Rich people and taxes

[gojujay]

Originally Posted by jeff

It is NOT the case that estate tax is double taxation (eg: money that has already been taxed being taxed again). That's frequently claimed but has no basis in fact. Consider: Daddy Warbucks makes an investment in 1939, and takes no capital gains against it because he never sells it. Finally drops off the twig in 2006, and Little Orphan Annie is the primary beneficiary of his estate (or maybe the dog is, for further tax avoidance). The money has never been taxed before.

Granted. A straw argument to be sure, but if I don't at least put it out there, I wouldn't be doing my due diligence!

Originally Posted by jeff

As far as fairness goes, ask yourself why the tax rate on income a dishwasher, schoolteacher or cop makes should be higher than on dividends or capital gains made by an investor? (A policy that directly benefits the rich at the expense of the non-rich) I don't have time or space today for the motivation for estate tax, but it has been widely discussed (including on this board). I think part of the rationale was to prevent formation of a country dominated by a few wealthy families, with a view over our shoulders at old Europe's aristocracies. A very democratic (small "d") principle.

I agree. It should ALL be considered income and taxed at that rate. Then we'd have the money class looking to lower the rates even more. As to democratic principle, you could argue that nobody should inherit or gain an advantage by virtue of to whom they were born and so, by the most egalitarian motives, cut everybody to the same size. The legend of Theseus and Procrustes comes to mind...

Originally Posted by jeff

The point of the original article is that a few wealthy families have conducted a campaign that directly benefits them (and almost exclusively them and nobody else), and have gone to lengths to cover it up. I've mentioned them previously on this board. Their PR campaign has been very successful despite its mendacity to the point where its own victims applaud it, sigh.

It's hardly ad hominem attack to point out that laws opening the chicken coop doors at night were written by the foxes.

Who is the victim here? The taxpayer? Those who don't make as much and should share in the wealthy's assets even though they have not earned that right? Or have the poor "earned" the right to share in the spoils by virtue of the fact that without them, the rich wouldn't have anybody to exploit? I have a problem with the estate tax because it seems to be a forced revenue sharing plan, no matter an individuals contribution, positive or negative.

[gojujay]

Originally Posted by Inquartata

Um...to, I don't know, encourage investment?

The US has a woefully low saving and investment rate. The lower tax rates are an attempt to increase incentives for making funds available for productive investment.

There you go again with that Chicago Boys stuff. If saving has enough utility then people will do just that.

[Bayou Bum]

The estate tax is just one tool in our grand scheme to make everyone equal. We need to take as much money as possible from the rich and give money to the poor so everyone thinks life is fair.

Maybe we should apply this same principal to fencing. We could "tax" A fencers 50% of their points scored. They would have to score twice in order to earn one point. The USFA could collect the points and distribute them in a fair manner. Likewise, unrated fencers would get a aid in the way of points to make life fair. They would get 5 points to start so they obtain the fencing poverty level and the USFA would give them an extra point for each one earned so each point earned would count double. Any unused points (or deficits) could be then used for foreign aid to help developing fencing countries or used to finance invasion of countries that have needed fencing equipment.

[lochinvar]

Let's stop muddying the waters by lumping the estate tax in with the capital gains tax, shall we? Fuzzy logic is great for computers but bad for debating an issue.

I'll address capital gains first.

Why are capital gains (and qualified dividends) taxed at a lower rate? Because the government wants to encourage direct investing by individuals rather than indirect investing by banks, which is where the money would presumably go if there were no advantage to buying securities.

I think we can all agree that increased investment in the economy--even by the blood-sucking rich--is a Good Thing.

The fact that "only the rich" can take advantage of this preferential tax treatment does not make it a bad tax policy. My granddaddy used to say, "If you want to catch a fish, you gotta go where the fish are." The rich are the only ones who have surplus capital available to invest; the poor must use their income for necessities.

Looked at from a different angle, preferential capital gains tax treatment might actually be a clever but nefarious ploy to dupe the selfish rich into giving up some of their money so it can be used to create employment for the poor.

It's all in how you want to look at it, isn't it?

[lochinvar]

The estate tax is a little trickier, and I must admit that I have never really understood why it exists.

