on the way to Enlightenment
or "Inherit The Wind" as my parents will say
Published on September 29, 2005 By sunwukong In International
All this talk about what "fair" level of personal income tax to levy seems premature to me without resolving two key issues on the transfer of wealth:

1. Inheritance/estate taxes -- how does wealth move intergenerationally.
2. Business taxes -- how much are corporate and organizational entities fiscally responsible to the employees, shareholdres, local, provincial/state and federal levels of government/society.

Any tax system for individuals can easily be skewed or frustrated by the systems in place for the above two methods of transfering (and keeping) wealth. In this article I will talk about my take on the first issue -- tax policy with respect to transferring wealth from the deceased to the living.

So let's start from my philosphical/policy view: while I'm sympathetic towards the idea that parents should be able to give their kids every advantage they can afford, I see no reason why death should have different rules or even be an advantageous situation for gifting. This mirrors with Canada's tax policy which I mostly agree with.

In Canada, the rule is very simple: whoever gets stuff from the dead (decided by whatever means, e.g., will and testament, first 2 out 3 throws, etc.) is ruled to have a "deemed disposition", i.e., if it's cash or equivalent, then it's counted against your income as if you had earned it -- otherwise assets are counted against capital gains (i.e., the value of the asset is determined at fair market value at the time of transfer and the difference from book/purchase/acquisition value is counted against the receiver's capital gains for the year). This is the rule regardless of the breathing status of the giver -- in other words Canada doesn't care about the intention for the gift or the giver and their relationship to the receiver, just that taxes are paid by the receiver for the increase to their wealth.

What gets the anti-tax crowd in a tizzy up here is that personal gifts of cash or equivalent can be taxed multiple times, "it's the same dollar, why does it generate tax after it's been created?" Also, "once you've taxed it at source, why are you penalizing the hard work put into its growth?" (in the case of assets). The most contentious (in more ways than one) inheritance gift is, of course, the family home as that is often where the greatest amount of wealth is concentrated for lower and middle income families. The tax rules basically say that the deceased have sold the house to the inheritors at the final price of the aggregate tax increase -- usually not a bad deal at all. Finally, there is allowance for charitable giving but with little taxation benefit accruing to the other inheritors.

The kicker, especially to people in the lower and middle income brackets, is that assets with sentimental value (i.e., things people aren't likely to sell) confer a very real tax burden, e.g., you now have your parent's great old Corvette convertible, but unless you sell it you can't afford the $3000 tax bill for its collector value. The implicit effect is pressure to keep the value of the estate below certain levels (depending on giver's and inheritors' incomes) to minimize the differential burden at disbursement, i.e., better sell or gift the homestead and move grandma and grandpa to the back of the F350 before the house gets too valuable. This is where the critics yell at the government for being insensitive to the plight of the bereaved.

This is also where we look at a system that was supposedly explicitly designed from the start with the following goals in mind:

1. People should be able to pass along their treasured belongings to their relatives with little or no tax burden,
2. Inheritance should not become the vehicle for an aristocracy based on wealth, and
3. Giving to charity to confer benefit to the giver (and therefore to the inheritors).

Correct me if I'm wrong, but I believe the system in the United States works as follows:

- There are various exemption levels based upon value of the estate to be disbursed
- Top rate at the $1M level is about 40% (I've also read 50%)
- For every dollar given to charity, one dollar is exempted from taxation

Whereas the Canadian system is a model of a an "insensitive" policy, the above (if correct) at least on the surface looks like it addresses many of the issues. However, it seems that there is just as vocal a group in the United States for removing any tax burden from inherited estates. Do people disagree with the above goals?

Finally, my own situation so you can assess what my biases might be:

- I have a young family (my wife and I are in our 30s and the 2 kids are 5 and 2, respectively)
- We are both professionals
- Our combined income is in the 6 figure range and should increase steadily
- We have a net worth in the 6 figures with only small, short term debt
- Our parents (both sets are roughly the same age) aggregate net worth is much higher than our own
- We (all of the children in both families) basically expect to inherit very little other than small items of sentimental value
- Hopefully our parents will use their wealth to its fullest in pursuit of their own dreams and needs
- We are committed to assist our parents in whatever way they require

Comments
on Sep 29, 2005
I believe this, inheritance or "death" taxes should be abolished. Only earned income should be taxed. If enough tax is not being raised by earned income tax, cut expenses first and if all else fails, raise the rate.

You brought up very good scenarios. Let's go a step further than the corvette that you mentioned. Let's say a young man is left a house by his deceased parents? Imagine a young man having to come up with even a meager 10 percent rate, but 10 percet of a $150,000 house; $15,000. An extremely high ratio of these tangible gooods are merely sold in order to pay the taxes.

The money with which all of these goods were purchased was already taxed at some point. To tax them again at death is unconscionable.
on Sep 29, 2005
Aside from sales tax collected, a business should pay no tax. The higher tax a business pays, the lower the wage they pay their employees, the less tax the employees contribute by way of earned income tax. No "business" pays taxes. Their employees pay the taxes by way of lower wages and their customers pay by way of higher prices.
on Sep 29, 2005
I am not sure lower corporate taxes would result in the employers paying higher wages or better benefits to their workers. Lower taxes would for the most part, mean higher profits. Corporations do no not have loyalty to their employees in general and just seek to incease profits. They also have no loyalty to country as they become more and more international.
on Sep 29, 2005
The money with which all of these goods were purchased was already taxed at some point. To tax them again at death is unconscionable.

What about the goal of preventing family dynasties? It obviously hasn't worked because the oldest of the old money (e.g., many of the Mayflower families and the resource barons) has pretty much kept a core group of insulated descendents.

What if the inheritence is from overseas?, e.g., pop has a mistress and a mansion in Cayman islands. Upon his untimely demise, she receives most of the cash and easily convertible stuff (e.g., jewelry) from his offshore accounts, and I get El Rancho Relaxo in the islands. Barring an offshore audit (extremely unlikely) it might very well be possible that the income for this staff was never taxed in the United States (or even North America).

A more local example: grandma in 1970 likes the look of clean-shaven, dress-shirt wearing Bill the Gates Jr. She asks her broker to purchase shares in Microsoft and holds them in support of the fledgling firm. After inflation valuation in 2005 when the old dear goes to the big Matlock jury in the sky is about 10000% higher than book value. The income used to purchase these assets was taxed long ago, in a galaxy far far away. But the wealth hidden in these babies comprises 99% "new money", i.e., untaxed revenue. Should there be a limit after which the value of an appreciated asset becomes taxable upon inheritance?
on Sep 29, 2005
Aside from sales tax collected, a business should pay no tax.

Two huge, offtopic issues here, but I'll bite.

I'm opposed to consumption taxes since they are regressive, i.e., the less income you have the more (as a proportion) taxes you pay. Obviously a huge kick in the pants for people (and companies!) who have little income.

Philosophically I agree that businesses should pay no taxes except:

1. Companies have non-zero impact on infrastructure and other community resources beyond the number of employees they have, e.g., a steel mill employing a hundred people uses up much more of everything versus a hundred blacksmiths. Not all resource consumption (e.g., fresh air) is directly or indirectly taxed (or even purchased). As well, issues like land reclamation are often borne by the community as incentive for business relocation (for and against) -- basically a hedge against loss of jobs versus restoring the land to a valuable state.

2. Capital (i.e., money) crosses borders almost as easily as bytes nowadays. Economic theory says capital moves to where it will be used the most efficiently. Of course, capital moves according to human will so the definition of use and efficiency are fluid according to non-mathematical intentions. Also note that "when" (the asset is used/attributed) isn't defined. Finally, think about why the government periodically has tax holidays for the repatriation of capital.
on Sep 30, 2005
on Sep 30, 2005
Reply By: Island Dog

Please, if you're going to comment, at least use some effort to address the issue directly. The sheer laziness of using this cartoon is astonishing -- better go back and make sure you have up to date bumper stickers too.