Income

[imoldernu]

With a little too much time on my hands, delving into philosophical subjects is a side hobby. This time, the subject is Income. What it means, how it is defined, how the interpretation affects us, and whether or not there are iniquities in the application of laws that use the term.

For argument sake, assume that you are 50 years old, have inherited 4 million dollars, and plan to spend $100,000/yr. for the rest of your life. Theoretically, you would likely never have to pay income tax again. (leave off the inflation bit..)

By the same token, if Warren Buffet bequeathed his fortune to every member of his extended family, two generations hence, not one single person would ever have to work, contribute to society in any way, or... ever pay income taxes.

In my own state of Illinois, (until very recently), a multi millionaire could collect subsidies of thousands of dollars in healthcare assistance, and do it legally, since the criterion for this subsidy was income.

From here:income legal definition of income. income synonyms by the Free Online Law Dictionary.

Income
The return in money from one's business, labor, or capital invested; gains, profits, salary, wages, etc.
The gain derived from capital, from labor or effort, or both combined, including profit or gain through sale or conversion of capital. Income is not a gain accruing to capital or a growth in the value of the investment, but is a profit, something of exchangeable value, proceeding from the property and being received or drawn by the recipient for separate use, benefit, and disposal. That which comes in or is received from any business, or investment of capital, without reference to outgoing expenditures.
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Income
income n. money, goods or other economic benefit received. Under income tax laws, income can be "active" through one's efforts or work (including management), or "passive" from rentals, stock dividends, investments and interest on deposits in which there is neither physical effort nor management. For tax purposes, income does not include gifts and inheritances received. Taxes are collected based on income by the federal government and most state governments.

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Purely as a matter for discussion, what would you think of using wealth (net worth) as a basis for taxation, rather than income?

 

[Animorph]

Taxing wealth would require really low rates, since we know even a withdrawal rate of 4% has a chance of depleting a portfolio.

Taxing wealth requires some kind of income from that wealth to pay the tax. A giant non-producing farm might be worth a lot but have no net income. Kind of sucks to pay tax on something that is already losing money.

How much is Donald Trump worth? Plenty of valuable stuff can't be easily priced.

Just because you managed to save it and your neighbor didn't you get to pay taxes?

You move here from France and bring $1M with you and leave $1M in France. What do we get to tax?

Income has similar problems, not to mention property taxes, so there's probably not great solution either way.

 

[ChiliPepr]

how would you tax someone with a million dollars in the bank compared to a $40k/pension?

I make a $100k/year work for 40 years, pay my taxes, LBYM and save $25k/year and end up with $1million in cash at retirement; you make $100k/year spend it all and have nothing at retirement... how is my million taxed?

 

[ChiliPepr]

Sounds to me a better solution would be to tax inheritence. But then you would have a lot of small farms/companies closing or being sold to larger ones when the owner dies to pay inheritence taxes.

 

[Meadbh]

How would you tax net worth if it was composed mainly of illiquid assets, e.g land and property? You would have to appraise it every year and it still might not reflect true values. It might force landowners to make an income from their land or sell it, which might lead to inappropriate development. As an example, I have a relative who inherited a piece of prime real estate on a beautiful bay, in the early 60s. In the 2000s she finally built her ER home on it. The property will pass down to her children in due course. For over 40 years this land produced no income. If she had had to pay tax on it annually, it would have been sold a long time ago and might not be residential. In other words, the utility of owning an asset would be judged more on its ability to produce income with which to pay taxes than on any other variable. One can easily imagine how this might decimate property values. Homes would become minimalist and recreational property would become even more of a drain on income. Commercial property rents would increase to fund taxation on the assets, thereby stifling business development. Wealthy people would see the writing on the wall and would move to countries where their assets would not be sucked dry in one generation. Given the reaches of US tax code, if they were USians, they might very well give up their citizenship. And on and on.

My points are that (1) assessing NW on an annual basis may be quite inaccurate if assets are not neatly organized in investment accounts and (2) taxing net worth changes taxpayer incentives and therefore behaviour. These systemic consequences need to be carefully thought through for their long term economic effects. Witness the exodus of wealthy people (and budding entrepreneurs) from France following the institution of the 75% tax on their annual income.

 

[aja8888]

And of course, members of Congress and others in office would be exempt from any wealth tax. That's the starting line....

 

[imoldernu]

Interesting and thoughtful comments so far... very real and serious reasons why any implementation would bring unfairness.

The question was posed, not to suggest the wealth tax should be enacted, but as a philosophical conssideration. In my own case, it would hurt, as because of our financial structure, we have not had to pay income tax for the past 24 years.

That said, many EU countries have been looking at wealth tax as a way out of the worst financial problems. Donald Trump suggested a one time 14% tax on wealth as a solution to US problems...

A search for "wealth tax" brings up hundreds of similar discussions/philosophies and opinions, as well as historical efforts in this direction.