The theory of preventing the establishment of an aristocracy could hold water, I suppose, except for the fact that it failed categorically. The Carnegies, Vanderbilts, Bushes, Kennedys, Rockefellers, and all others of that ilk are the de facto aristocracy of the United States.

The only difference I see is that our aristocracy of wealth--as opposed to the Old World system of aristocracy of blood--leaves the door open for new members to join, should they be shrewd enough or lucky enough to be able to get rich. Bill Gates and Ross Perot are stirling examples of persons who in my lifetime have "risen to the peerage", so to speak.

On the other hand, it could be argued that inheritance is, in fact, income to the heirs and should be taxed as such.

[Inquartata]

Originally Posted by Dr. Pfleschbach

My understanding is that the estate tax was originally intended to prevent the establishment of an inherited aristocracy as existed in Europe, and which was felt to be anathema to the premise that America is the land of opportunity, not landed gentry.

I have heard that rationale too, but I don't know whether it has any historical basis. The US didn't enact an inheritance tax until the Civil War, then it repealed it, only to impose one again during the Spanish-American War. The estate tax was not imposed until 1916. Timing-wise it looks as though "we need more money to pay for this war" is a stronger contender for motive...

Here's an excerpt from the IRS website on the matter:

The Committee on Ways and Means of the U.S. House of Representatives explained that a new type of tax was needed, because the "consumption taxes" in effect at that time bore most heavily upon those least able to pay them. The Committee further explained that the revenue system should be more evenly and equitably balanced and "a larger portion of our necessary revenues collected from the incomes and inheritances of those deriving the most benefit and protection from the Government."

Many individual states, of course, have had inheritance and estate taxes as well.

Meanwhile, the estate tax is not levied only on capital appreciation in a decedent's estate, as Jeff intimated. From the IRS website:

Estate tax may apply to your taxable estate at your death. Your taxable estate is your gross estate less allowable deductions.

Gross Estate

Your gross estate includes the value of all property in which you had an interest at the time of death. Your gross estate also will include the following.

Life insurance proceeds payable to your estate or, if you owned the policy, to your heirs.
The value of certain annuities payable to your estate or your heirs.
The value of certain property you transferred within 3 years before your death.
Trusts or other interests established by you or others in which you have certain powers.
Taxable Estate

The allowable deductions used in determining your taxable estate include:

1) Funeral expenses paid out of your estate,
2) Debts you owed at the time of death, and
3) The marital deduction (generally, the value of the property that passes from your estate to your surviving spouse).

[Inquartata]

Originally Posted by Feltan

Too often the assets (business, farm) have to be sold off to pay the tax. Such are the limits of taxation applied to social engineering.

The IRS appears to support what Jeff and Philistine have said on this: No one has been able to document a single case where a family farm had to be sold to pay the estate tax. Which does not imply that the tax did not cause great hardship, that some assets may have to be sold, that burdensome debt may have had to be incurred to pay the tax, and so forth. Just that no complete farm has been lost that way. As far as we know.

[Inquartata]

Originally Posted by jeff

You're not understanding how this works. Unrealized gains (eg: stock that grew in value and was not sold, similar for other investment classes) never were taxed during the deceased's life.

Yes, I get it. However, the estate tax does not target only unrealized capital appreciation. It targets a great deal of the decedent's entire gross estate, which includes assets that have been bought with income...income which has most likely been taxed already, and indeed in the case of income from dividends and capital gains taxed several times...

So, the initial money in the investment may have been taxed, but the growth of a (say) decades-old investment was not.

Yes. And that initial money ( or the property it was used to acquire ) is also part of the taxable estate. Ergo...

That's the putative reason, and surely you understand that it overwhelmingly benefits those whose primary source of revenue is investment, rather than those whose primary source of revenue is employment.

Not in the modern economy, where virtually everyone incur unearned income. Even a portion of Social Security payments is attributable to income earned from investments. It is by no means only "the rich" who so benefit from investment. And if the argument is that it is fair to tax that sort of income heavier because "the rich" receive the lion's share of it, then the same may be said of earned income...because a corporate executive earning $12 million a year in salary is certainly making "overwhelmingly" more than the average salaried worker. Why not tax all income earners more heavily, then? Who cares if we hurt everyone a little as long as we hurt those naughty rich a lot, right?

