Property/estate taxes: Evil or just plain stupid?

Another thread inspired me to hijack it with a rant about property taxes, but that was a mistake. I now attempt to rectify that mistake by opening a thread for this in the proper place.

Property taxes are imposed on people based on the value of property they own, and estate tax is imposed upon people based on the value of property they inherit. These taxes are levied with no concern for the taxpayer’s ability to pay. I therefore think these kinds of taxes are unfair and should be rethought.

For example, if you buy a house for cash, you will be charged some percentage of the home’s value, say 1%, in property taxes. Every year the valuation of the home goes up and so does your tax bill. Eventually, you retire and have a fixed income, but your taxes continue to increase. Eventually, you cannot afford to pay the taxes and must sell your home.

Another example - your father owns a farm worth two million dollars, but by working the land you just make a middle class living. That’s OK, because you grew up on the farm, and want to live there forever. When your dad dies and passes the farm to you, you owe $800,000 dollars in taxes and are forced to sell the farm.

Isn’t that lame? How about taxes like this being based on ability to pay, more like income taxes are? For example, estate taxes could be replaced with capital gains taxes - if your farm was purchased in 1877 for $35 dollars, when you sell it you pay capital gains on the difference.

Please note I do not claim that all taxes are evil, nor that I do not wish to pay any taxes. I just object to those taxes that are levied without concern for ability to pay, such as property taxes and estate taxes.

A person dies and the 1.2 million inheritance isn’t enough to cover the family estate.
I’m supposed to feel bad for the heir? Sorry, I’ve got real concerns.
And how can an estate tax be more than a person can afford?
When you die your need for money dies with you dead and you can afford to have them take it all.

Just my 2sense
Partisan mudslinging is Great Debates. - David B

As I understand it, estate taxes are to prevent one family from controlling the ecomomy perpetually. The taxes forces the splitting of he property of the deceased, so that the multiple beneficiaries can receive the deceased’s items with less of a tax liability.

The problem with estate taxes right now is that the cutoff is simply too low. These aren’t so bad for gazillionaire families, but small family owned businesses get ruined all the time. A lot of people have the mistaken idea that when someone inherrits an estate, they get a bunch of money. This is often not true. If the person inherits a small business, it may be valued at, say, $5,000,000. According to this nifty Estate tax calculator, you will wind up paying 43%, or $2,150,000! That’s close to half the valuation of the business. If this business only nets, say $500,000 a year in cash, and all profit goes back into the business, there is no possible way the heir could pay the tax. The only solution is the sell the business (for less than what it’s worth because your desperate.) That leaves you with $3,850,000 in cash, instead of a profitable business. You then have to go and start your own business with a lot less than what you inherrited.

There’s also the moral issue; a dude pays income tax his whole life, then has to pay tax on his income a second time when he dies. I think estate taxes are an OK thing, but the cut-off needs to be MUCH higher. I’d say it should be around $10,000,000. People with an estate that big can certainly afford the tax without too much trouble (and people with that much money should make an adequate estate plan anyway.)

As for property taxes, property values can generally be extrapolated fairly easily. I don’t have much of a problem with them. If you plan it wrong, it’s your own fault.

I don’t complain about my property tax. Why? It’s only $1200/yr. That’s because my city also has an income tax,which most of the places around here with high property and school taxes (we don’t have those at all) don’t have.The thing is, some people prefer property taxes to income taxes. Maybe they’re not thinking of retirement, or maybe they plan to sell and move to an apartment when they retire.The advantage to property taxes instead of income taxes comes when your income rises but you don’t trade up in houses. My income has more than doubled in the past 10 years. My property tax went up 20%. I wish that’s all my income tax went up.

I have even less compassion for the plight of friedo’s heir. If Junior wants a business s/he should go out and earn one. And, oh yeah, that $3.85 mil could come in handy for that.

I strongly disagree that it is immoral to tax dead people.
I believe that taxing based on ability to pay is just and no one can afford to pay a higher percentage than the dead. They can afford 100%
So what if the deceased were already taxed on the income? How is it immoral to tax a dollar twice?

