Posted by pinky at May 31, 2006 07:21 PM
read this and weep for the folks down home ...============
Reich: More Tax Obscenity
Who's afraid of the big bad wolf?:More Tax Obscenity, Robert Reich: Real wages haven't budged in five years. Yet the typical worker is far more productive now than five years ago. Where has all the extra value gone? Mostly to people at the top -- to the very rich. So if we want to have good schools, good roads, safe streets, clean air, safe drinking water, homeland security, national defense, Social Security, and Medicare, who should pay more? Yes, the very rich. Their taxes should rise. We should have a national wealth tax equal to one-tenth of one percent of a person's total net worth, payable each year. This is not rocket science. So why are Dems so afraid to say it? Because, as J_Krehbiel suggests, conservative Republicans have so demagogued the issue that Americans believe taxes are bad.
Higher taxes would be bad for most working people who are now paying through their noses for health care, gas, and variable-rate mortgages. But average Americans are already paying higher taxes in the form of rising sales taxes, user fees, tolls, payroll taxes, gas taxes, alcohol and tobacco taxes, and property taxes passed through even to the third of American households renting their homes. Meanwhile, the rich are paying a smaller and smaller share of their total income and wealth in taxes.
The next tax obscenity happens in a few weeks when congressional Republicans try again to eliminate the estate tax -- which Newt Gingrich and his heirs have called the "Death tax." But the estate tax now hits only the richest one-eighth of one percent of Americans. If it's eliminated, federal revenues will be reduced by tens of billions of dollars over the next decade. What does this mean? Fewer or lousier public services, or higher taxes on the middle class.
Posted by Mark Thoma on May 28, 2006 at 04:32 PM in Budget Deficit, Economics, Income Distribution, Taxes | Permalink
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The estate tax is also of value as an impediment to the entrenchment of wealthy aristocracy. It is not good for democracy to have people born into wealth of such magnitude that it buys them significant political power. It also undermines the meritocracy which is a cornerstone of our productivity and progress.It is true that the inheritance tax can interfere with the continuation of family enterprises such as farms and local businesses. This problem can be easily addressed by raising the exemption to easily cover such modest-sized businesses. An exemption of $5 million or $10 million would adequately cover all but a few family enterprises.
Keep the estate tax, raise the exemption.
Posted by: Zephyr | May 28, 2006 6:07:03 PMI find the idea of taxing wealth to be troubling. It would lead to extensive gaming of the system - beyond what exists now. The super rich would mostly dodge this tax through offshore trusts and other entities, and through gimicks to grossly understate asset value. Everyone else would be stuck paying full rate on their modest but hard to hide assets.
Better to tax the wealthy based on the extravegance of their lifestyle. Implement a federal luxury goods sales tax. Have it apply to all non-basic goods. Exempt all food, clothing, shelter (up to a limit), medical expenses, education expenses, cars (up to a limit), fuels...
Tax things like restaurant meals, hotel stays, expensive cars, etc... Remove the income tax deductions for taxes and interest on second homes...
Clearly the rich consume far more of these remaining items than do the poor and middle class. Thus, the luxury tax would be overwhelmingly paid by the most wealthy citizens.
To the extent that the tax influenced behaviour it would encourage investment rather than consumption.
Posted by: Zephyr | May 28, 2006 6:27:00 PM
Does the Estate tax motivate the creation of charitable foundations and trusts and the giving of endowments?
Is abolishing the Estate tax also going to result in the decline of the private charity or foundation, in addition to the estimated tax loss?
Posted by: Bruce Wilder | May 28, 2006 7:36:26 PM
I second zephyr... keep the estate tax so as to limit the formation of a permanent aristocracy... raise the exemption & maybe even index it so it doesn't resurface as a perpetual issue a la current AMT.
How damned hard is that to understand? Obviously too hard for congress.
Posted by: dryfly | May 28, 2006 7:44:15 PM
"How damned hard is that to understand? Obviously too hard for congress."
About 300 of the 800 or so families affected by the estate tax have been spending money to buy the attention of "think tanks", pundits and congressmen for years. When was the last time you contributed to a political campaign or party?
The Congress understands who butters their bread: it certainly isn't the voters, who respond robotically to television commercials that would embarass soap.