Considering how laws are influenced - this very case we're talking about now regarding the estate tax being an excellent example - it should be obvious to you that the underlying reason is that people with lots of money to gain (and the banking and brokerage industries) were successful in obtaining tax rates favorable to them and their businesses. This is hardly a secret: the campaigns to lower taxation on capital gains were well publicised, as were the parties lobbying to that effect

So what? How is this at all relevant to the question of: Is depriving a person disproportionately of his income just because he is "rich" just or not? To say that because a person is better endowed with certain advantages than are his peers is a reason for reducing his advantages is "Harrison Bergeron" thinking, IMO.

In any case, what I was responding to was a question of "fairness", not "does it boost investment".

The two are not in my mind unrelated. You asked whether it was "fair" to tax earned income at a higher rate than unearned income, and my answer would be "Yes, if the latter has greater benefits to the economy and the society which it feeds". Is it fair to hamper the improvement in living conditions which come to ALL when economic efficiency is improved, in the name making that which is inherently unequal artificially equal, or superficially so at least?

It might even be argued that the benefits to the lower and middle classes from improved economic results are greater than those to the wealthy. The wealthy, as it has been said, can only ride in one Rolls Royce at a time, wear one $4,000 suit at a time; more income improves their overall lot less dramatically than it does that of those lower on the economic scale.

Yes I do, in fact, and I have quoted from the relevant sources several times on this board. If memory fails you, you can have an enjoyable half hour playing with "Advanced Search"

Memory? What memory? I'm a geezer, you know. Get off my lawn, you!

Seriously, I'll grant the point for the sake of argument. That still leaves me with "So what?" Legislators get laws benefiting only a few passed all the time, and it's not always wealthy people benefiting from those narrowly targeted laws, either. How does this prove that these wealthy families of yours are doing anything unusual or untoward, much less that they must be retroactively punished for their behavior by being taxed additionally?

Perhaps you're a little unclear on the concept of ad hominem attack.. Pointing out that a handful of individuals influenced tax law to their advantage, to sums of hundreds of millions of dollars, is a matter of fact - obscured but definitely in the public record, not an attack on them personally.

Huh? What are you talking about? Who did I attack personally and where?

I said that couching a statement as a homely metaphor doesn't make it more true. Just as my couching an assertion in a quote by Mencken doesn't make the assertion any more unassailable. Or have you changed your mind on that score?

[Philistine]

Originally Posted by gojujay

So we should tax the bejeebers out of them because they have so much and showed the forethought to have enough to leave it to their heirs? All that does is punish those who make, by hook or by crook, the most money. It's an elegant system for ripping people off, the more you make, the higher the rate, but you've still got more than everybody else, so quit'cher whining

The whole federal income tax system is progressive--so the issue of "the more you make, the higher the rate" isn't any different than the system has been.

The Estate Tax's (pre-2001 change) highest marginal rate was 55%. This after a $1,000,000 exclusion--Most reforms (as opposed to repeal) proposals on the Estate Tax suggest a $2,000,000 exclusion.

This rate is substantially lower than the highest marginal rate on ordinary income through the 1970's, and only slightly higher than most of the 1980's. (50% through 1986).

I can really see very little argument from a "fairness" perspective as to why inheritences should be exempt from taxation at all (currently they technically are--it is the estate which pays the taxes, not the beneficiary--though it has much the same effect).

If people want to quibble about the rates--that's fair. But I hardly consider them confiscatory in relation to other taxes--current and historical. YMMV.

--Philistine

[Inquartata]

The estate tax exemption has already been raised to $2M per the IRS website.

The question is, why is existing property to be subjected to taxation a second or in some cases a third time? ( Depending on the source of the original income used to compile the estate. )

And in what sense is fairness served by the "soak the rich" attitude? It erects a disincentive to the building of substantial estates precisely by those most able to build them, ie by the most productive members of the society...

[jeff]

Originally Posted by gojujay

Who is the victim here? The taxpayer? Those who don't make as much and should share in the wealthy's assets even though they have not earned that right? Or have the poor "earned" the right to share in the spoils by virtue of the fact that without them, the rich wouldn't have anybody to exploit? I have a problem with the estate tax because it seems to be a forced revenue sharing plan, no matter an individuals contribution, positive or negative.

(Skipping over areas of broad agreement, though I don't favor cutting off anyone's feet!)

