More on inherited wealth

Earned income vs. unearned income

Published on May 15, 2005 By Draginol In Politics

My last article on inheritence taxes sure drew some controversy. Surprisingly, much of it from conservatives. Perphaps it's because I'm an only child or perhaps I just don't have the "correct" attitude on families but to me there are two types of income: Earned and unearned. My problem with welfare is that it provides unearned income to people. And so to me, inheritence isn't much better than welfare.

Before you turn your flame throwers on, hear me out. My view is very straight forward -- inherited wealth should be taxed as any other income. If I bust my ass and earn $10 million over my lifetime, it's going to be taxed. So why should some guy earn $10 million while sitting on his rear end without having to pay taxes simply because he shares some genetic material with the provider of that wealth? To me, that's insane.

Realestate was used in my previous article to illustrate how this can really get out of hand. The more you know on how huge tracks of private land in the US was acquired, the more I think people will rail against the idea of a free lunch when it comes to handing down land. So let's use some southern plantation as an example. 200 years go Johnny Reb builds a plantation on 100 acres of land in the deep south. He didn't really "buy" this land but rather squatted on it until it became his by default. Through generations, that same land stays in the family through inheritence.

Fast forward to now. Johnny Reb V passes on leaving the 100 ascres to Johnny Reb VI. It's valued at say $10 million. Should Johnny Reb VI just get that land? That's where the debate is. I say that Johnny Reb VI owes income taxes on it. At $10 million, that would be 35% ($3.5 million). Assuming Johnny Reb VI hasn't been complacent, having grown up with immense wealth around him, he should be able to get together with either other family members or investors and pay that $3.5 million. Then the land is available to be handed over to Johnny Reb VII. If not, the land is sold and Johnny Reb VII pockets $6.5 million of it (not bad for not having had to spend a lifetime earning it through labor). At that point the land is available for Billy Yank I to purchase it and pass on to Billy Yank II if he is able to pass the tax muster.

I do agree that traditional inheritence taxes are too high. Inheritence income should be treated as any other income and not discriminated against. But at the same time, it shouldn't be eliminated entirely either. You earn your money, it's taxed it's yours. But that has nothing to do with your children, let alone your great great great great grandchildren. They did nothing more than be born to "earn" it. The system should be biased in favor of keeping assets within a family, but it shouldn't be a free ride.

Comments (Page 2)

Not_I

on May 15, 2005

To all the people who are against the inheritance tax, please answer this question. Do you want this country to have a hereditary aristrocracy? Without this tax that is exactly what we will end up with.

Lee1776

on May 15, 2005

to radical socialist because for the current moment

What is so Freekin socialist about paying taxes on income. It is more socialist that a person wants free money, without paying something for it.

IMO Brad's views are more Capitalist and basing one's life on merit. Not based on what social class your born into. While poor people get free money without taxation from the Government, you're wanting rich (or soon to be) people to not be taxed for receiving free money. You call him socialist, when you are requesting the same thing for yourself.

Income is income no matter if you worked for it, won it in a lottery, or got pulled out of the right person's crack to get it. The money changed hands and that is income.

Dr Guy

on May 15, 2005

You know, Dr. Guy, it maybe time for you to go bye bye. As I have said several times, I used that example to illustrate a point. And yes, I know that inheritence taxes will get my children too. Duh.

That is your choice and your perogative. As you did, so did I use that as an example. For the simple reason that you used it, I showed it was a lame one. If that is an attack on you, my appologies. It made a point both ways.

There was nothing personal in that response other than to say your arguement was flawed. Delete this and have me gone. It is your site and I will not contest it.

Daiwa

on May 15, 2005

Drag, earned & inherited wealth have followed a cyclic course forever. There's lots of old money in this country that was earned generations ago, albeit a lot of it very illegally (name Kennedy ring a bell?), that is now inherited wealth sitting and stagnating (relatively speaking), while people earning it (like you) are on the ascendency. I read an article recently about the high-end luxury vacation business and that industry is seeing a strong shift from clients with inherited wealth to those with earned wealth. Once they've finished their careers and their heirs have the money, we'll see another cycle. It's not always a single generation shift - may take several generations for the shift to occur, but it has and will. Having said all that, I can agree with taxing the appreciated value of inheritance (which itself would become ripe for abuse by contrived rules), but at no more than regular income rates. I'd still prefer a consumption-based tax system, personally, leaving everything else alone. A tax on your hard work has never seemed right to me; on the other hand, if I think I can afford to buy something I think I can afford the tax on it. Given that there is a lot of luck involved in getting wealthy the old-fashioned way (as John House used to say) as well as hard work, our tax system should provide incentives to accumulation of wealth.