Posted by: Bruce Wilder | May 28, 2006 8:24:18 PM
When was the last time you contributed to a political campaign or party?
We do every campaign - always have. But its peanuts compared to the heavy hitters... obviously they think a permanent aristocracy is a good idea.
Plus my guys always lose.
Posted by: dryfly | May 28, 2006 8:59:17 PM
If you think preparing income tax returns is fun, try a wealth tax return.
Some items can be readily valued (publically traded stocks) but for most it is just an educated guess.
The worst is the attempted valuation of closely held stock.
The wealth tax may be an appealing concept but is a nightmare in execution.
Posted by: save_the_rustbelt | May 28, 2006 9:25:42 PM
"We should have a national wealth tax equal to one-tenth of one percent of a person's total net worth, payable each year."
There is idiocy and idiocy. Five years ago we had a reasonable income tax system leaving a budget surplus large enough that there was worry, yes, worry that the national debt would be gone this decade. Now Robert Reich invents a better way. We must tax wealth, not income, not capital gains nor dividends nor interest nor rent, nor even estates, but wealth....
Posted by: anne | May 28, 2006 10:05:06 PM
One way taxing wealth makes sense is to 'liberate' idle assets. I'm thinking of some Latin American countries where a few families own everything... the income stream is small as a percentage of the value of the assets (land mostly)... Plus property taxes are low so there isn't much of a tax burden.
Not much of an incentive to make those assets more productive if they already produce more than you need.
But there are a lot of hungry people in those societies who would benefit if the assets were more productive assuming they received some of the benefit.
So maybe putting a 'wealth tax' on those assets would pressure the families/oligarchs to either increase production (& hopefully hire more) or sell to others who would (increase production (and hire more).
In such a scenario an increased tax burden could be considered 'pro-growth'.
Posted by: dryfly | May 28, 2006 10:18:37 PM
I have often thought it would be good to have a progressive tax that was calculated at a lower rate the more hours you have to put in for your income, which would give the person who has to work 60 hours a week or two jobs in order to survive financially a small break (certainly I have no idea how to enforce honesty about the hours a CEO might put into his job....they seem to be completely dishonest as a group) Of course this would be a nightmare in execution as well.
Posted by: DJM | May 28, 2006 10:20:50 PM
I have often wondered why noone has proposed a wealth tax.
If government exists for the main purpose of protecting property rights, shouldn't those with the most property pay the most? Our courts, our national defense, our police forces all exist to protect property rights. Schools even exist to an extent to prevent a permanent underclass from becoming violent and stealing property.
Even if some rich guy doesn't earn a penny in income, he still has lots of property that is being protected by the cops, military, etc.
Taxes should be tied directly to wealth. After all, if I own one house in a gated community, and my neighbor owns two, he would pay double for security, upkeep, pool fees, etc. It's only fair.
Posted by: tomboy | May 28, 2006 10:44:39 PM
Tomboy, That would be fair, and probably why it would never happen. (I think I recall a suggestion and reasoning much like this in PKs book, The Great Unraveling.)
Posted by: DJM | May 28, 2006 11:51:08 PM
The arguments coming from both sides of the aisle on this issue are misleading, demagogued and full of holes.
Firstly, there are numerous types of irrevocable trusts and loopholes- namely, family dynasty trusts and family limited partnerships, that the wealthiest families employ now and always have employed to substantially reduce the hit they take when they pass on wealth to their heirs. Remember, people like Paris Hilton, the Kennedys and the Waltons received their wealth while the estate tax was in full force. So you can just forget about closing the gap between rich and poor- pure phooey.
Secondly, the arguments coming from the right that portray the tax as a pox on the farmer and small businessman are spurious and exaggerated at best. There already are numerous credits in the tax code to reduce the tax for farmers and small business owners.