The victim is everyone else besides the few families benefiting from the rewritten tax laws. Fair or unfair, which we can argue over, that was the tax law status quo ante. By ending that tax upon themselves, those individuals have increased the tax burden and/or deficit that the rest of us will have to pay. That they did it in a dishonest manner - with a brilliant PR campaign to make it look as if family farmers and middle class were victims of the estate tax - is a non-financial consequence. Do you think it is ever good for special interests to get legislation passed for their benefit under guise of it being something else? I don't think that's good government or public policy.

Considering the different taxes - capital gains, inheritance tax, sales tax, excise tax, and other paystub taxes - one can argue along several different lines: that they raise money for the state being the obvious one, but we immediately fall into the "is it fair?" and "does it promote some desired behavior?". As soon as we do that we get into pretty subjective argument: It may be desirable to encourage investing, so we're willing (or some of us are) to have "unfair" lower rates on investment gains to encourage it. Well. it strikes me as unfair to tax capital gains at a lower rate than the tax a janitor pays. Don't we want to motivate people to work, too? Were the rich going to do something else with their money? (advocates for the rich argue against tax on luxury items, saying that these expenses create jobs; they also argue against capital gains taxes, claiming this increases investment. If they neither spend nor invest it, what else do you think they plan to do with it? The purpose is the same: these are both arguments to reduce taxes on the rich) It may be desirable to prevent creation of a hereditary class of the rich, so we're willing to tax their legacies. Or, at least some of us are.

Actually, I think the estate tax justification can be answered in simpler terms. As lochinvar just said "it could be argued that inheritance is, in fact, income to the heirs and should be taxed as such.". That's pretty much my position, and I see no reason to claim that this is a "grand scheme to make everyone equal". Sorry, Bayou Bum, it's not about that: it's about the ability to have a class of individuals exempt from paying taxes, as you and I must do.

[jeff]

Originally Posted by Inquartata

The IRS appears to support what Jeff and Philistine have said on this: No one has been able to document a single case where a family farm had to be sold to pay the estate tax. Which does not imply that the tax did not cause great hardship, that some assets may have to be sold, that burdensome debt may have had to be incurred to pay the tax, and so forth. Just that no complete farm has been lost that way. As far as we know.

Thanks for the point. The reason that all this comes up is that the advocates for eliminating the estate tax, including Bush, frequently claimed that estate taxes lost family farms. When asked to give examples they ducked the question. Do we call this "lie" or merely "mislead"?

[jeff]

Originally Posted by Inquartata

Yes, I get it. However, the estate tax does not target only unrealized capital appreciation. It targets a great deal of the decedent's entire gross estate, which includes assets that have been bought with income...income which has most likely been taxed already, and indeed in the case of income from dividends and capital gains taxed several times...

My point was that the blanket claim that estate taxes were ipso facto double taxation was wrong. I think we agree here. The actual percentages can be worked out. I then would say: "So what?" since we also double tax via sales tax, and I'm sure others as well. The point here is that estate tax is primarily, numerically, relevant to the rich, and relief of that tax is relief for that sector.

Originally Posted by Inquartata

Yes. And that initial money ( or the property it was used to acquire ) is also part of the taxable estate. Ergo...

Answered above.

Originally Posted by Inquartata

Not in the modern economy, where virtually everyone incur unearned income. Even a portion of Social Security payments is attributable to income earned from investments. It is by no means only "the rich" who so benefit from investment. And if the argument is that it is fair to tax that sort of income heavier because "the rich" receive the lion's share of it, then the same may be said of earned income...because a corporate executive earning $12 million a year in salary is certainly making "overwhelmingly" more than the average salaried worker. Why not tax all income earners more heavily, then? Who cares if we hurt everyone a little as long as we hurt those naughty rich a lot, right?

You dropped the "primary" part of my statement. Many of us have some dividend income, but only a very few of us live off of it; eliminating taxes here benefits in a meaningful way only those. To the $12M executive: as Philistine just noted, our tax system is somewhat progressive, I think partially because the pain of paying taxes is hardest on those barely making ends and what we're doing is spreading the pain over all, but as I've illustrated in previous posts on this subject, the actual tax system is now almost flat.

I don't see any need for invoking some sort of class warfare rhetoric. That adds nothing to our discussion.

