I want my fellow Dopers to think about whether the US is (or aspires to be) an egalitarian society. (And I am speaking in terms of equality of opportunity.) I want Dopers to think about whether the Bush team’s tax ideas further, or hinder, this aspiration.
According to the Washington Post, Bush’s tax plan will seek to “shield” capital gains, interest income and dividend income from taxation.
How will he pay for these tax cuts?
In other words, Bush will effectively increase taxes on earned income.
Let’s think for a moment about the implications of all this.
Bush has already eliminated the estate tax. If he succeeds in eliminating tax on capital gains, interest income and dividends, the result will be that a person who inherits $50 million, then spends the rest of his life living off investments would pay zero federal taxes over his lifetime. Zero.
Meanwhile, a man who works to earn $50 million (or $50,000), a man who strives and strains and innovates to create that wealth, has to pay taxes the income.
For debate:
Does this plan represent a shift of the nation’s tax burden from the wealthy to the middle class?
Will Bush’s policies create a permanent American aristocracy? (And is that what they are designed to do?)
Where should we place our incentives? Is Bush making a mistake by taxing work and innovation while eliminating tax on passive investment?
Finally, and most importantly: Are we an egalitarian nation? That is, do we aspire to be a nation where there is equality of opportunity, and in which the cream can freely rise to the top? How do we square that with a tax policy that seems to favor those who are born to wealth and power? Is inherited wealth a hindrance to an egalitarian ideal?
Interesting questions… I’ll wait to see if in fact others interpret the taxation the same way you do. (Haven’t been following Tax Reform in the US)
As for the “inherited wealth” part… if they are overly protected from the competition its a hindrance for sure to efficiency. If its about giving too much incentive to “passive” investments… that can lead to excessive financial investments and too little “real” investments in production and job creation. Bad.
I think that most Americans believe you should be able to pass your belongings on to your children when you die, and not have to give it to the government. I certainly think you should be able to.
Maybe. But that’s not necessarliy bad. In order to believe that it is, one has to postulate that the current division of the tax burden is fair, and that it can only be ratcheted one way. Americans generally think about tax policy in terms of what they hope their income will be someday rather than what it is right now.
No and no. I’m not going to disprove your thesis. If you think the answer is “yes and/or yes”, give us a reason and we’ll go from there.
Only if the tax code is deemed to be correct in its present form. One problem with capital gains taxation is that it’s not indexed for inflation. If I buy stock and sell it in 10 years, I may have actually lost money even though for tax purposes I have a gain. What you call “passive investment” is actually risk taking. You make it sound like investing is a sure-fire thing. Of course, if you eliminate capital gains, you also get rid of capital loss. That makes people more cogniscent of the investments they make.
Yes.
Because most people work for their families, not just for themselves. Why should I work my butt off to procure wealth if the government is going to take it when I die? I might as well just spend it, if my kids can’t have it.
Inherited wealth would only be a hindernace to equality if the economy were a zero sum game.
We do? Not me. I think about how tax policy affects me right now.
OK, so mend it, don’t end it. Index it for inflation.
Yes, and playing blackjack is risk-taking too. What’s your point? Should we eliminate taxation on gambling profits?
Let’s say I buy a piece of land expecting it to increase in value. And then I just sit back while it does. How is this any different from playing blackjack? How have I helped the economy? Why shouldn’t my profits (after adjusting for inflation, as you wish) be taxed as income?
Sure would stimulate the economy if you did, now wouldn’t it?
George Bush seems a prime example to me of the way in which inherited wealth and power interfere with equality of opportunity.
Bush got into Yale (let’s face it) because of his wealth and connections. (And I’m not saying he’s stupid-- just not as bright as a typical Ivy Leaguer.)
Because Bush got into Yale, someone else-- someone brighter-- was denied the opportunity. Not only the opportunity to learn at Yale, but just as important, the opportunity to make connections with other bright and talented up-and-comers.
As for proving my hypothesis that we are creating (or perhaps just perpetuating) an American aristocracy, isn’t this sort of thing proof enough?
Could someone explain how the coding works for quote boxes?
I’ve not seen anything offered as a plan from the administration. Bush speaks in broad terms about reform and an ownership society. I’ve not seen anything specific yet.
How does eliminating the deduction for state and local income taxes raise taxes on wages more than any other form of income? The deduction reduces the taxable income of any form of income. Is someone proposing to tax only wages and salaries? If so, that politician better start to polish his resume.
I’ve not seen any recent proposals to eliminate the tax on interest. The last one floated was back in 1991 or 1992. It would have eliminated the tax on interest income paid to individuals but also eliminate the deduction for interest paid at the corporate level. Effectively, if you receive interest on a corporate bond, the corporation pays the tax instead of you. This was supposed to reduce a corporation’s incentive to use debt financing instead of equity. The use of debt financing was considered a problem at the time. I’ve not heard a similar concern recently.
Well, part of it. It’s not like the estate tax took everything, at the max, it was about half.
Maybe, but more income will be taxed more under the proposed scheme. Investments will be taxed less, but I doubt most americans think of tax policy in terms of the investments they will make, today or someday.
