What are the pros and cons of a very high inheritance tax.

[bump]

@Damuri_Ajashi

A 99% tax is pretty confiscatory. I would say that the lowest estate tax should be a mark to market at death and the highest estate tax should be progressive to no more than about 50%. Right now the exclusion is about 5 million. Thats probably a lot higher than it needs to be to promote financial independence.

99% was more of a illustrative example at the ridiculously extreme end of things; 1% of Warren Buffet’s estate would still be 535 million dollars, which is more than enough for any 50 of his heirs to live large for the remainder of their days on.

My main point was that the 5 million exclusion is worth keeping- it lets people have their upward mobility without necessarily accumulating obscene dynastic wealth.

[BobLibDem]

@L. G. Butts

It’s a dumb idea.

Hypothetical:

If I start a company, say a farm or factory that makes widgets, and then I work my entire life and build the company until it is worth 10 million dollars. The company may be a wholly owned private company or one where I just own the majority of shares, either way, the company comprises >95% of my net worth. When I die, I would like to pass this company on to my daughter and I have been teaching her farming (or widget making) her entire life. With an inheritance tax, when I die either my daughter has to give up on this dream or she has to take out a loan to essentially buy the company from government and now what was a perfectly profitable and sound business with no debts has a debt to value ratio near 1 and is no longer sound and may not be profitable with the interest payments.

Well that sure sucks! And if my daughter (who is well trained and really wants to farm widgets for a living) decides to just say screw it and start a new business up from scratch without all the debt, what is the government going to do with the factory? Put it up at auction so some rich investment bank or hedge fund can buy it and then hire my daughter or someone like her to run it? Well that worked well for the people! Or maybe the the government can just install some crony as CEO and hopefully the company will continue to be well run… Sure…

I’m as liberal and 99% as they come, but if you really stop and think what inheritance taxes really mean they are a stupid idea (IMNSHO). Better to tax income and capital gains at a high rate, then the government could get a lot of money if I or my daughter ever wanted to sell the widget farm and live on easy street. While the capital is productive, it should be left alone!

There are some problems with this hypothetical. So you have amassed in effect a capital gain of $10 million. When did you ever pay tax on that gain? You didn’t. So you give it to your daughter. She excludes her $5.25 million and pays 40% tax on $4.75 million, or $1.9 million. She takes out a loan with a debt to value ratio of 0.19. That isn’t anywhere near 1.0.

The estate tax is in my opinion the fairest tax of all. We tax people for a big windfall which they did not earn. Why should the guy who earns $10 million have to pay tax every step of the way but the guy who happens to be lucky enough to have wealthy parents get $10 million tax free? If this were allowed to be the case, not only would we have to tax wage earners and businesses more, but wealth would be even more concentrated in the hands of a few elite than it is today.

[msmith537]

It’s a terrble idea. It will disproportionately affect the left-wing blog industry as those people are dependent on their parents wealth to maintain their lifestyle.

[CurtC]

@Damuri_Ajashi

There are all sorts of ways to protect active family businesses. In fact we use almost all of them.

Isn’t this just saying that there already exist loopholes which let people get around the estate tax? It seems like you’re implying that this is OK, but I’m not sure what the point is for a tax law that is rendered toothless by loopholes.

[Happy_Fun_Ball]

@BobLibDem

There are some problems with this hypothetical. So you have amassed in effect a capital gain of $10 million. When did you ever pay tax on that gain? You didn’t. So you give it to your daughter. She excludes her $5.25 million and pays 40% tax on $4.75 million, or $1.9 million. She takes out a loan with a debt to value ratio of 0.19. That isn’t anywhere near 1.0.

The estate tax is in my opinion the fairest tax of all. We tax people for a big windfall which they did not earn. Why should the guy who earns $10 million have to pay tax every step of the way but the guy who happens to be lucky enough to have wealthy parents get $10 million tax free? If this were allowed to be the case, not only would we have to tax wage earners and businesses more, but wealth would be even more concentrated in the hands of a few elite than it is today.