Originally Posted by Inquartata

So what? How is this at all relevant to the question of: Is depriving a person disproportionately of his income just because he is "rich" just or not? To say that because a person is better endowed with certain advantages than are his peers is a reason for reducing his advantages is "Harrison Bergeron" thinking, IMO.

Harrison who?

Are you claiming that there remain confiscatory tax rates anywhere in US tax law? Please show. What we're talking about, or at least I am, is about changes in tax law that exempt a source of income from taxation.

Originally Posted by Inquartata

The two are not in my mind unrelated. You asked whether it was "fair" to tax earned income at a higher rate than unearned income, and my answer would be "Yes, if the latter has greater benefits to the economy and the society which it feeds". Is it fair to hamper the improvement in living conditions which come to ALL when economic efficiency is improved, in the name making that which is inherently unequal artificially equal, or superficially so at least?

Here we will simply have to disagree. I cannot see any reason one could claim reasonably that it is "fair" to tax a billionaire's earnings at a rate lower than that of a dishwasher. To the contrary. I would also say that a higher tax burden on the middle class and working poor is a lead weight that keeps them in their place, unable to advance.

Originally Posted by Inquartata

It might even be argued that the benefits to the lower and middle classes from improved economic results are greater than those to the wealthy. The wealthy, as it has been said, can only ride in one Rolls Royce at a time, wear one $4,000 suit at a time; more income improves their overall lot less dramatically than it does that of those lower on the economic scale.

The first sentence needs to have some justification - which benefits flowing from which actions going to the lower and middle classes. "It could be argued" - well, let's see it - and the evidence!

That last sentence is a good justification of progressive taxation. The utility of the extra money left in the lower and middle class is much higher, so let's put the tax burden elsewhere where it has lower effect. Thanks!

Originally Posted by Inquartata

Memory? What memory? I'm a geezer, you know. Get off my lawn, you!

Seriously, I'll grant the point for the sake of argument. That still leaves me with "So what?" Legislators get laws benefiting only a few passed all the time, and it's not always wealthy people benefiting from those narrowly targeted laws, either. How does this prove that these wealthy families of yours are doing anything unusual or untoward, much less that they must be retroactively punished for their behavior by being taxed additionally?

"unusual" - no. "untoward" - yes, by virtue of the deceptive way it was sold. What "additional taxation" are you referring to? I'm talking about not exempting tax to the heir.

Originally Posted by Inquartata

Huh? What are you talking about? Who did I attack personally and where?

I said that couching a statement as a homely metaphor doesn't make it more true. Just as my couching an assertion in a quote by Mencken doesn't make the assertion any more unassailable. Or have you changed your mind on that score?

Not you, Grandpa! It was your claim that identifying the few rich families scheming to avoid tax upon themselves was itself an ad-hominem attack.

[Epee_Pox]

Originally Posted by jeff

I then would say: "So what?" since we also double tax via sales tax, and I'm sure others as well. The point here is that estate tax is primarily, numerically, relevant to the rich, and relief of that tax is relief for that sector.

To which I also say, "so what?"

What is it about successful families, that makes it appropriate to double- or triple-tax them, but not the rest of us?

Or, to put it another way, what makes them more undeserving of relief from existing overtaxation?

[Dr. Pfleschbach]

Originally Posted by lochinvar

The theory of preventing the establishment of an aristocracy could hold water, I suppose, except for the fact that it failed categorically. The Carnegies, Vanderbilts, Bushes, Kennedys, Rockefellers, and all others of that ilk are the de facto aristocracy of the United States.

Which supports my argument that the estate tax is really not much of a threat to anyone's fortunes. It is a political football used to score emotional points with constituencies. Both Right and Left wave this red herring when they feel the need to distract people from real monetary policy issues. It's a handy tool for both sides.

[lochinvar]

Originally Posted by jeff

Thanks for the point. The reason that all this comes up is that the advocates for eliminating the estate tax, including Bush, frequently claimed that estate taxes lost family farms. When asked to give examples they ducked the question. Do we call this "lie" or merely "mislead"?

Let's call it "lie", shall we? I would ordinarily be inclined to the softer "mislead", but Dubya has demonstrated a propensity for hiding the truth to serve his otherwise unstated purposes and thereby has forfeited any claim to quarter.