What the tax really amounts to and where it functions most efficiently is in penalizing families of modest wealth- what I would call the upper-middle class. Those with wealth between 3 and 10 million dollars. They are affluent, but not enough so to hire reams of lawyers and bankers to protect and manage complicated tax shelters and offshore bank accounts 24 hours a day. 10 million may sound like a lot, but if you do some simple math using current figures you can see how thinly it would be spread: Say a widow with 10 mil has four kids and wants to leave them some sort of legacy from their parents. At todays rates and assuming she gave half a mil to charity she would pay 3.5 million in estate tax. That's 35% of the total family wealth. Subtract the half mil in charity and she's left with 1.5 million for each of her four children. 1.5 million will buy you a 3 bedroom, 1800 sq ft house in a decent neighborhood in Los Angeles- hardly lavish.Posted by: mb | May 29, 2006 1:14:06 AM
Thank you, Anne, for (re)stating the obvious. There seems to be a widespread mentality that the only ideas worth debating are new ideas, but our budget/tax system of five years was not broken, so far as I can tell.
Posted by: lonesome moderate | May 29, 2006 2:38:41 AM
One way taxing wealth makes sense is to 'liberate' idle assets. I'm thinking of some Latin American countries where a few families own everything... the income stream is small as a percentage of the value of the assets (land mostly)... So maybe putting a 'wealth tax' on those assets would pressure the families/oligarchs to either increase production (& hopefully hire more) or sell to others who would (increase production (and hire more).
dryfly - which Latin countries are you thinking about? In the ones I know, the farms/plantations are already overpopulated with uneducated campesinos. Increased pressures to make their holdings profitable would not be the same as pressure to make them more productive. It might well have the opposite effect, similar to how NAFTA has accelerated the depopulation of the Mexican countryside. However, NAFTA has created opportunities in the Mexican manufacturing sector to offset the losses in agriculture--I don't see how a wealth tax would do anything equivalent.
Posted by: lonesome moderate | May 29, 2006 2:54:46 AM
Well, a $10 million estate, sweet old widow, is not a middle class class nor even an upper middle class estate. The amount for each of 4 children from the estate would be $1,810,000 which simply invested in a long term invested-grade bonds at Vanguard costs would yield a yearly income over $100,000 for each sweet child, which is not all that bad. But, if that is not enough raise the deductible for the sweet, middle class, unable to estate plan, because who can estate plan with only $10 million, widow. Sad old window :)
Posted by: anne | May 29, 2006 4:20:51 AM
Lonesome and Dryfly are rightly worried about land ownership and rights in Latin America. We should be seriously concerned sbout the loss of land by small farmers from Mexico on south for reasons ranging from trade and American corn subsidies to local neglect of farmer's needs. That there is compensation in manufacturing for small Mexican farmers, is highly doubtful. We can only wish there might be dramatic change to benefit small farmers through Latin America.
Posted by: anne | May 29, 2006 4:31:55 AM
But Anne, with increased globalization of corporate capital the Latin American yeoman farmer is predestined to be sacrificed in a manner similar to that of our own yeoman farmer. They will all eventually be driven to extinction. The only thing missing now are calls for a government-sponsored reeducation plan to help these farmers in the transition from their chosen occupation toward something more globally productive... like short-term contract computer technicians or call-center operators.
I always get a chuckle out of Republican calls to save the family farm in regards to the estate tax when such calls are obviously twenty years too late.
Posted by: Live Wire | May 29, 2006 5:42:01 AMLive Wire :)
Yes; there will be a movement from smaller farms, but I would like the movement to be eased in Latin America and Africa by farm or farm product subsidies. How China copes with rural income and social service pressures and movement from farms should be of interest. China is focusing now on rural infrastructure including education, while health care is a special need. India is beginning to fucus.
Posted by: anne | May 29, 2006 6:36:52 AM
While each orphan of the sad old widow would have an income from the estate over S110,000, the widow could only have had 2 children not 4, then the orphans would have $220,000 in secure bond income a year. We must then not let women, especially those who expect to be old widows, unduly breed :) Oh dear, so much for this week's confession.
Posted by: anne | May 29, 2006 6:43:07 AM
A nicely conservative way to gauge what an endowment or estate will mean is to look to the Vanguard long term investment-grade bond fund, take the current yield and estimate income from that. The 10 year estimate as a result will be highly accurate no matter interest rate changes, for that is the general duration of the fund. Then, an investor can think of mixing a stock index and the bond fund to various effect. So, a retirement account of $100,000 will give off $6,000 in income a year if fully in bonds....
Posted by: anne | May 29, 2006 6:54:41 AM
"Well, a $10 million estate, sweet old widow, is not a middle class class nor even an upper middle class estate."