Cheers,
Daiwa

Draginol

on May 15, 2005

Dr. Guy: You insinuated that my belief in inheritence tax is based on a selfish motive - to get land at a lake. As if somehow, if it weren't for my "greed" I would be yelling for generational free rides.

terpfan1980

on May 15, 2005

if it weren't for my "greed" I would be yelling for generational free rides.

I take exception to the generational free rides labelling.

If I bust my ass and I earn several thousand, or several million or whatever amount of money and I leave it to my family for them to enjoy, that's my decision. Considering the time and effort that may go into my making that "wealth", all while constantly having to protect as much of my income from the tax man while I'm alive (so that I can hopefully grow the wealth quicker, using the larger base amount), I don't see how my relatives should be forced to pay again for their loss. Why do I say pay again? Because my relatives pay now in the loss of quality time with me while I'm trying to earn my living and take care of them. Because my relatives would be paying in the loss of their family member.

This is the biggest problem I have with the inheritance tax.

As others have said repeatedly - the money was taxed. Hell, it gets taxed several times along the way, but it is taxed at least once before being left as an inheritance. Once it's an inheritance, why the hell should it be taxed again -- it didn't grow, so there's no new income. It is just passing from one family member's hands to another. On, one more thing, it can be certain that the money will be taxed again when it does grow and changes hands in someway -- will those that are in favor of these death taxes be ready to give back the death taxes as they hold out their hands to collect income taxes on the increases in the wealth?

I still say asking the government -- or even allowing the government -- to take even a penny of the money is not right. It just seems to show jealousy of the work of others or the jealousy of the fact that someone, or several someones didn't have to work as hard for the wealth they have as someone else might have to. Along the way though, someone, somewhere invented a better mouse trap, worked harder at their chosen profession or was just plain lucky enough to invest in a company that performs well and makes it's investors wealthy.

If it seems that this is a conservative stance, you are probably right, as typically conservatives feel that one persons wealth is no business of the government, or at least should only minimally be affected by payment to the government for the necessities we all must share in.

Draginol

on May 15, 2005

Well unfortunately that's not how the government operates. When your company pays you, that hard earned money gets taxed. Money gets taxed over and over again.

And yea, if someone GIVES you a million dollars, that's a free ride. It's not a free ride for the guy who earned it but the guy who receives it because of genetics certainly got something for nothing.

flipdoubt

on May 16, 2005

As someone who stands to inherit a chunk of money himself, I have to say that I agree with a lot of what Brad said in both articles. If for no other reason, it applies one standard across all situations, taking a much needed step in the right direction of making our chaotic tax code comprehensible.

As I was very close to the person who "busted his butt" to pass money on, I have to speak with his voice for a moment. Aside from the entertainment value of being a player in the stock market, being able to pass a significant amount of money on was his motivation for amassing so much wealth. That is how he fulfilled himself, with the knowledge of what he was doing for his family. Whatever is suggested should take into account that people have worked within the existing system for quite some time and made long term strategic plans based on this system. I'll be painted liberal for speaking about fairness, but I think it would be unfair to change the rules on those who have worked so long and hard.

But, based on the plan Brad proposed, it sounds like there is a chance the tax burden would be less if such money was taxed as income. If Johnny Reb inherits $10 million worth of land now, how much does he have to pay? Is land taxed differently for cash? I don't know.

Also, someone in the previous article mentioned rolling inherited lands into a corporation. The same is done with all other assets, deeding out shares to "genetic" investors. Sounds weird, but accountants can be creative folks.

dharmagrl

on May 16, 2005

I think that thus far we've all focused on relatively 'new' money and the cash aspect of things rather than money that's been in families for generations and assets rather than cash (or bank accounts with liquid funds in them).

I can see the point better when I think about it in terms of land and other assets...but I still think that inheritance taxation is the government double dipping.

bakerstreet

on May 16, 2005

I think this also overlooks the fact that many kids don't just "sit on their asses". Many inherited businesses and property don't get passed on until the "kids" are 40 or 50 years old, and have put a good deal of THEIR lives into the management and upkeep. A good friend of mine just inherited his parents property and he is 62. He's worked his ass off managing it for his parents, and the income from it went 100% toward his parents retirement.