We are pious toward our history in order to be cynical toward our government - Garry Wills

I think Friedo has it right except for the claim that a business valued at five million is a small business. In reality, who pays estate taxes? Anyone with any business worth protecting is either incorporated or in a living trust which totally avoids inheritance taxes.

This is not necessarily the case. California passed Proposition 13 because property values were skyrocketing and little old ladies had huge tax increases. If you ever retire to some podunk little town that suddenly becomes the next Aspen or Santa Fe, you might not find your extrapolation is valid, and you’re screwed.

But it isn’t the dead who pay the taxes, it is the living.

That’s right, the living pay. In the case of some kid who grew up on his father’s farm, he has to pony up 40% of the value when his Dad dies, just to live in his father’s house. What’s next, tell parents that after their kid reaches age 18 they aren’t allowed to give them any money? OK, so I’m the master of the slippery slope, but I don’t see why it is acceptable to tax recipients of estates when it does not tie into ability to pay.

How about this for estate taxes:
[li]Cash is taxed at the ridiculously high rate.[/li][li]Other assets are not taxed at all, but are marked such that upon their sale, any gain up to the value at the death-date is taxed at the high rate, above that it is capital gains.[/li]This way, when someone does sell the stock the government gets its due, but until then nobody has to get screwed because of this.

I could easily see someone taking out a huge mortgage in order to pay the taxes on some inherited property and then watching the value collapse - in a real-estate bust or bear market. That’s just wrong, you said it yourself 2sense - taxing based on ability to pay. The problem is, the dead aren’t paying.

**douglips **:

OK, I’m flexible. I don’t mind viewing the tax as being paid by the heirs or by the deceased. As long as you don’t argue both.

I don’t see the lack of ability to pay on the part of the heir.
His/her cut of the pie is still $3.85 million. That’s not enough to retain ownership of the current plantation but it leaves plenty to buy another farm. I certainly wouldn’t favor leaving a person’s surviving dependants out on the street but that isn’t exactly the case here.

Well no. We currently have a gift tax. You are only allowed to give another person a certain amount of money without paying taxes on the exchange. The gift tax rates, by some strange coincidence, are suspiciously similar to inheritance tax rates. I am content with this solution so there is no slope to be found, slippery or no.

The problem that I have with your proposal to exempt assets is that includes most of the wealth.
How much cash do people have lying around uninvested?

The market price that matters to a family farm is how much they get from this year’s crops. What does it matter if they can’t sell out? If they wanted to take the money and run then why did they take out the mortgage in the first place?

Hi! I’m a Weenie
What’s your sign?

Whats wrong with making the living pay?

Take this example. Bob buys a widget from Pamela, using money that he is already taxed on. Pamela, upon receiveing that money, has to pay taxes on it as well (See, money getting taxed more than once is a common and accepted practice). Pamela then dies. How is Pamela’s son, upon recieveing that money, somehow magically exempt from poneying up to the government? Seems to me that people getting money they did nothing to earn should be more than happy to pay up! Heck, if anyone would rather not pay estate taxes, they should send it over my way…I’d gladly pay taxes for unearned cash.

So it seems the real problem is the ‘Joe has to give up the beloved family pig farm’. I feel sympathy for those people, and propose this plan: The average profit that the pig farm is likely to make per year is figured out. Then Joe can keep the beloved pig farm, but is responsible yearly for paying the estimated profit as taxes until his estate tax is payed off. Joe gets the pig farm, Uncle Sam gets his cash. We all end up happy.

OK- we have 2 separate Ops here. It will be very hard to debate them both- how about limiting this thread to just one of these?

