I know I’ve seen this debate before but I tried to wing it with some friends and found I didn’t remember enough of the info. I came back and attempted the search function but I can only make that work for me if I can remember a piece of the OP Subject. Otherwise I seem to get a bunch of irrelevant stuff. (Serendipitously, I did get the BBQ Pit rant on SUV drivers that I may contribute to later if I get in the mood to rant.)
Shall we have this debate again or can someone point me to where it happened before?
Do the very rich actually avoid most of their taxes? I did convince my friends that those in the high income bracket paid most of the taxes but they are convinced that most rich people manage to hide most of their income so that they don’t look rich to the IRS.
A related issue. I am told that by willing your estate to your grandchildren you avoid the death tax. Is this true? If so, why?
I put this in Great Debates because, as I remember it, there were some who were never convinced. I thought that those who said that the rich cannot avoid taxes were generally more convincing, but some were unconvinced.
BUT I’ll throw out there that some of the tax relief that the rich get shouldn’t be sneered at by the rest of us unwashed masses. Sure, stuff like hidden bank accounts and vacations that are disguised as “business trips” for the write-off… those are sneaky. But some of the other methods for reducing taxes simply mean that the wealthy are doing something the gov’t is trying to encourage. There are things the government want to happen in the private sector, so they make it attractive, tax-wise, for those who are most able to do so. You can get a tax break, for example, for investing in a housing complex that has low-income spaces. You can get a break for donating money to 501(3)c charities. You get a break for mortgage interest. Etc.
I believe that some of those who express outrage over “tax breaks for the wealthy” fail to remember that some of those breaks produce desirable outcomes in the economy and society.
There is a perfectly legal and non-sleazy way to avoid estate taxes. It’s called a living trust, and most people I know with any money at all have one.
Cecil’s column deals with reported incomes. Is there any way to know if there are a significant number of people who successfully hide their income? One of my friends is a CPA. He claims his boss has reported less than $5000 in income for the last 10 years. His boss lives in a million dollar home and lives the lifestyle of the rich and famous, but pays very few taxes because he hides his income with various tricks mostly involving stock market purchases and sales. This would not show up in Cecil’s statistics because he bases his ideas on statistics based on reported income. Could there be thousands of people doing this? Could there be one?
As far as the death tax, if it is so easily avoidable, what is it for and why is it such an issue?
While a marital life estate trust can increase the estate tax exemption amount for a married couple (it’s useless for single folk), it is dangerous to say that living trusts “avoid estate taxes.” They do not avoid estate taxes. Since a living trust is revocable during the grantor’s lifetime, the property in the trust is considered to belong to be part of the grantor’s estate when (s)he dies.
And, no, making an “irrevocable living trust” won’t solve that problem. Giving property to someone via an irrevocable trust does avoid the estate tax, but it incurs a gift tax. (When property is irrevocably placed in trust for beneficiaries other than the grantor, and the grantor relinquishes all control over said property, it is considered a completed gift for gift tax purposes.) And the gift tax rates are identical with the estate tax rates, on purpose, for the very reason that the government doesn’t want you weasling out of estate taxes by giving everything to your heirs just before you die. In fact, when someone says that the first $675,000 of your estate is exempt from estate tax, they’re not telling you the whole story – what’s really going on is that everybody has a lifetime unified gift/estate tax credit pool equal to the amount of tax on a $675,000 estate. The gift and estate taxes are intimately intertwined, and in general, avoiding the one incurs an equal amount of the other.
I’d heard some city or state passed a law once, stating that no person may vote who had been dead for more than 4 years. It might just have been an urban legend, but it sounded sooooooo fitting!
A general rule of thumb, is that with normal estate tax planning, you can 'avoid" taxes on the 1st 4 million or so.
And the guy who reports 5K in income, and has a Million $ home? Well, the IRS is slow, but they are sure. They will catch this guy, and he will owe a bundle, if he does not go to prison. They have this method called “net worth”, see, and if they show your net worth has increased far more than you can account for, then that is all income, and you owe taxes on it.
The IRS loves guys like this…eventually he will brag to someone at a cocktail party about not paying taxes, the someone will call the IRS (they have a hotline just for this) and he’ll get audited.
He will claim that the million dollar house and Mercedes belong to the company - and they will tax him on the “rental” value of these items as a benefit. You will notice that some of your benefits are non-taxable (i.e. healthcare), but the majority of them you need to pay taxes on (company cars, paid parking)…in general, its better to get paid in money than taxable benefits because the IRS will decide the rental value of that Mercedes.
I used to work in a Fortune 500 company’s tax department and worked on taxes for their execs. They were never happy with their tax bill, but “hide income, go to prison.”
It can be perfectly legitimate to live in a nice home and drive a nice car but not have much income. All you have to have is a nest egg. Presumably you paid taxes on that when you got it (or got it by some means where no tax was owed, such as an inheritance under $600K). Thus, if it sits in the bank/investment fund, you can spend it at will, spend it like a “rich person” and never pay taxes on it again (except interest).