WHy should they pay 20-30% to get an inheritance they've worked 20 or 30 years to protect? I know you hate the 'selfish' assertion here Brad, but that's the only way a lot of us can make this jive with your other, well documented beliefs about government and taxation.

Sir Peter Maxwell

on May 16, 2005

For such an economist, Brad, you should realise that Inheritance Tax hits those of self-made wealth the most. Taxation is simply legalised theft on behalf of workshy plebs.

It is much the same as any form of taxation, proportionally the poor pay more tax than I do. The rich can afford to shelter their wealth. It is a common misconception that the wealthy pay more tax than the peasants, most tax comes from the less well off.

stutefish

on May 16, 2005

little_whip:

Those Hummel figurines are an interesting case.

The fact of the matter is, your parents worked very hard for many years, to accumulate the wealth that those figurines represent.

The reason you cannot afford the tax on them is the same reason you cannot afford to buy your own Hummel collection right now: you haven't focused your wealth on that task.

Now, I'm not sure it's good to put descendants in the position of having to re-purchase the legacy their ancestors already worked so hard to provide. But assuming there's nothing fundamentally wrong with an inheritance tax, your problem is that you've been spending all your wealth on building your own assets, rather than spending it on acquiring your parent's assets.

Daiwa

on May 16, 2005

LW -

I believe that the first $X of an inheritance passes untaxed, I'm thinking $500,000, but that could be off.

Cheers,
Daiwa

C H Wood

on May 17, 2005

Some quick facts for those so inclined for such things:

Year of Death	Exempt Amount

2003	$1 million
2004 or 2005	$1.5 million
2006, 2007 or 2008	$2 million
2009	$3.5 million
2010	No estate tax
2011	$1 million unless Congress extends repeal

http://www.nolo.com/article.cfm/ObjectID/DAC2BB31-35E4-43B2-9BDFA70AD3775418/catID/257899BC-C5FA-435D-BA9BCC083F55357E/309/126/FAQ

I.e., even at the lowest levels ($1 Mill) most people don't have to worry about estate taxes. It seems about 2% of estates qualify at that's at todays much lower exemption levels.

Also, one does not pay income tax currently on the same estate being passed on to them. Just the estate tax. Technically, the person recieving doesn't pay anything at all, the estate actually pays the tax itself. But I suppose it could be percieved as the same thing (not too dissimilar net effects)

Anyway, it's a wonder what a few minutes of google searching can do. You may now continue your flamewar...Ah, "spirited discussion" ...already in progress.

terpfan1980

on May 17, 2005

Reply #31 By: C & H Wood - 5/17/2005 9:53:31 AM
Some quick facts for those so inclined for such things:
Year of DeathExempt Amount

2003$1 million
2004 or 2005$1.5 million
2006, 2007 or 2008$2 million
2009$3.5 million
2010No estate tax
2011$1 million unless Congress extends repeal

There are multiple ways of dealing with the Estate tax issue that can help. If you are so inclined, you might hear a world of great information by listening to talk radio like Ric Edelman on WMAL AM630 (wmal.com) on the weekends (Saturday morning, 10am east coast time, available via web streaming I think), or Bob Brinker or a host of other financial talking heads.

Between the financial advisors and the lawyers you can also hear, there's a literal wealth of great tips and info on establishing trusts, and using insurance and other means to help protect the assets one might want to pass along to an heir.

For most people, the numbers above seem to not really impact, but you have to be very careful in thinking you are not going to be impacted. In the Washington, DC area (as an example) home prices and home values (and property values) have risen so fast that people that wouldn't have been impacted under old numbers can very easily find that the estates they are dealing with are much more valuable than they assumed or were aware of.

Just like the AMT (alternative minimum tax) which now hits more people than it was originally designed to, people many times are not aware of their own wealth, or the wealth of family members.

Think about it, no one ever wants to face their own mortality or that of others. And talking about someone's wealth as an inheritance seems too morbid for most people.

It is highly advisable to speak with financial planners/advisors and lawyers and make sure that you cover things as best you can. But... keep in mind also that for many "working poor" and middle class individuals, it may not be easy to find the money to put into the hands of the lawyers and financial planners that would help lead to a larger pile of wealth in the future.

Perhaps it's an area where the government should provide services for free, but then again, think about the conflict of interest that would exist there? The government would be paying for a financial advisor that would be trying to keep you or your heirs from having having to pay more into the hands of the government. Would the government ever really want to do that?!?

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