Now- example one is specious. If your home increases in value every year about that of inflation- then your "fixed’ income, usually increases about the same (Socail security and many pensions include a cost-of-living increase). Thus, your ratio will stay about the same. In any case- even if not- you Prpoerty tax bill is only a small item of your overall budget- unless you live forever it is not going to increase to the point where it eats up all your available income. Now- if you home is increasing in value much faster than the CPI- as here in Silicon Valley, then you also have options. “Reverse mortages” for one- “equity sharing” is another- or just selling the place for a HUGE tax-free profit and buying your home where the housing market is a bit more stable. Note that in some areas- property values are actually decreasing, along with your prop tax.

Example 2 also shows a lack of tax expertise. With estate planning- an estate of up to 4 million can be sheltered withou any significant Estate taxes. Even without clever planning by professionals, the Estate tax would not be anywhere near $800,000. There are exclusions & deductions. Assuming the farm is mortgaged to the hilt- that would mean no estate tax right there- and most family farms are. Even if the Farm is “bought & paid for”- then “Dad” being at least able to read- has 'given" some 10K of the farm every year to the son- tax free- for quite some time- and thus exempted some 400K+ from taxes. Then the first $675000 is also tax free. Then, of course- family farms are allowed to be valued at their “special (or business) use value”. This deduction is not unlimited- but would reduce the value of the estate by $675000. Then , the “family owned business” deduction kicks in- exempting another $675000. Thus, in your example- the net estate tax would be zero, zip, nada. Or $800,000 less than your figure. No selling the “old family farm”. The “old family farm” would have to be worth over 2.5 million before any Estate taxes kicked in- and that is only if Dad did not hire a real sharp Estate tax planner.

In ctual fact- the dead due does not have to pay “tax again a second time when he dies”. What is taxed is not the “estate” per se- but the TRANSFER of the assets from one hadn (the dead) to another (the heir. Just like when you buy something, the money is transferred fom your hand, to the sellers- and he has to pay taxes on that “income” despite the fact you have already done so. All dollars are not only “taxed twice”- but dozens & hundreds of times.

As to your example- a “small business” with “net assets” of 5 million that only nets 500K a year- is being run EXTREMELY poorly, and is a rather specious example. Again, in this case, good estate planning could exempt about the first 4mill- and the tax of the rest is not too bad. besides- that business is very asset heavy and needs to be runs more effectively. :smiley:

However, already written into law is a a very large increase in the “base exemption” as you wanted- not to 10 million, no- but quite a bit.

In Nebraska, elderly and disabled low-income homeowners have a “homestead exemption” that excuses them from paying property taxes. “Able-bodied” low-income homeowners under 65
do not qualify, which I believe constitutes age discrimination.

The troubles with the income cutoff are: a) It’s way too low
at $11,400 a year; b) If Granny’s pension plan’s cost-of-
living escalator takes her income even $1 over the cutoff,
she pays 100% of the taxes due on the property.An elderly
woman I know whose federal pension’s escalator finally took her past $11,400 experienced a sudden $1500 tax liability.

I feel that the current “throw 'em off the cliff” system should be replaced by one that reduces the exemption gradually such as the way that the federal earned income credit fades away as income rises beyond a certain point.

Property tax: IMHO the property tax is a holdover from pre-modern times when property=income automatically. If you owned a manor, there was a population of serfs that went with it, and the whole enterprise produced a regular output of goods that could be traded, i.e., income. Or, in later times you might merely charge the tenants rent, in which case ditto income, more or less. In that context a tax, as a percentage of the proceeds, seems reasonable. But how can that idea be carried over to people’s houses? I rent, by the way, but I am with the homeowners on this one.

As for estate taxes, this is a difficult area. Sure, the concept of making one’s own fortune is very dear to the American heart. But so is the possibility of leaving something for your kids. It seems that the overwhelming majority of parents want to leave something for their offspring, even if the latter are fully grown and well established. Judging by what my own parents have done and said, they’ve been somewhat more comfortable financially in recent years, so they’ve been enjoying their money more, but they still say they want to leave something for my brother and me. For my part I urge them not to worry about me, but that’s just the way parents usually are. To be honest, I have a problem with those wildly successful parents (the inventor of Nautilus gym equipment springs to mind) who proudly boast that they refuse to leave their kids a penny. I’m assuming that these kids are raised in a fairly opulent, comfortable lifestyle, and to whip the rug out from under them seems a bit mean.