In any case, any workable wealth tax would necessarily be a progressive tax, and based on the concentration of US wealth, would affect the acknowledged top percent of the wealth pyramid, proportionately much, much more than those with several million dollars in savings or net worth.

Valuation, while not a simple project, would not be impossible, as the relative acceptance (by the public) of property tax, but... as with any different approach to a sustainable economy, there would necessarily be exceptions and adjustments, as most of you have pointed out.

Porbably one of the least important of the considerations is the one that bothers me the most... I am concerned that infinite wealth breeds dynastic ills, that I fear would deprive us of the genetic brain trust that is needed to go forward.

 

[samclem]

Purely as a matter for discussion, what would you think of using wealth (net worth) as a basis for taxation, rather than income?

I don't think it's a great idea. These assets were (presumably) already taxed once when they were earned, or when they were received as interest/gains.

Taxing wealth would require really low rates, since we know even a withdrawal rate of 4% has a chance of depleting a portfolio.

Why "require" low rates? It's not like the taxing authority (or those receiving the benefits form the money taken) gives a darn about how long the victim's portfolio lasts.

Taxing wealth requires some kind of income from that wealth to pay the tax.

Just sell off some of it to pay what is owed. It's not the government's problem that it is a hardship for the owner of the property. The property owner has something that other people need more.

 

[samclem]

Porbably one of the least important of the considerations is the one that bothers me the most... I am concerned that infinite wealth breeds dynastic ills, that I fear would deprive us of the genetic brain trust that is needed to go forward.

How about the flip side: People who have accumulated money, in general, have a more well-developed ability to put capital to work most efficiently. That benefits everyone.

 

[daylatedollarshort]

Wealth taxes would provide a disincentive to save for retirement, making even more of the U.S. aging population totally dependent upon Social Security and Medicaid for LTC.

 

[imoldernu]

Look at the amount of wealth owned by different percentages of our citizens, and consider where you fit in, according to this:

However, net worth is a far better measure of wealth, in my view. According to the Federal Reserve Survey of Consumer Finances, a net worth of $415,700 puts you in the top 20% of American households. You are in the top 10% if your net worth is $952,200. (This jives with the findings of Dr. Thomas J. Stanley – author of The Millionaire Next Door – that one in eight American households has a net worth of $1 million or more.) If your nest egg totals $1,863,800, you are in the top 5%. And – trumpets please – if you have a household net worth of $6,816,200, you are again in the top 1%… and possibly frowned upon by redistributionists who resent folks that live beneath their means, save regularly and handle their financial affairs prudently.

... the consider how you would feel if the wealth tax was only assessed (progressively) on the top 1%... or perhaps the top 5% in this chart.

 

[Fermion]

There doesn't have to be any real record of wealth once you legally make it and pay taxes on it. I can buy gold, silver, art, etc. with no documentation, or I can just stuff my mattress with money and take the inflation hit.

If we want to go all police state and have house to house searches then maybe a wealth tax would work.

 

[Meadbh]

As soon as word got out that the top 1% (or whatever) were going to be taxed on NW, they would be getting their advisors together to figure out how to get around it. One obvious way is to transfer wealth to family members and another is to set up holding companies, perhaps overseas.

Samclem is correct about the ability of wealthy people to invest and create more wealth. When countries disincentivize the creation of wealth, it goes underground or abroad and does not benefit society in general. Just look at Argentina.

If I were an economic policy maker I would be looking first at the behavior I want to see and then trying to figure out how to incentivize it, without causing ill effects elsewhere.

 

[FIREd]

Most countries who tried at one point or another to tax wealth have given up on the concept. So experience has shown that it is a poor way to collect taxes.

 

[daylatedollarshort]

You original post mentioned a multimillionaire collecting subsidies. There are a going to be a lot more multimillionaire households with $2M collecting subsidies than there are Warren Buffetts.

A four person household drawing down 2.5% a year on $2M is living off $50K. That isn't exactly the high life. Paying $16K in health insurance premiums alone without a subsidy could leave a family of 4 to live off 35K, including out of pocket medical expenses of up to $6 - $12K per year.

This is why most of the early retirement blogs / forums written by people in their 30s pre-ACA were kind of a joke. You can't have $300K in the bank when you are 50 in the U.S. and expect to stay retired if you have to pay $16K a year just for health insurance premiums alone.

 

[Alan]

For argument sake, assume that you are 50 years old, have inherited 4 million dollars, and plan to spend $100,000/yr. for the rest of your life. Theoretically, you would likely never have to pay income tax again. (leave off the inflation bit..)

By the same token, if Warren Buffet bequeathed his fortune to every member of his extended family, two generations hence, not one single person would ever have to work, contribute to society in any way, or... ever pay income taxes.

Unless you have that $4m stuffed in a mattress or invested really badly, you are going to be paying income taxes.

Like other responders I don't see taxing wealth is going to happen for all the reasons mentioned.

 

[Telly]

Purely as a matter for discussion, what would you think of using wealth (net worth) as a basis for taxation, rather than income?