My husband was in an arrangement not unlike this. He got bought out, and got a large lump sum up front. Then we lived off it for three years. His portion of our income in those subsequent years was in the four figures. But we didn’t live like he was bringing home < $10K, because we had the money in savings to live off of. But let me tell you folks, the year he got that payment? We paid a staggering amount in taxes. 6 figures, all to Uncle Sam. But it’s conceivable that someone who reviewed our subsequent finances (not knowing about that) would think we were pulling a fast one.
The guy I’m talking about supposedly somehow shows losses on some segment of his large holdings in stocks to reduce his delcared income. His increasing stocks don’t get taxed until he sells them?
I wish I could talk my CPA friend into checking out this thread. I think I will give it some additional effort. Hopefully you’ll be seeing his arguments soon.
Ahh, the arguments made under the enhancement of alcahol. Apparently I led the wrong impression. Everything this person does is 100% legal and reported. Real Estate… not as much now as 10 years ago, allows you to depreciate, write off interest and take in cash while reporting a loss. With new tax changes for real estate professionals, that once passive income is now active. So, it isn’t anything illegal or inappropriate or even on the ‘squiggly line’.
Generation skipping… an additional million dollars plus of estate can be moved to a generation skipping trust, which can then pay the income to the grandchildren over a period of time. Yes, it is taxed, but at a much lower rate than a one time shot at all the money.
A good and wise rich person is already making moves long before they are dead… stocks are gifted, partnerships are formed, corporations created, charitable remainder trusts with 100 year lives are devised. There are ways to avoid the nasty, horrid, ugly (someone once told me not to sugarcoat how I really feel) policy of estate taxation. But there are no ways, that I know of to transfer the entire estate at death on a tax free basis, as I probably represented in my spirit-induced Republican vs. Democrat debate with VO last weekend.
Even if they weren’t making the right moves and transferring the interests, they will at least have an investment consultant that will instruct them on how much life insurance they need to pay off their tax liability at death… (some life insurance is tax free, another death investment tool)
On the other hand, the people really burned are the ones that don’t know they are rich until (example) the 10th generation farmer dies, leaving his 1,000 acres which have barely made a living for his family to his children who really wanted to carry on the family tradition of farming but now have to sell off a quarter of the land to pay the federal and state governments who have continuously made tax revenue off the property taxes and revenues of the farm over the life of the poor, old dead farmer.
So, JustAnotherGuy, do you now admit that the rich do pay a lot of taxes? Or do you still maintain that a large percentage of rich people get around our tax laws?
There are several other threads ongoing with this general theme. The general consensus is that a very large percentage of taxes are paid by the rich. I might be able to agree that there is a point where someone making a lot, but not enough to take advantage of some of the write-offs, might be, unfairly, paying more than someone making just a bit more. BUT, both of these individuals is doing very well and will probably increase their income next year. I suspect that it is more about education than money. I suspect that it’s the information rich who do the best. It pays to learn, and learning is not always expensive.
That nutbar Carnegie who ran around spending all his money on public venues probably didn’t get hit with too many death taxes…(not even sure there was a death tax then)
But yes, for the most part the rich will pay death taxes, though they will have it covered by insurance and it won’t be on everything they owned.
They still won’t be hurt by death taxes as much as the lower-class-rich. (I kind of like that term, catchy)
The rich always did pay alot of taxes though, even without the death tax. The death tax is double taxation, unfortunately, there is no law against double taxation, only against being tried for the same crime twice.
If only the criminal justice system felt the same way about it being a crime to make too much money… sigh
So, JustAnotherGuy, do you now admit that the rich do pay a lot of taxes? Or do you still maintain that a large percentage of rich people get around our tax laws?
There are several other active threads with this general theme. The general consensus is that a very large percentage of taxes are paid by the rich. I might be able to agree that there is a point where someone making a lot, but not enough to take advantage of some of the write-offs, might be, unfairly, paying more than someone making just a bit more. BUT, both of these individuals is doing very well and will probably increase their income next year. I suspect that it is more about education than money. I suspect that it’s the information rich who do the best. It pays to learn, and learning is not always expensive.
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Concluding Remarks: Some of which will be related but not directly on topic.
The people paying the estate tax are fairly rich and failure to prepare for the tax is their own fault. I don’t mind punishing ignorance when the information is readily available.
A flat tax would result in higher taxes for the greater number of people including the middle class, making the rich richer and everyone else poorer.
Reducing big government is a good idea, but you have to be careful. In the same way that making a sweeping change in the tax laws ends up hurting a majority, a sweeping reduction in goverment hurts all but the big departments like the military.
Actually, I agree that this system is not fair to the rich. That doesn’t mean I want to change it. It’s sort of enforced charity. They can afford it and one of the ways they can legitamately reduce their burden is to give to charities of their choice. I encourage them to make use of that opportunity. I don’t see many of them leaving this country (and I do see a lot of rich from other countries moving here, mostly to Florida for some reason) and I don’t think they stay because of patriotism.
Has Alan Greenspan ever made any comments on the tax laws? I’d love to hear his views. The best thing Bush did in office was appoint Greenspan, that goes for Clinton too. Has either current candidate made any comments about who they would put into Greenspan’s position? I think Greenspan wants to retire.