Anne:
If most of the estate is in stocks and bonds your argument may be correct.
If most of the estate is a family-owned manufacturing company with an average cash balance of $200,000 then it is a different matter.
Not all assets are created equal, which is one of the reasons I oppose an estate tax.
Posted by: save_the_rustbelt | May 29, 2006 7:15:17 AM
Yes and no; I understand, but have never come on a circumstance when significant assets could not be converted to a cash equivalent. Change the limit to be generous as wished, but worrying about converting an estate worth $10 million to cash equivalent is does not seem worth the while :) The dear orphans will manage, unless there are, say, 16.
Posted by: anne | May 29, 2006 7:36:06 AM
It is so convenient to forget the disparity of wealth in this country when it comes to tax talk, esp Estate tax which arises in the transfer of this disparity.
I think it's bakho who monitors tax revenues ( and of course spencer, who monitors everything) [even to the detriment of his spelling] and argues that the tax cuts are not only tax deferments but a deferred tax shift from the working poor to the wealthy (not always 'working' according to the workers)[but always entitled, people, and this tax legislation is exactly that: creating that legal enfranchisement, entitlement.]
Could be some of that 70% that disapprove of w's performance are onto this heist: Abolishing the estate tax is a gift for the children of the wealthy (not you, you poor SOB), is a vote for family over performance (for entitlement over merit, as someone above posted).
We have never paid so much for this, people.Posted by: calmo | May 29, 2006 8:21:05 AM
What occurs even more forcefully than before is how essential saving and investing have become. As growth in the return to labor lags, even slightly, growth in return to capital and land, then short of newly balancing corporate bargaining strength sagainst employees investment becomes employees only way of balance and employees have to do better at investing.
Posted by: anne | May 29, 2006 8:39:44 AM
I checked recently on wealth distribution and as of 2001 some 7% of all households in the nation have 1 million in assets or more (I presume this includes the house, so most would have maybe around $500-750,000 in addition to the house that I would also presume to have a mortgage on it). The percentage of those with 10 million would be much smaller. I would think an exemption of 10 million on estate taxes might be reasonable, but in conjunction with increasing the tax drastically above that. Like 60% on anything over ten million; and 90% on everything over 15 million. Plus draconian penalties on any avoidance schemes.
Posted by: hj | May 29, 2006 8:47:40 AM
The rich dont own, they control - using trusts and other legal inventions. Any estate tax should eliminate this fictional entities from providing any protection.
The simplest way to get the ground back on estate tax would be to set the exemption amount up for debate - How much should an heir get as a handout? 5 million? 20 million? That would be an honest debate.
An even better idea - set an exemption which is tied to poverty level income. Like 1000 times the poverty level will be allowed per heir estate tax free. BUT, with the catch that the poverty level income will be income tax free for everyone. All income taxes would have to come from people earning above that.
Eg: if poverty level is 50,000 income/yr then estate tax exemption is 50,000 *1000 = 50 million. And $100,000/yr would be income tax free.
All these are rhetorical - but it would bring the real issues up. What is poverty? How much of a handout should an heir get? If "death tax" rhetoric can get us here, then it's time for reverse rhetoric.
Posted by: bullbust | May 29, 2006 10:16:38 AM
Do we think it just a fortuitous coincidence that the richest baby boomers find themselves exempt from an estate tax just as their Greatest Generation parents are reaching life expectancy?
Posted by: Live Wire | May 29, 2006 10:32:40 AM
So
How much should an heir get as a handout? 5 million? 20 million? That would be an honest debate.'zero', 'nada', 'zippo' is too honest a debate?
Maybe if we inverted something:
Who wants to be serfs this month?
Come on you heirs and heirs apparent. You are so bored with your lap of luxury, admit it --it's driving you nuts. Try a little poverty to wake you up. Just part time, temporary, --nothing serious. A little effort to reaquaint you with what used to be work...and the glory of sweat...maybe even the catharsis of work: rest. Add meaning and dimension to your empty lives.
Ok, so who'll take the monthly? the quarterly? the annual poverty hike?
Posted by: calmo | May 29, 2006 10:41:42 AM>'zero', 'nada', 'zippo' is too honest a debate?