Are you sure about this? While 10 years of inflation might lower the effective amount of money you make when you sell the stock, I would think it would also raise the price of the stock. Or am I wrong in assuming that the price in stocks rise along with everything else due to inflation.
In any case, I hope they don’t get rid of capital gains, someday I hope to make enough to invest and thus be able to pay it. Kind of a status symbol in my mind.
Again, you still get to give a sizable chunk to your kids.
Taxation is more or less a zero sum game. If we eliminate 20 billion worth of federal revenue on people inheriting money, then we have to raise it elsewhere, presumably on income tax. Thus people earning income lose, people inheriting it win.
I’ve heard that used to explain why proposals like Kerry’s “raise taxes on the wealthy” plan isn’t automatically lapped up by the non-wealthy. But of course, even if it’s true, I said “generally” not “univerisally”.
That’s a possibility, too. But capital gains taxes have other problems, too. Say I sell my house and have a capital gain. But unless I move to an area where real estate is cheaper, I probably have to buy another house that’s just as expensive, or maybe more so, than the one I sold. Right now there are exemptions so that you don’t pay those taxes under certain circumstances. But that still introduces distortions in the economy. Better to just get rid of that tax altogether. That allows people to make economic decisions bases solely on the economic issues (and they’re own personally situation). The economy suffers when people make decisions to avoid taxes rather for pure economic reasons.
Buying land is not the same as drawing from a deck of cards. Again, people buy and sell land for many different reasons, and the best situation for the economy is to allow people to make decsions based on economic reasons, not on tax reasons.
Not necessarily any more than willing it to your kids. It’s not like the kids are going to hide the money in a mattress. Even sitting in a bank, the money is being used for investments.
Bush got in as a legacy. That’s an entirely different matter. I’m no fan of the legacy system, but I understand why institutions have it-- it helps raise money. Are you suggtsting that people should not be able to spend their money to send their kids to the best college they can get into?
Again, that’s a different issue. But Yale, as a private institution, should be able to make its own rules for admission. Your case would be stronger if Yale were a public university. But even then, there is a trade-off between complete equality and alumni donations. As I said earlier, I’m no fan of the legacy system. But it’s more complicated than your analysis implies.
Aristocracy is a misnomer, as it has nothing to do with wealth. If you want to argue that allowing wealth to be inherited tends to keep some wealth within a family, then that’s probably true. Whether that situation is “permanent” is another matter, and is not true. That is what you stated in the OP.
You also realize, I hope, that you only get to deduct state and local taxes if you itemize deductions. And most people who itemize do so based on mortgage deductions, which almost certainly puts them in the higher income categories. The working poor would generally be unaffected.
In some states, the income tax is high enough that many people itemize based only on the taxes. That said, the working poor are basically unaffected. Only about 25% of all returns itemize. They tend to be of higher income individuals.
Wouldn’t the person who earned the $50 million and leaves it to his slacker son have paid taxes on the money already? But you would suggest that it should be taxed again. Just because you want (presumably) to discourage accumulation of assets that can be deeded to your offspring. What exactly does that say about the relative importance of family vs. government?
Perhaps an example might be useful.
I am Joe Businessowner. I have a successful business, and a chunk of money I have to decide to do something with.
I can invest it in my business, and upgrade the machinery so as to raise production. This will make me a more efficient producer, and thus raise the value of my business.
Or I can blow the money at the race track, and on bourbon and hookers.
I read in the Wall Street Journal, however, that the government has just passed the Fair Play Tax Reform Act of 2004. I thus realize that most of the increase I would have realized by upgrading my business is going to be grabbed by the government. However, I get to keep all the bourbon and hookers I can buy with my money, myself.
Now, I won’t be taxed until I realize the profits by selling the business (or stock in it). So I could invest in the business, and then little Johnny Businessowner, my son, will get the benefit when he inherits after I go to the Great Franchise in the Sky. But I further read in the WSJ that one of the provisions of the FPTRA2004 is that the inheritance taxes are going to grab even more of the increased value than I would pay in taxes myself.
At this point, I make up my mind. It’s bourbon and hookers for me.
Now that is fine for the bourbon and hooker industries, but it causes everyone else (especially the government and my employees) to lose out because I didn’t attempt to increase the productivity of my business. Ms. Kitty Litter and the Old Granddad Company get the money instead of the Better MachineCo, consumers pay more for the products they buy, and I can’t hire the ten new employees I could have if my business ran better, so they lose out as well.
You are thus discouraging production at the Better Machineco, and encouraging drinking and hookers. But liquor and prostitution are activities that tend not to increase efficiency and overall well-being as much as other sorts of business investment. If you buy stock, for instance, you are making your funds available for business to take risks with. If the risks pay off, you make a profit and everyone is happy. If, instead of investing, you hand the same amount to the young lady in fishnet stockings and the red vinyl skirt, you are taking a risk of a different sort, but the pay off is much less. Maybe you won’t get herpes and your wife will never know, but that isn’t the same as a dividend check.
Now, obviously this is not going to be as cut and dried as all that, since it is going to operate at the margins, as with most economic considerations, but Jack Kemp said:
IIRC.
Thus, if you want to encourage investment, you aren’t going to have much effect if you remove the incentive to investment by taxing the profits more. Profit is the reward for risk. If you don’t get rewarded for taking risk, you aren’t going to do so. And therefore your capital investment rate is going to go down, all other things being equal.
Well, yes, yes and yes, who cares, and no, respectively.
That is to say, I don’t believe the government has any interest in discouraging people from building up their estate and investing it for the long run.
Isn’t buying a piece of fallow land and holding it for investment purposes the economic equivalent of hiding it in a mattress? Why should we provide tax incentives for that behavior?
But Bush didn’t get into Yale on his merits. That’s my point. Family wealth got him into Yale.
Nor am I questioning that. What I am questioning is whether a permanent aristocracy should exist, such that it is able to perennially buy its scions into the best universities. Or should our tax policy mitigate this aristocracy?
I won’t quibble over semantics. What I’m talking about when I refer to “aristocracy” is a system of inherited wealth and power having little or nothing to do with merit. If there’s a better word, let me know and I’ll be happy to use it.
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If you want to argue that allowing wealth to be inherited tends to keep some wealth within a family, then that’s probably true. Whether that situation is “permanent” is another matter, and is not true. That is what you stated in the OP.
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It is made more permanent by Bush’s tax cuts because those tax cuts make it possible for the wealthy families to pass along and retain more of their wealth. The elimination of the estate tax allows the wealthy to pass that wealth to their heirs intact, and the potential elimination of capital gains tax, tax on interest, and tax on dividends would allow wealthy scions to live their lives tax-free, without ever contributing to the infrastructure that allowed them to create and maintain that wealth.
Please explain why a man who works to earn $50 million should pay taxes on it while a man who sits on his ass and inherits $50 million should not. Souldn’t both be taxed for their income? In fact, shouldn’t we tax the man who worked for his wealth at a lower rate than the man who simply inherited it? Shouldn’t there be an incentive to work, to innovate, to create?
Probably d) all of the above, plus addressing one of the major factors driving the increase in health care costs - that the ones consuming it are partially shielded from knowing how much they are paying.
Please note that I did not say that this was going to solve the problem entirely, or that it will not be painful, especially in the short term.
Let’s say I go out and earn $1 Million. I pay taxes on the earnings and put the rest of the money in the bank. Now I take $400,000 of that money (which has already been taxed) and pay it to Joe Contractor to build me a house.
Now Joe Contractor must pay taxes on that portion of the $400,000 that represents his profit. (“Double taxation!” I hear you scream! That money has already been taxed!)
Now Joe Contractor takes a portion of his profits and buys a back massage. Now his masseuse must pay tax. (“Triple taxation!” you scream!)
Well no. What is being taxed is not the money, but the transfer of the money. Joe Contractor has to pay income tax on that transfer. The massuese must pay income tax when the money trickles further down.
Now look at Joe Scion. He inherits $1 Million without lifting a finger. Why shouldn’t that be taxed as income? It’s not double taxation, since what’s being taxed is the transfer of wealth. And at least Joe Contractor created something (a house) to earn his money. Joe Scion did nothing.
And let’s talk about this idea that tax cuts for the wealthy encourage “investment in the economy” whatever that means.
Let’s say we give Joe Billionaire a huge tax cut (at the expense of Joe and Jane Middleclass, remember).
Now Joe Billionaire has and extra billion in his pocket. What shall he do with it? Well, maybe he’s build a new factory in Ohio and stimulate the US economy, as proponents of tax cuts seem to assume.
On the other hand, maybe he’ll build a new factory in China.
Or maybe he’ll buy a mansion in the South of France. (Which benefits the US economy how, exactly?)
Or maybe he’ll buy land and just hold it for investment, creating exactly zero jobs.
Why the assumption that money given in sackfuls to the wealthy is good for the economy? If you insist on cutting taxes, wouldn’t tax cuts directed at the working poor and middle class be more likely to stimulate the economy (since their money is more likely to be spent on consumer items and more likely to be spent locally)?
Regardless of at what point you impose another tax, you are still taxing the same money again. It doesn’t matter what you call it, you are taxing the same money again and again.
The same reasons I explained above - that taxing it again will tend to discourage the wealth from being collected in the first place, and invested if it is collected in the second place.
Yes, it is indeed double taxation. Joe Scion’s parent’s paid the income tax. Now you want to tax it again. That’s two taxes. If there were no inheritance tax, it would be one. See how it works? One + one = two.
spoke: It’s only a “tax break” if you assume that system as it exists is fair. I look at it this way: I have an idea of what my ideal tax scheme would look like. That involves changes to the current system. The closer a president tries to move the tax code to my ideal, the better it is. That will mean that some people will benefit and some people will lose. You seem to be assuming that any change that doesn’t tilt the system to tax the wealthy more is bad. Why is the current system the standard by which you judge the fairness of any new system?