Didn't the UK do that after WWII, thereby causing landowners to sell off the ancestral estates and homes? Or try to open them as museums hopefully to bring in enough pounds to pay the inland revenue?

 

[donheff]

Seems to me you can equitably deal with the issue with capital gains and estate taxes. Just like taxing IRAs eventually catches up with the tax differed growth. Now, setting the CG and estate tax rates sensibly -- that is a thorny issue.

 

[Rambler]

Hmmmm....if I were my son, and he were looking at my situation, and a new wealth tax, and a probably means testing of SS, and probable eventual reversion of CG and dividend taxes to current income rates, here is what he'd be thinking:

"ok, dad worked his @$$ off, got taxed at effective tax rates of 40% plus or minus, well over 100k in property taxes in the past 10 years, 8.25% sales taxes on everything he bought, leaving him with less than half his earnings to live on and save, and because he is in the small minority who saved is in the top 1% based on his net worth, he now:

1) still has to pay half his retirement income in taxes,
2) receives no SS, and
3) on top of that has his net worth taxed so that his future income declines"

Then he begins to think:

"Well, instead of working my @$$ off and living below my means, I'm gonna work maybe 20-25 hours a week, get earned income credits since I don't earn much, collect food stamps, get healthcare for nearly free with the subsidies, and maybe even get a government phone and internet thrown in for free."

In other words, a wealth tax will simply mean that we are taxing what has been taxed again, simply so that we can re-distribute the wealth to those who choose not work hard and/or live below their means. It would dis-incentivize work, and within a very short period of time I believe it would lead to the total collapse of our economy.

R

 

[xyz]

I think Alan and Rambler have it right. If you have money working for you, you will be paying taxes on dividends and capital gains or interest. You can argue all day if the rates are fair but you still pay taxes. If you earn say 6% on the 4 million that's $240,000. Granted you can monkey around with tax loopholes but you still will end up paying something. As far as a wealth tax I believe it will be one of the biggest disincentives to become a successful individual ever. I do believe we need to create a society which is benevolent and helps those who are unfortunate but we are a capitalist not a socialist country. I think the Soviet Union proved that it does not work.

 

[marko]

Most countries who tried at one point or another to tax wealth have given up on the concept. So experience has shown that it is a poor way to collect taxes.

+1. Taxing the crap out of those 'evil, wealthy, made-their-money-on-the-backs-of-the-poor' makes for a good sound bite and gets votes, but, as it has always been, the rich have too many options.

France is learning that right now. Remember the 'tax exiles' from the UK in the 60's and 70's?

Tiger moved from CA to FL for better tax treatment and Lebron decided to play for the Heat instead of paying NY taxes. Heck, half of the people I grew up with here in MA have moved 30 miles north to NH to dodge the tax man.

As an aside, the paper said that every game that the Cards play in Boston over the next week(s) they will have to pay about $40K collectively in income tax.

 

[Alan]

Didn't the UK do that after WWII, thereby causing landowners to sell off the ancestral estates and homes? Or try to open them as museums hopefully to bring in enough pounds to pay the inland revenue?

The UK has never had a wealth tax apart from 1696 when they did pass the infamous window tax where the variable part of property taxes depended on the number of windows a house had. Many owners bricked up some of their windows to cut down on taxes and you can still this in many old houses in the UK today.

 

[Fermion]

The UK has never had a wealth tax apart from 1696 when they did pass the infamous window tax where the variable part of property taxes depended on the number of windows a house had. Many owners bricked up some of their windows to cut down on taxes and you can still this in many old houses in the UK today.

What about the Domesday book? Wasn't that used as sort of a wealth tax source?

 

[Alan]

What about the Domesday book? Wasn't that used as sort of a wealth tax source?

Not that I'm aware, it was a means to asses the amount of land and property held by the landowners, on which property taxes were due.

Like many countries the UK has imposed taxes on property so the more property you own the more tax you pay, but this is not the wealth tax that is being discussed here.

If you can find a source that shows that the UK ever had a wealth tax then I'll be interested it. I don't believe folks listed in the Doomsday Book had a tax placed on them for the amount of precious metals and gems they held.

Although these can by no means be reconciled in every detail, it is now generally recognised that the primary object of the survey was to ascertain and record the fiscal rights of the king. These were mainly:

• the national land-tax (geldum), paid on a fixed assessment,
• certain miscellaneous dues, and
• the proceeds of the crown lands.

Domesday Book - Wikipedia, the free encyclopedia

Some European countries have abandoned this kind of tax in the recent years: Austria, Denmark (1995), Germany (1997), Sweden (2007), and Spain (2008). In January 2006, wealth tax was abolished in Finland, Iceland (but temporarily reintroduced in 2010) and Luxembourg. In other countries, like Belgium and the United Kingdom, no tax of this type has ever existed

Wealth tax - Wikipedia, the free encyclopedia

 

[Fermion]

Ah ok, I thought it included things like livestock and such....back when the barter system was more in use. I will defer to history though and agree that the UK has never had a wealth tax.