That too - but what would be really interesting is to change the debate to WHERE the line should be drawn, rather than the current scare tactics debate which can only have one outcome - that there should be NO LINE.
Posted by: bullbust | May 29, 2006 11:04:10 AM
While asset inflation has a mildly ominous tone, there is every reason for assets to continue to increase in value at least as fast as the economy can grow, or as international economies grow, and there is a pronounced need for saving and low cost efficient investment to at least duplicate the returns that could once be counted on from better corporate managed pension plans.
Posted by: anne | May 29, 2006 11:47:16 AM
anne's 10:05:06 comment gets it right.
If any change were to be made to the estate tax, the best changes would be those that would simplify it so as to reduce the maximum rate -- in its current form the maximum rate is high enough that the spin-doctors can demagogue with it as confiscatory, obscuring the fact that only the very rich pay the maximum rate. Thus, ironically, opposition to it among those who today would pay little -- because they aren't rich enough to have advisors telling them what they'll actually have to pay -- might be decreased by changes that would in fact make them pay more. Perhaps just initiating debate on the topic would get enough publicity out on that to counterbalance the spin-doctors.
Posted by: jm | May 29, 2006 11:51:40 AM
Some items can be readily valued (publically traded stocks) but for most it is just an educated guess.
The only thing keeping assets from being properly valued is by keeping assets off the market.
'Ownership' is either enforced by the society or the individual.
If someone expects society to defend their ownership they should be willing to pay a tax to that society otherwise they should provide their own defense.
To define what was to be defended by society, a chain of title would be established for every asset worthy of being defended. If someone thinks their toothbrush is worthy of being defended they would need to register its title. Insurance policies currently attempt to itemize one's possessions, why shouldn't government?
To determine the amount of tax, each asset should always be on the market to be sold to whoever is willing to pay the highest tax. If an item does not show up on the list, the ownership can be seized by anyone willing to pay the tax.
Every asset should be for sale on an universal public Ebay equivalent.If you needed a home, car, book, movie, job, citizenship etc. you'd know where to go. Government should RFID every asset in the world, Walmart soon will.
No, I really haven't thought this through :)
Posted by: Winslow R. | May 29, 2006 1:07:31 PM
One can try as best as one can to plug all the holes, and yet as quickly, diligently, and well-intentioned as one does this, there will remain numerous opportunities to diddle, fiddle & optimize.
Take France: high income taxes, VAT/consumption taxes; see-through/no recognition of trusts; wealth taxes; estate taxes; property transaction taxesand generally broad powers scribed to Tax authorities to determine if one is paying sufficient tax commensurate with one;s lifestyle; but without abolishing capitalism, and freedom of movement guaranteed through international treaties, this has just spawned tax refugees and the use of listed (but majority-controlled) companies using webs of other private & family holding companies to shelter income & assets. And while France's tax authorities are good at getting their share, they still can't get the big fish, who in any event advise in the creation of rules. Pinault & Arnault are reputed to pay some of the lowest all-in rates in the country.
"Wealth taxes" are typically upon declared assets which is essentially real estate, on-shore personally-held cash & marketable securities. Authorities rarely if ever demand revaluation of antiques etc. This is why most substantial assets are held in corporate entity forms, and since some shares are held by family members etc., why these listed vehicles trade at substantial discounts to any realistic NAV, but why their owners are keen to keep it this way. American arbs have banged their heads for years as minority owners in someone else's tax dodge with only very rare and occasional gratification.
Posted by: Robert | May 29, 2006 1:28:44 PM
dryfly - which Latin countries are you thinking about? In the ones I know, the farms/plantations are already overpopulated with uneducated campesinos.
All over Central America (Guatamala, El Salvador, etc.) and now also in Brazil... many huge plantations are being turned into cattle ranches for fast food export... they are marginally productive but also don't require a lot of 'inputs' to be profitable (also marginally). But if you have millions of hectacres you don't need each one to be highly productive.
And as for the locals (compasinos) they are used like our 'migrant labor'... only when needed & in season.
Similar situation with cane sugar, coffee, cocoa, fruit, etc.
If locals owned & operated & practiced 'wise' land management you could easily reduce the acres & gainfully employ more. 'Permaculture' is the way to go - integrated crop & livestock in a sustainable pattern.
Won't happen with these mostrous plantations.
::::::
On the estate tax debate... valuing privately held businesses & land is a problem - agreed. In many cases the estate tax burden on 'marginal' assets - assets that have a lot of potential value but are currently producing little or no income (I'm think farms here) - is especially problematic. The only way to pay the tax liability is to brerak up ther asset & for farms & small businesses this means 'death' of the enterprise.
For cases like this I have always believed the estate tax & cap gains tax should be 'unified' to better capture these long term values without requiring them to break up unified holdings.
Say for example if heirs get a lot of land or privately held stock and don't want to break it up & sell it off to pay taxes... let the heirs roll it over into a 'capital account' at 'zero basis' and treat it like a cap gains account... some day when they sell the holdings they would then pay the inheritance tax as if it were a regular capital gain. In addition they would pay the tax on the value of the asset at the transaction date - not the inheritance date. Since the asset would probably have increased in value both the land owner & tax collector 'win'.
Obviously the rate schedules between estate taxes & cap gains would have to be 'unified'. Ideally these rates would also be unified with income tax schedules so that all would be equivalent... income is income no matter how earned & all see the same treatment.
I'm sure there would be some shananagans with tax deferals & avoidance... but if all the rates are unified & tax treatment equivalent... I think a lot less of it would happen than we see now where every single income stream & asset class has its own schedules & rules.
And eventually people due sell the assets - they want the cash. I doubt many would hold on to marginal assets generation after generation... especially land where property taxes tend to make people think twice about carrying assets that can't cashflow their own cost structure (farms often do that unless well managed).
That's my musing on the topic... but I am not a 'tax expert'.
Posted by: dryfly | May 29, 2006 1:54:01 PM
Dryfly is worrisomely correct on many levels, but I have no approach other than small farm subsidy, rural infrastructure development and free education and this is overly simplistic. So, we must watch and think.
Posted by: anne |
---------------------
at this point i interject
pinky as slinkyamazing bobby R hits a first inning homer
with this net worth tax meme
and yet even with that zing doooeee
to lead off
you guys can't buy a base hit here
cept dry fly
yup
dry fly is on to it
with his
wealth tax as a pinch to richy rich's capital ass
less picasso price inflation
and
more robot steel plantsyup
more
productive investment
and
more saving too
too bad
you folks rope a doped yourselves on the hoary detailscounting the peach fuzz
anne my dear
u flabber ghasts me
from stem to sternand one chap here
suggests a 10 million lower limit
and
that's on the estate tax no lesswhich reminds me
the new meme is the yearly net wort tax
not
'do we the people
or don't we the people
want our gub
to tax high worth estatesi say you get to carry
your first million tax freebut hey...
then its bingo bango
the net worth tax starts taking a public good cut
my idea to start with
make the net worth tax
service the national debt
that way rich guys can lend it now
and
we'll tax em later
to pay fem backiwhen i first read this
i sez to myself" bobby bobby what a fine idea
like making fire with flints .."
i had to stop i dizzied my head so ...
but oh man oh man
is this blog site's comment panel
tender foot territoryu pokes got yourselves
all gum balled up
with prufrockian stuff
about daddy warbucks
"gamimg the system"where's the torch brandishing
digital mob
ready yto march on boss whimsy's
gothic revival pile
i say
bring it ongive me half the cadre in the DEA
and i'll create a circus maximus that 'll.....hell let me at those silk hat gamers
Posted by: slink | May 29, 2006 5:19:04 PMbut i had no effect what so ever
they carried on as if i never postedwishing that peach fuzz
was long enough
to cut and bale like hay------------------------------------------
Dryfly, If we defer tax on inherited assets until the asset is actually sold at some future date, that is the same as having no inheritance tax at all. People could just never sell. This would do nothing to slow the accumulation of superwealth over the generations. An aristocracy populated by superwealthy heirs is not good for the country.
Posted by: Zephyr | May 29, 2006 6:52:58 PM
If you are going to do it, just make sure you do it wholesale - not piecemeal. Barricade all the exits and plug as many holes as possible. Rats can squeeze through impossibly small openings.
