it lets remove the cap on FICA and put another knee in the the computation of benefits formula: only 5% of the average monthly wages above the $9k/mo level get added in the benefits formula

I appreciate the suggestion, but it won't make much of a difference. Numbers to the best of my ability;

In 2010 the federal government took in $2,163B and spent $3,456B - for a deficit of $1,294B. $899B were individual income taxes ($192B Corp income tax BTW).

The top 20% had an average salary of $231,300/yr, with a 25.5% effective tax rate, paying 68.7% of all income taxes (the other 80% of us paid only 31.3%). So the top 20% paid $618B.

If you increased effective income taxes on the top 20% by 25% (approx what you're suggesting) - you reduce the deficit by $155B or about 12%. If you doubled their taxes, about 24%.

If the top 20% were made to balance the budget, you'd have to tax them at an effective rate of 79%. Clearly outrageous IMO...

And if you instead chose to increase taxes on all levels to erase the deficit, you'd have to increase taxes by 169% or more than 2.5X. Ouch?