Following DITWD’s post, even if the family farm were worth $10 million and earning only $500,000/year, the $6 million or so that would be taxable would likely be eligible for a so-called “Section 6166” election, which lets an estate comprised mostly of a “small” business pay estate taxes over time. Sure, you have to pay interest, but the farm doesn’t have to be sold. And as Daniel also said, anyone with a $5 million asset should have done some estate planning.

bare - a living trust avoids probate, but DOES NOT avoid estate or inheritance tax. If anyone has told you otherwise, don’t take that person’s advice for very much, or it’ll end up costing you.

Neat, but wrong. A $5,000,000 US estate in 2001 pays $1,175,800 in estate taxes, a total rate of 34.3%. The tax is $1,290,800 on the first $3M, and $1,715,800 (55% marginal rate) on the amount over $3M, less a tax credit of $675,000, as per my 2001 edition of the CCH Master Tax Guide, page3 38-39.

Look, if you’ve got a profitable farm or business with a net worth of 5 million bucks, you should have no problem getting a loan to cover the inheritance tax.

Sorry, guys, but inheritance is what makes this country great. It is not something to be penalized with excessive taxation.

Anyone know when the inheritance rates started being so high?

Anyway, leaving your stuff to your heirs is a matter of private property: its yours, and you can do what you want with it. The idea that it becomes up for grabs after the owner’s demise is terrible…if the people he wants to have it don’t have a right to it, then neither does anyone else!

Not only that, but large businesses normally do not spring u overnight. They are decades of work. To simply trash that because dad feels jr can run the show just as well as he did is a little cruel.

I’ve always felt that inheritance should be seen not as a transfer of goods outright but more as an income. It would be covered under normal taxation.

2sense, you’re killing me! They should sell it and start a business from scratch? Then they get nailed on being taxed AGAIN. How much of that 5mill business do you think you deserve?

1.715 million tax on 2 million dollars is a marginal rate of 55%? Looks more like 86% marginal rate to me. What am I missing?

If we’re gonna debate the estate tax, let’s at least get the facts right. I’m pulling mine from the Instructions for Form 706, and the Form 706, the Federal Estate Tax return. (For the latter, you’ll need the free Acrobat reader.)

A few basics:

  1. The unified credit amount in 2001 is $220,550, which has the effect of excluding the first $675K from estate taxation. The credit will go up by steps between now and 2006, when the credit will be $345,800, which will exclude the first $1M.

  2. First you figure out the net value of the estate, after deductions, then you compute the estate tax, using the Unified Rate Schedule, then you apply the credit to reduce the tax to the amount actually owed.

  3. The tax is paid by the estate - specifically, by the executor of the estate.

  4. For a closely held business, the estate can elect to pay the tax in ten annual installments, beginning five years and nine months after the owner died.

In order to take advantage of this, the closely held business must be worth over 35% of the total value of the estate. The logic is that, if the business is worth less than that fraction, it should be no hardship to pay the tax out of more liquid assets, while keeping the business intact.

  1. One can also protect farm valuations in areas that are getting built up by signing over a conservation easement to a group such as the Nature Conservancy. The owner signs away, in perpetuity, the right for the land to be developed for other uses. And when he dies, the land gets valued as farmland for estate tax purposes, even if it’s surrounded by condos and townhouses.

  2. In the instance of a family farm or other family business, it’s common for the estate to pass through the hands of both parents before being left to the children. Each spouse gets to pass $675K (now) going up to $1M (in 2006) to their kids; the transfer between spouses is tax-free. So after 1/1/06, a married couple that owns a $5M business will be able to transfer $2M of it tax-free to the kids.

OK, that’s some of the facts, with applicable links. I’d better get some work done, but I’ll be back, and in debate mode, later. :slight_smile: