Most dollars in the economy are taxed multiple times as money changes hands. We generally tax the transfer of wealth. Your dollar in wages has already been taxed, and we will tax it again in sales tax when you spend it. It becomes revenue for the store, and then its taxed again when he files taxes.
Don’t buy into the myth of “double taxation”. Let’s say you buy 10,000 shares of Acme stock at $1.00. In 30 years you die and it’s worth $100 per share. The increase in value is $990,000. That profit was never taxed. Profits from unsold capital increases are never taxed.
Secondly, money is taxed when it makes money. If Grandpa Gotrocks makes $100 million per year, he gets taxed on it. He has a bundle of cash built up from his after-tax earnings. If he takes that after-tax money and invests it, that new money is new income and is taxed accordingly. There is no double taxation. When Little Johnny Gotrocks inherits the estate, that is new income for him and should be taxed.
The point is that the principle bvehuind a policy matters even if the policy would negatively affect only a small number of people.
Makes sense. OK thanks.
And the principle behind the policy of inheritance taxation is sound, even though it affects very few.
I would make a stronger statement: the principle behind the estate tax is sound, and it would be, even if it affected many.
In fact, I consider the estate tax to be one of the most justifiable taxes, morally and economically, in our system. Morally because it militates against the amassing of large fortunes. Economically because it introduces very few economic distortions. Taxing something discourages it, and you get less of it. That’s bad (though justifiable) for wage income, etc. But it’s not as if we can discourage death, anyway.
And I’m not sure if there ever was a millionaire who worked less hard because their children would have a few less thousand in inheritance.
I think you share a common misconception. Income taxes are also low at moderate income levels.
Let’s look at the two scenarios. The original question related to someone earning $100k vs someone with $5m stashed away. Let’s assume we are talking about someone married with 2 kids and just taking standard deductions and using 2010 taxes. Our hypothetical family has $26,000 in exemptions and deductions, leaving $74,000 of taxable income.
The tax on this is $10,862.50. Using my state of Georgia for state taxes, there is also $4,440 of state taxes for a total of $15,302.50 in taxes - 15.3% of the total.
Our $5m investor is a little harder to calculate as we have to make assumptions about the type of income. Let us say he is fairly conservatively invested with a mixture of stocks and bonds averaging 7% return per year. That would break down something like 5% cap gains/dividends and 2% interest.
So we have investment income & growth of $250k taxed at cap gains/dividends rates, and $100k as income. Our person would have the same deductions and exemptions as the previous example. Hence the $100k of interest-taxed-as-income would generate exactly the same $15,302 in tax. So all the cap gains/dividends would result in extra tax that the investor pays on top of our wage-earner. The cap gains are only paid when realized, of course. Historically, one third of the gain in the S&P 500 is from dividends, so they would be taxed in the year earned. This means paying 21% (15% Federal, 6% state) on $83,333 = $17,500 in tax. Our investor has now paid more than twice as much income tax as the wage-earner, and is accumulating capital gains to pay tax on sometime (unless he never sells and “beats the system” by dying).
I have ignored Social Security/Medicare. If you view those as taxes, the wage-earner will pay $7,650 in 2010 ($5,650 in 2011) and Federal/State taxes will reduce by the tax on that amount. The investor pays no SS/Medicare (and accumulates no SS benefit either).
I do actually support there being an estate tax (although I would convert it to an inheritance tax), but I can certainly see senior millionaires running family businesses being less motivated to build up that business in their later years if they think that the government will just take away a big chunk of the extra. It could be viewed as better to have a $5m business that passes on unmolested than a $10m business that you have to break up to pay the estate tax.
Not sure what you mean by “sound”–seems like you think that a principle can have an objecive quality of soundness, and the animating principle of the estate tax has that quality.
I think that’s hogwash. Rather, you simply have an opinion that an estate tax is a good thing, and I simply disagree. But I’m happy just having an opinion–I don’t need to try to elevate into some objective truth.
Why do you think it’s a good thing to discourage people from amassing large fortunes?
I’m not MilTan and can’t speak for him/her, but the way I interpreted what s/he said was that morally speaking, we want our tax code to reward hard work and enterprise, not just sitting on your ass waiting for Daddy to die and leave you a bundle.
To limit the concentration of wealth into a select oligarchy. Next question please.
Nobody is against people amassing large fortunes. We just don’t think that one has the right to inherit such a sum without paying tax on it. Person A invents a new computer system and makes a billion dollars. Person B inherits a billion dollars. Why should B get his tax-free that he didn’t earn while A earned his and paid taxes on it?
Another thing to consider is that the estate tax laws actually reduce taxes that would otherwise be due; i.e., if we did not have the estate tax laws then there would be more taxes paid.
For example, let’s say you mother had stocks she and your dad paid $5k for 50 years ago and it is now worth $25K at the time of her death. Normally when the stock is sold there would be income tax due on the gain. The estate tax laws exempt the first $5M, so unless the rest of the estate exceeds that, there will be no taxes paid no that gain. In addition, the basis for the stock you inherit will be set to $25K so if you sell it later you only pay taxes based on the difference between $25K and the selling price.
So in this case the estate tax laws have reduced your tax liability as it does for the vast, vast majority of tax payers.
On that less than 1000 dollars a month, they pay property taxes, local taxes, sales taxes, gasoline taxes and lots more. You are talking about Federal taxes only.
And, of course, Social Security/Medicare. A regressive tax.
A fear shared by our founders, particularly those crazy socialists Thomas Jefferson and Benjamin Franklin.
Funny how part of the understanding of the Egyptian ruler overthrow was about it being 38th in the world for bad income distribution. You should eventually expect people to tire of exploitation.
We are 43rd. It may be our turn.
So you’d rather awealth didn’t exist than it be owned by a “small” number of people?
Say there are two islands, each of which have 5 citizens. On the first island, all 5 citizens are subsistence farmers. They own land and livestock and not much else. On the second island, 4 citizens are subsistence farmers, and the 5 has learned how to generate and use electricity (and lots of other stuff). So he has a power plant and lots of electrical gadgets. You think the first island is “better” somehow than the second?