Posted by: Robert | May 29, 2006 7:00:10 PM
An unimpeded band of 'Pirates in the Caribbean' could get asset titles flooding back to America for protection along with the rats that live there.
Posted by: Winslow R. | May 29, 2006 7:30:17 PM
Dryfly, If we defer tax on inherited assets until the asset is actually sold at some future date, that is the same as having no inheritance tax at all. People could just never sell.
They'll sell - in time, sooner or later - wait them out.
It's the same argument you hear all the time about cap gains tax - they hold on to the assets forever because they don't want to pay the tax. Fact is it doesn't happen unless the assets are cash cows (if so tax the income from the assets waiting for them to sell)...
A tax scheme like this for either cap gains or estate just makes it harder to 'churn' the assets. Less speculation & more 'long term growth'. Not all bad.
If the rates are 'reasonable', meaning non-confiscatory, then they will sell when the time is right - just like any other capital gain decision.
If we want to make it 'easy' for them to liquidate the assets right at inheritance... then maybe offer a lower 'initial' rate if they liquidate & pay the tax now... or a higher one if they decide to hold the asset that later converges on the cap gains rate after some period of time. Of course this assumes the cap gains rate (and ideally the overall income tax rates) are higher than the initial estate tax rate. Historically it has not been the case that estate tax rates were lower than income taxes.
I get your point & agree but think this would actually be a better way to prevent a permanent aristocracy if done correctly (accompanied with a general reform of the tax code - income, cap gains, etc.). Make all income streams & asset classes carry equivalent tax burdens - literally cradle to grave - but no single one would be over-bearing.
Robert's point about the 'rats' is my biggest concern... like I said before, I'm no tax attorney (plenty in the family though)... I can't even begin to think of all the loopholes those rodents could scurry through.
Posted by: dryfly | May 29, 2006 7:31:37 PM
The "rich" (errantly defined as those with a median income above 100k) have an eight-year longer life span than the poor in this country. One could argue that they should be taxed the same as the poor because they will need to preserve their wealth longer. For instance, it is a well known fact in the insurance industry that medicare recipients who can afford supplemental health insurance will service 20x more health care costs during the last decades of their lives than those who can't. Also, the rich are more likely to finance their children's education and to own a home (property taxes; homeowner's insurance). Along those lines a consumption based tax makes sense. Also, some interesting facts gleaned from this weekend's Wall Street Journal:
There are 195,000 households in this country with 10 million or more in investable cash assets. There are 30,000 households with 25 million or more in investable cash assets.Posted by: mb | May 29, 2006 11:29:02 PM
One could argue that they should be taxed the same as the poor because they will need to preserve their wealth longer.
[...]
There are 195,000 households in this country with 10 million or more in investable cash assets. There are 30,000 households with 25 million or more in investable cash assets.
Gee just think how long those millionaires could live & preserve their wealth if the poor paid ALL their taxes for them (besides fighting their wars too).
Where is Willie Sutton when you really need him.
Posted by: dryfly | May 30, 2006 7:26:59 AM
Usually I'm a fan of Robert Reich, but I'm not a fan of a wealth tax.
How do you define 'wealth'? Are my retirement accounts wealth, or are they something I need (which might then be tax exempt)? The money I saved for my kids' college tuition? How about equity in my house? Savings in the bank? Does anything that brings my net worth above $0 count as wealth?
At what point during the year will my wealth be measured for tax purposes? Net worth is a moving target -- it doesn't stay exactly the same from day to day. If one day a year is set by the government for a 'wealth snapshot,' is there any way that the truly wealthy could make themselves look considerably poorer on that day -- and then a week later the money is back in their accounts?
In addition, a wealth tax might drive even very honest people to start off-shoring as much money as they can, or keeping their savings under their mattresses rather than investing ... psychologically it seems a bit like a punishment for having saved money.
Let's go back to taxing dividends and capital gains as ordinary income before we start talking about creating an entirely new tax category.
