The Viper Room - NO SCRUBS

[filghy2]

2. Economies prosper when the government gives away money.

That's a gross over-simplification, as usual. There are three main rationales for government spending:
1. To support the economy when private spending is weak.
2. To supply public goods that the market can't or won't provide.
3. To redistribute income more equitably.

[broncofan]

There some data here. It looks like an American's lot in life is more likely to be influenced by their parents' income than in most other countries.
https://en.wikipedia.org/wiki/Socioe..._United_States
https://voxeu.org/article/intergenerational-mobility-us

Thanks. I'm glad you found the data because Nick and I would be more likely to post the yelp reviews for some restaurant. My sense is that the "self-made" men that Nick knows would be less likely to benefit from Republican tax and spending plans than the very wealthy trust fund kids I've met along the way.

First, the estate tax in this country doesn't even kick in until the estate is worth more than 10 million dollars. Second, I've said this before but a big part of estate planning is advising older clients not to sell property because of the step up in basis. Basically, income tax on unrealized gains for property vanish at death for the decedent and the heir gets the property at a reappraised value and basis. Third, many tax exemptions and deductions that are in the code are very helpful to large investors in real estate, many of whom have high net worth are going to be passing on this wealth in the form of property to the next generation.

It's not surprising that this is the case. We don't provide health care and we have more medical bankruptcies than any other developed country. College is expensive and lobbying allows certain key industries to hold onto wealth and create dynasties.

[broncofan]

Basically, income tax on unrealized gains for property vanish at death for the decedent and the heir gets the property at a reappraised value and basis.

Just in case any readers don't know how this works here's an example. In 2005, grandma buys a piece of property for 1 million dollars. In 2015 grandma dies. When the property is passed to her grandkid Billy it is reappraised at 5 million dollars. In 2018 Billy sells the home for 6 million dollars. He has taxable gain on the property of 1 million dollars instead of 5 million dollars. Grandma was never taxed on the unrealized gain of 4 million dollars because gain must be realized to be taxable under our income tax code.

The estate tax is separate from our income tax but if she and her husband had a combined net worth under 23 million dollars*, no estate tax is paid.

* I made my argument weaker than it should have been. I forgot that in 2018, the individual exemption was doubled, and the exemption is indexed for inflation.

https://www.taxpolicycenter.org/brie...fer-taxes-work

https://www.forbes.com/sites/ashleae...h=59bb132b459e

Would it be unfair to tax estates that are less than 23 million dollars?

[broncofan]

https://en.wikipedia.org/wiki/Inheritance_tax

I'm curious how much inheritance taxes contribute to dynastic wealth. I'm sure it's not everything. You can see in this link that some countries don't impose inheritance taxes but they also make sure the decedent pays tax on their full estate and doesn't get to avoid taxes for unsold assets. The combination of not taxing unsold assets and giving a very large exemption is a pretty good cushion.

Edit: I'm not certain but I think what Australia and possibly other countries call "crystalising action" is similar to how we require realization before anything is taxable.

[Stavros]

Just in case any readers don't know how this works here's an example. In 2005, grandma buys a piece of property for 1 million dollars. In 2015 grandma dies. When the property is passed to her grandkid Billy it is reappraised at 5 million dollars. In 2018 Billy sells the home for 6 million dollars. He has taxable gain on the property of 1 million dollars instead of 5 million dollars. Grandma was never taxed on the unrealized gain of 4 million dollars because gain must be realized to be taxable under our income tax code.

The estate tax is separate from our income tax but if she and her husband had a combined net worth under 23 million dollars*, no estate tax is paid.

* I made my argument weaker than it should have been. I forgot that in 2018, the individual exemption was doubled, and the exemption is indexed for inflation.

https://www.taxpolicycenter.org/brie...fer-taxes-work

https://www.forbes.com/sites/ashleae...h=59bb132b459e

Would it be unfair to tax estates that are less than 23 million dollars?

Broncofan, I find your remarks about tax an important way of understanding that it is not the headline figures that matter, or the 'we're gonna cut taxes' or 'they're gonna raise taxes' slogans i politics, but the layers of definition that comprise the tax code, or codes. As Stiglitz argued in the Price of Inequality, corporations use these layers and layers of codes to reduce the headline figure of corporation tax so that in effect, whatever the headline figure is, they rarely pay more than 10%. And, as I think you probably know better than most on HA, Trump has made most of his money with the help of tax lawyers, which is why they are, with Medical, Intellectual Property, and Corporate (in General terms) the best paid lawyers in the US.

But is the tax system fair? And how would you even answer that question?!

