Draginol

Join Date 03/2001

+137

More on inherited wealth

Earned income vs. unearned income

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.

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but it shouldn't be a free ride.

But it should be a free ride for the government? Taxes have been paid once on whatever it is. So then it's okay for the government to double dip into your pocket? Because when it's all said and done, that's whose pocket their hitting. Yours not your kids or anyone elses.

If not, the land is sold and Johnny Reb VII pockets $6.5 million of it

wrong answer Brad. He pockets whatever is left after taxes! He has paid the 3.5 mil in inheritance tax. NOW he'll have to pay income tax on the 6.5 mil left over. And I believe that figure would put him in the 30% bracket?

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Draginol

Join Date 03/2001

+137

DrMiler: We ALREADY PAY INCOME TAXES. You understand this right? You earn $100 from your job and some percentage of it between 10% and 35% is going to go to the federal goverment.

So why should income that is just handed to you be treated differently.

Taxation occurs when money changes hands. When I pay for a candy bar, I pay a sales tax. The money I used to pay for the candy bar was already taxed when I earned it. The store that receives the money for the candy bar is also taxed on that money.

And no, I am not wrong. I think I know my analogy better than you do, thanks. In my ideal system, Johnny Reb pays $3.5 million of the $10 million as income taxes and keeps the rest.

The reason you are not understanding what I'm talking about is that you have apparently decided that I am for a death tax in which a person's assets are taxed BEFORE it is transferred to inheritors. No where have I said or implied that.

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If you bust you ass and make 10 million ITS already been taxed at somewhere close to 50% with state taxes included, why should the gov, get some money because you simply uped and died?

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Why should the government get some money because you simply up and bought something, or up and got a job? How come, when I buy something, I pay sales tax and the seller pays income tax on the same money? Wouldn't you think that if there was one thing that the government wanted to encourage by making it tax-free, it would be earning money by working for it?

And why should your children get some money because you simply up and died?

Taxes, money, and all that crap is just never going to make sense. If you're in a position where you don't have to seriously worry about it because you already have enough for food and shelter and whatnot, praise the lord and move on.

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So why should income that is just handed to you be treated differently.

Because TAX HAS ALREADY BEEN PAID on the money!

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BTW this is waaaay different. You are paying tax on a product "bought".

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And no, I am not wrong. I think I know my analogy better than you do, thanks. In my ideal system, Johnny Reb pays $3.5 million of the $10 million as income taxes and keeps the rest.

And "yes" you are wrong. He STILL has to pay income tax on the 6.5. He pays 3.5 inheritence tax and then income tax on the rest.

Just what do you think an inheritence tax is? Death tax or inheritence tax, 6 of one half a dozen of another. It's basically the same thing. Also judging from the replies I would venture to say that I'm not the only one thinking this way.

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Taxes have been paid once on whatever it is.

That's my opinion too. Whoever earned that money originally was taxed on it as and when they earned it, so why should it get taxed again? Even if the money wasn't earned but was won (in a lottery for example), that money would already have been taxed once.

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There is a flaw to your logic Draginol...

You are trying to make the case that Unearned income is the same, no matter where it comes from. The problem with your argument is, there is a difference between taxpayer revenue and private money.

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.

Unless they are under investigation for a crime, It isn't the government's business to decide what portion of any private citizen's money was "earned" or "unearned". Welfare, on the other hand, is from taxpayer revenues, therefore, it is completely different than private holdings.

We have agreed though, that an inheretance is income, and could be taxed, just not at an artificially confiscatory rate. If you get right down to it though, I'm against all forms of income tax... however, they are now consitutional, and the government has to get operating revenues somewhere.

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Again I have 2 problems. I bust my ass, make $10m, and decide to give it to the United way. Should they be taxed? They did not earn it. Of course the answer is no.

But I bust my ass to PROVIDE for my children, and I pay taxes and die, the taxes have already been paid on that $10 million! What gives you the right to decide if I give my money to kids or the United way? For now you are deciding that you know better how my hard earned money is to be spent (literally). That is too socialistic for me.

Ok, point 2 (and I find your Johnny Reb to be highly ironic, and somewhat prejudice). I bust my ass, and make a going concern of a farm VALUED at $10m. But the value is only in the product of my sweat. My son comes into the Business. Again, some years are good, some are bad. I die during a bad one, and no one will give him jack shit. SO he looses it all because the price of rice is now down to a dollar a buschel. My hard work has been for nothing and he cannot make a go of it becuase the carpet baggers have bought the land for a freeway.

Tough you say. And so it goes. You see, many farmers are property rich, and cash poor. And no bank is going to loan them money on something that is iffy at best and speculative in the most part. So they lose the farm. And we lose another farm to a huge conglomerate. That cares not for the workers these people have employed, or the investment they have made.

And for what? because you want a lake front house in Michigan? I must say of all your articles, this is the lamest and most self centered. For in the end, it will be you that is bitten as well as paris Hilton (some would say deservedly so) and Uncle ned and his farm.

Sorry, I dont agree. you just threw the baby out with the bathwater.

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If the inheritance is in the form of cash then I would agree with the reasoning that it is income and should be taxed as such. But if it's land, it really isn't income unless it's sold and therefore should only be taxed at the normal property tax rate for that land as usual.

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Draginol

Join Date 03/2001

+137

You're taxed on lottery winnings btw. For the inheritor, an inheritence is pretty similar.

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Draginol

Join Date 03/2001

+137

Again I have 2 problems. I bust my ass, make $10m, and decide to give it to the United way. Should they be taxed? They did not earn it. Of course the answer is no.

The United Way is a Non-Profit Corporation.

You bust your ass, make $10 million and give it to your buddy Bill, then Bill is going to be taxed on that $10 million.

Don't you remember the Ophrah and the free car thing? The people who got those cars had to then pay taxes on it?

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Draginol

Join Date 03/2001

+137

Again I have 2 problems. I bust my ass, make $10m, and decide to give it to the United way. Should they be taxed? They did not earn it. Of course the answer is no.

The United Way is a Non-Profit Corporation.

You bust your ass, make $10 million and give it to your buddy Bill, then Bill is going to be taxed on that $10 million.

Don't you remember the Ophrah and the free car thing? The people who got those cars had to then pay taxes on it?

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.

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Brad why threaten Dr. Guy with banning because he doesn't agree with you? That is the "Way of Brad". Surround himself with a bunch of "Yes Men", and isolate or purge everyone else. The sooner you all realise that Brad is probably one of the most self centered, egotistical and patronizing brats on the internet the better. He's the Derek Smart of the skinning world.

I inherited nearly 3 million (cash and properties including a beachfront condo worth 600k which you seem to think i'm not entitled to) from my father when he passed away. I wasn't poor when I inherited, but I am surely rich after (by anyones definition of rich). But my dad busted his ass to make sure his son was set up for life and paid millions in taxes over his lifetime. It makes absolutely no sense at all that I would have to pay more taxes, that is nothing but double dipping and it is wrong. In fact, I think I should be entitled to all of the money my father paid into Social Security, it isn't the governments money it was my dads and now it should be mine.

What this really is about is how Brad can't have his way and in a normal hypocritical fashion, he shifts from radical right-winger, to radical socialist because for the current moment, that would benefit Brad the most. Can anyone imagine going through life with a complete lack of principles as one such as he?

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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.

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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.

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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.

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Daiwa

Join Date 07/2001

+351

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

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Draginol

Join Date 03/2001

+137

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.

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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.

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Draginol

Join Date 03/2001

+137

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.

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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.

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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.

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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.

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