I didn’t pay a capital gain tax because I have not realized the gain yet. I own a farm or factory or whatever that has increased in value, I have not sold it yet so how can I have a capital gain? Like a house or stock you only only have a capital gain when you sell the capital. I have no problem with having a high capital gains tax; if I or my daughter sell the business go ahead and take 1/3 or 1/2 of the 10 million I reap in profit, but don’t handicap the business by saddling it with debt. Of course over the entire time I owned the business, I would hope that i was taxed on all the money I made over the years either by paying taxes on income or dividends. I think that dividends should be taxed as income that is what they are. If i pull money out of my business this is income, whether or not I am on salary. It makes no sense to me to tax this at a different rate.

Regarding your second point I disagree. If i inherit a business, a house, or even a pile of stock I did not inherit money. I do not have money until I sell the stock or house or business. At this point capital gains taxes should come into play and i should pay the 30% or whatever. Do you think that if you leave your house or car to your kids they should have to take out a mortgage to pay the government for it? Why should this be different than a business or stock certicate or any other asset. If they sell the asset be it house or car or stock, tax them for the capital gain they realized, but don’t force them to take out loans if they want to keep the asset. To me it is just not fair.

[Algher]

To make it more personal, before we put much of the assets into the trust, we were staring at the $1,000,000 exemption limit. We were able to purchase a nice bit of land awhile ago, and since then the land value has increased significantly.

If we had to pay the tax - we would have 4 options:

1. Clear cut the majority of the forest, sell the timber to pay the tax.
2. Sell off enough property to pay the tax (possibly subdividing it into some pocket estates)
3. Sell the entire property (and see 1 & 2 happen)
4. Borrow against the estate and pay the tax, starting over with a HIGHER cost basis than when it was first purchased.

This is not dynastic wealth, just a nice piece of land and equipment that the family shares. Again, thanks to some well paid attorneys and accountants, we should be fine - but is that what we are trying to achieve?

For some interesting data, the Heritage Foundation has a great historical table listing the tax rates and exemptions going back in US history (you can ignore their write-ups - just check out the tables):

Estate Taxes: An Historical Perspective

[CurtC]

I’ve heard before that there is a significant loophole in the current estate tax law regarding capital gains, and I’d appreciate it if someone could confirm or deny it.

Let’s say I own a million shares of a stock that I paid $1 each for, and now they’re worth $10 each. Now I die and my son inherits the stock. A year later, my son sells the stock for $10.50/share.

What capital gains should my son have to pay? I have heard that his cost basis for this pile of stock will be its value when he acquired it, which was $10. Therefore his reported capital gain is a total of $500,000. But in this case, the stock had appreciated for a total of $9,500,000, and most of it will not ever be taxed.

Is this true?

[BobLibDem]

@L. G. Butts

I didn’t pay a capital gain tax because I have not realized the gain yet. I own a farm or factory or whatever that has increased in value, I have not sold it yet so how can I have a capital gain? Like a house or stock you only only have a capital gain when you sell the capital. I have no problem with having a high capital gains tax; if I or my daughter sell the business go ahead and take 1/3 or 1/2 of the 10 million I reap in profit, but don’t handicap the business by saddling it with debt. Of course over the entire time I owned the business, I would hope that i was taxed on all the money I made over the years either by paying taxes on income or dividends. I think that dividends should be taxed as income that is what they are. If i pull money out of my business this is income, whether or not I am on salary. It makes no sense to me to tax this at a different rate.

We’re not disagreeing that you haven’t been taxed on the capital gain, but you’re saying that your daughter should be able to get what would be a capital gain from her point of view absolutely free. And I’ve already shown that your daughter wouldn’t be saddled with 1/2 or 1/3 in tax, it would be more like 1/5.

Regarding your second point I disagree. If i inherit a business, a house, or even a pile of stock I did not inherit money. I do not have money until I sell the stock or house or business

I disagree. You’re inheiriting something worth money and should be taxed on it. Otherwise everybody converts all their cash to stock when they approach death and leave it to their heirs who won’t get taxed until they sell.

[Tom_Tildrum]

@bump

Above that floor, maybe even make it progressive, so the Feds take 99% of Warren Buffet’s assets, but 2% of someone who inherits 750k.