[broncofan]

Broncofan, I find your remarks about tax an important way of understanding that it is not the headline figures that matter, or the 'we're gonna cut taxes' or 'they're gonna raise taxes' slogans i politics, but the layers of definition that comprise the tax code, or codes. As Stiglitz argued in the Price of Inequality, corporations use these layers and layers of codes to reduce the headline figure of corporation tax so that in effect, whatever the headline figure is, they rarely pay more than 10%. And, as I think you probably know better than most on HA, Trump has made most of his money with the help of tax lawyers, which is why they are, with Medical, Intellectual Property, and Corporate (in General terms) the best paid lawyers in the US.

But is the tax system fair? And how would you even answer that question?!

I think the answer to those questions depends on what people believe the government should provide for its citizens. In the UK you have the NHS whereas in the U.S. we have record numbers of medical bankruptcies and spend hundreds of billions of dollars on the military. So one way to frame the question is, is it fair for someone to go bankrupt because they're underinsured and have cancer or heart disease or diabetes while someone else inherits 20 million dollars that is not only tax free, but includes property whose appreciation in value up until the decedent's death will never be taxed?

Like you imply the tax code is so granular and includes so many carve outs and provisions that only lobbyists and a select group of tax attorneys and accountants know about that it is difficult for the public to be informed. If you asked the average person on the street even something as straightforward as what amount of money is exempt from estate tax, the people most likely to have the answer are estate planners and people whose net worth is close to 20 million dollars or greater.

I have never studied corporate tax unfortunately (just federal income tax for individuals) but I'm sure it is an area that includes tons of complex planning to avoid taxes or defer them.

Tax policy is a very interesting subject because for every provision of the tax code we're revealing what our priorities are as a society. And the code incentivizes and discourages different economic behavior in ways that probably isn't always easy to predict.

[filghy2]

Edit: I'm not certain but I think what Australia and possibly other countries call "crystalising action" is similar to how we require realization before anything is taxable.

Yes, capital gains are taxed only on realisation at half the owner's marginal income tax rate (except for the main residence, which is exempt). There's no estate tax, so the inheritor would pay tax only if they sold the property.

Conservative philosophy seems to be as follows:
If a person has no money the government should not give them any because that would reduce their incentive to work.
But if a person inherits millions the government should not tax any of it because that would reduce their incentive to work.

[broncofan]

Yes, capital gains are taxed only on realisation at half the owner's marginal income tax rate (except for the main residence, which is exempt). There's no estate tax, so the inheritor would pay tax only if they sold the property.

Conservative philosophy seems to be as follows:
If a person has no money the government should not give them any because that would reduce their incentive to work.
But if a person inherits millions the government should not tax any of it because that would reduce their incentive to work.

I agree with you and think even without seeing the contradiction neither statement is true. People who have been crushed by poverty may be demoralized. I hope that isn't the cue for an anecdote about someone's remarkable fortitude in the face of overwhelming odds.

When I started to look at the link on inheritance tax there were a lot of societies that don't have nearly the wealth inequality the US has that don't have an estate tax. Of course when I randomly chose countries to look at I found instances where the characterization wasn't inaccurate but the situation was more complicated. For instance, Austria doesn't have an inheritance tax but there is a 3.5% transfer tax on real estate that is inherited. That's not huge but it can add up and if the bulk of the estate is real estate I'm sure it forces a sale in some cases.

Probably more important is that these are also societies that struck different compromises. The U.S. is (I think) such an anomaly for having a weak social safety net, poor healthcare system, relatively low upper income tax bracket, tons of tax avoidance strategies that aren't closed off, step up in basis on inherited property, and huge estate tax exemption that contributes to this.

Stavros, one way I'd distinguish reasonable tax planning from some of the shadier stuff we see is like this: If a tax planner tells a client what the tax consequences are of different courses of action, the client can make an informed decision that considers potential taxation as another cost of doing business. On the other hand, if the tax planning creates "sham transactions" that are intended to re-characterize what is being done to get a tax advantage, I think it's at least unethical.

For instance, if one state has a tax rate of 6% and another state has a tax rate of 3%, then someone should take it into account when they decide where to locate. For states this might lead to a race to the bottom but it's a legitimate consideration. But many tax avoidance strategies involve complex sequences of transactions that are only intended to avoid taxes and do nothing to advance any business purpose.

[Stavros]

[QUOTE=broncofan;1962032

For instance, if one state has a tax rate of 6% and another state has a tax rate of 3%, then someone should take it into account when they decide where to locate. For states this might lead to a race to the bottom but it's a legitimate consideration. But many tax avoidance strategies involve complex sequences of transactions that are only intended to avoid taxes and do nothing to advance any business purpose.[/QUOTE]

Sounds like Delaware! Shall we email Joe about it?

[broncofan]

Sounds like Delaware! Shall we email Joe about it?

It's worth a try;