Posted by: Holly W. | May 30, 2006 12:10:36 PM
Your concerns are reasonable yet somwhat unfounded. In France it's levied upon assets above a threshold (approx $1 million at current exchange rates), excluding one's primary residence. I believe it's 0.50% of the principal & assessed value, typically marked at the end of the Financial year. Since our Washington reps write the laws, "we" could exempt college savings and primary pensions, but most of this is caught by the threshold in any event. The real idea is to tax the so-called stagnant eddies and the "excess" (yea its tough, but how about 2 std dev threshold from the median?) accumulation of wealth. By taxing the wealth itself in addition to income that it throws off or earns, it adds a an adidtional layer of progressivity that continually works against the entropy in capitalism tending towards a more skewed distribution.
It's a valuable progressive policy tool and for the most part needn't impact most working people who can only dream of assets ex- primarry residence of > $1 million. I wouldn't worry about the offshore thing as thereis no practical benefit for most American's of "putting money offshore", since American's are liable for tax upon it irrespective of where the owner of the money or the money itself resides. Anything less in terms of reporting is illegal, and with the Patriot Act and anti-money-laundering directives, the US has strong armed pretty much all financial institutions (including French Banks!!) to comply.
Posted by: Robert | May 30, 2006 1:54:32 PM
Thanks, Robert.
What about the problem we have with the AMT? Would this $1 million threshold be indexed by inflation every year?
It may sound far-fetched to imagine the median net worth of Americans minus primary residence to be so high, but I do keep reading that we should all be aiming for a net worth of about $1 million to retire on ... after all, we're going to need $200 grand per couple for drugs alone if we don't enjoy perfect health, or so some startling report recently claimed ... >:(
Posted by: Holly W. | May 30, 2006 2:12:07 PM
oh no i wasn't suggesting that 2 or 3 STD from the median liquid net worth ex primary res was $1mm. I was just thinking with my fingers on the keyboard that since "we" write the laws, "we" can make it anything sensible we want. I wonder myself what 2 or 3 Std Dev from the household median net worth ex-primary residence actually is though! (bet PGL knows!).
I am sure there will be whingers and corner-cases but you can't please everyone and we are spending half-trillion++ or so more than we are raising in revs....
Posted by: Robert | May 30, 2006 2:31:10 PM
Anne: "I understand, but have never come on a circumstance when significant assets could not be converted to a cash equivalent."
Well I have and it totally explains why the spearheads for the Estate Tax Repeal are named "Blethen" and "Nordstrom". The Blethen family owns and operates the Seattle Times, the Nordstroms still have direct control over their department store chain. I have a certain amount of sympathy for both families, Frank Blethen could no doubt come up with a tax avoidance scheme, but doing that while keeping the title of publisher or chairman of the board and actual operational control of the business is a little more difficult. The Blethens and the Nordstroms are really good local citizens, but at some point you want to say: pay your share.
I am not an expert but my understanding that the effect of the estate tax is to reset the capital gains base. Absent estate taxes your heirs would have to track capital gains from the time of original acquistion to sale. Taking a tax hit every thirty years on average might be easier than tracking capital gains from now to the year 3434.
Between the currently generous exemption and the reset of the capital gains base the Estate Tax is a fairly efficient way to avoid the true nightmare of tracking capital assets over decades and centuries.
When you think of the Estate Tax as a logical and efficient offset to intergenerational tracking of Capital Gains it begins to look a lot less like a 'Death Tax' and more like 'Thanks granddad! I just got my remaining share of the family fortune tax free and reset to current base!"
Yeah in some ways it sucks to be Frank Blethen, nobody likes the prospect of having the Feds whack 35% or 50% off the top because you want to hand over your business whole to a new generation, but allowing the tax problems of a few hugely wealthy families whose wealth is almost totally tied up in family businesses doesn't justify a perfectly reasonable method for taxing capital gains at reasonable intervals.
Posted by: Bruce Webb | May 30, 2006 7:02:55 PM
I'm being tongue-in-cheek, except for the data, which is real.
B.T.W. The rich are much nicer to animals. If you go to the Humane Society- all the dogs are formerly from poor homes. And I hear that the rich practically run the place. I think they deserve a tax credit for that.
I bought a great book today: Dictator Style: Lifestyles of the Worlds Most Colorful Despots. Apparently, Saddam Hussein was the world's largest collector of sci-fi porn. He probably transferred a big chunck of his wealth into these hard-to-value assets so he could avoid taxation upon his demise and leave more to his family- a favorite tactic among the oil money dictators.
Posted by: mb |