Well, Warren Buffett intends to entrust his estate to the richest man in the world, so that may not be the best example.

[Human_Action]

@CurtC

I’ve heard before that there is a significant loophole in the current estate tax law regarding capital gains, and I’d appreciate it if someone could confirm or deny it.

Let’s say I own a million shares of a stock that I paid $1 each for, and now they’re worth $10 each. Now I die and my son inherits the stock. A year later, my son sells the stock for $10.50/share.

What capital gains should my son have to pay? I have heard that his cost basis for this pile of stock will be its value when he acquired it, which was $10. Therefore his reported capital gain is a total of $500,000. But in this case, the stock had appreciated for a total of $9,500,000, and most of it will not ever be taxed.

Is this true?

Seems to be. From the IRS, Publication 551:

If you inherited property from a decedent who died before 2010, your basis in property you inherit from a decedent is generally one of the following.

1. The FMV of the property at the date of the individual’s death.

2. The FMV on the alternate valuation date if the personal representative for the estate chooses to use alternate valuation. For information on the alternate valuation date, see the Instructions for Form 706.

3. The value under the special-use valuation method for real property used in farming or a closely held business if chosen for estate tax purposes. This method is discussed later.

4. The decedent’s adjusted basis in land to the extent of the value excluded from the decedent’s taxable estate as a qualified conservation easement. For information on a qualified conservation easement, see the Instructions for Form 706.

Bolding mine. FMV = fair market value. So, using the value at the time of inheritance appears to be an option for establishing the basis of property for future tax purposes.

Not sure if this has changed since 2010, though.

[Dog80]

Here is the (translated from Greek) piece from the blogger:

Our goal is to create an economic game that is as equal as possible and fairer for all in order to create a common destiny in humans. Greece is highly fragmented in this area, which prevents a joint action. And without common action are destined to be doomed as evidenced by thousands of communities since the beginning of history.

And the equality based solely on fantasy elements, “We are all Greeks” or “we are all workers” although it can be a very important catalyst, it will quickly break down when there is no infrastructure or rules to enforce it. Because it is different to like the idea of a ​​public school when your child goes to private. And it is different to say the rents must be sustainable when the little Mephistopheles tells you that if they go up a little more, you have to work less.

We should basically be done with various ideologies of capitalism on capability that have no historical basis. Wealth, and more specifically the considerable wealth, is something that you basically either inherit or marry. Something more akin to feudalism than to a modern new system. Wealth is something you rarely get for yourself, and even more rarely you get on your own and in a fair manner. And that applies almost throughout the duration of historical capitalism, not only in Europe (large parcels [of land?] belonged to the aristocracy until the early 20th century), but even in the U.S. of 19th [century]. For each Bill Gates there are several dozen Paris Hiltons.

So the whole narrative about a meritocracy in historical capitalism is a narrative extremely deficient and problematic. Especially in these parts of Europe that never had a revolutionary change from the old regime. And this false narrative, we have no reason to keep it. In the context that we have not discovered a way to get our material possessions in the afterlife, I find no reason to allow royal roads for the offspring of some rich. This means that inheritance taxes should go up, as well as the transfer of wealth from parents to children. And to be fair, it should be done incrementally. You can transfer 150,000 to your children by 10% [tax], the next 150,000 to 20%, the next with 40% and reach very high inheritance taxes on inheritances of millions. The same goes for businesses and many more things related to the transfer of wealth.

While of course the state must use these revenues to support young people to find their way regardless of their family.

This of course is just one example. The first goal is to make 2-3 income groups for the citizens that do not have huge differences in wealth. You can say that the basic category is 12,000 euros per year, 24 for the next and 30 for the next. And make sure that anyone who has above that to be taxed almost punitive as in the U.S. during the golden Thirty[I believe he’s referring to the postwar years 1945-1975]. Ie we must create disincentives for greed. Economically and socially. When it will become fashionable to laugh at the funny fat guy with the cigar that roams his belly as a trophy for success, and the 25 year old aunties with Louis Vuittons and the proud bags of [a big mall], then a significant chunk of change will have been achieved.