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Comment by gefh | Hacker News Reader

This is one of the arguments in favor of inheritance/estate taxes - they should have a distributive effect that prevents the formation of a nobility or royal class. Of course, no-one with enough foresight actually ens up paying a significant amount these days.

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There are a few challenges here.

Unless you fundamentally alter the way trust funds shelter wealth and income across generations, then all raising the inheritance tax does is widen the gap between the 1% (who you will tax) and the .1% (who will remain out of reach and become relatively more entrenched).

Second is the fact that we live in a global economy now and taxes that are not applied globally will encourage human and capital flight. If, for example, you gutted trust funds or raised inheritance taxes to 75% in the US, you would likely find many wealthy families relocating (and expatriating if necessary) to more favorable jurisdictions. For a few generations now the US enjoyed unrivaled status as the best/safest/most desirable place in the world to live (for most people), but this is already lessening as the world becomes smaller and more connected. It's already much easier for me to imagine raising my kids in London or Singapore (especially if I'm worth tens of millions) than it was for my parents.

Personally I would be in favor of a globally applied inheritance tax set at a high level but the devil is in the details and I don't think we'll get there in our lifetimes.

Americans paid 19 billion in inheritance taxes in 2014.

In comparison to what? And exactly what income-levels paid what percentage of that? Did the poor & middle class paid 98% of of that? Did the rich & powerful use all kinds of crazy tax-loop-holes to avoid paying trillions? Cost of living/retirement in what parts of America?....maybe 19 billion is a drop in the ocean, maybe not.

19 billion tells me nothing.

Well, roughly 2.6 million Americans died in 2014. I've read that 1 in 500 estates gets taxed so that's about 5200 estates.

19 billion / 5200 = an mean of ~3.65 million per taxed estate. That's all I know off the top of my head.

In general I've found the trope of "the rich don't pay taxes because of their fancy lawyers and accountants" generally turns out to be false.

>>In general I've found the trope of "the rich don't pay taxes because of their fancy lawyers and accountants" generally turns out to be false.

It's not that they don't pay taxes at all, but they definitely pay less than they should. http://money.cnn.com/2013/03/04/news/economy/buffett-secreta...

There's no way you can believe otherwise, a millionaire can afford all kinds of financial experts to work 40hrs/week to move money all over the place to avoid taxes. It's unreasonable to think they don't (ab)use that ability.

Buffet doesn't pay lower taxes because of fancy lawyers and accountants though. He pays lower taxes because capital gains are taxed at a lower rate than ordinary income.

We can certainly debate whether that is good policy or not, but it has absolutely nothing to do with any sort of fancy tricks.

I wonder which group of people lobbied for capital gains to be taxed lower than ordinary income? Is it coincidence that since the law (one of Reagan's tax cuts) was passed a lot of executives are paid a lower base salary and tons of stock options?

I'd consider that a fancy trick :)

EDIT: To answer harryh: Yes and it has been steadily decreasing [1]. And your point is? I think we can agree this mainly benefits the rich; I don't see someone in the middle class would have the discretionary income (not 401k, I'm talking about leftover income after expenses) to put his/her money in massive amounts stocks.

[1] http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Doc...

Capital gains taxes have almost always been lower than ordinary income taxes. This is not a new post-Reagan phenomenon.

The rate was much higher pre-Reagan, nearly double what it is today.

Also, the rise of finance means a lot of Wall Street hedge fund managers who should be paying ordinary income tax are paying cap gains rates through the carried interest exception. Venture capitalists too.

http://avc.com/2010/05/why-taxing-carried-interest-as-ordina...

Reagan lowered max cap gains rates from 39% down to 20% but then back up to 28%. At the same time he lowered the max rate on ordinary income from 70% down to 50% then down to 28%. So ya, at the end their they were briefly the same (which is why I used the word almost). But in general my point stands. Capital gains rates are generally lower than ordinary income rates as a matter of public policy.

A similar point holds for the carried interest rule. Those taking advantage of it aren't doing so because they've hired amazing accountants to file their taxes. They're just following relatively straight forward tax law.

Adjacently, while I generally agree with you on the topic of carried interest I did find this column thought provoking. You might enjoy it.

http://www.nytimes.com/2012/03/04/business/capital-gains-vs-...

My understanding is that the carried interest rule was originally created as an incentive for mining exploration. It wasn't until the 80s that Wall Street hedged funds started taking off, and that they really started making use of it.

My feeling is, if you don't have actual capital at risk, you shouldn't get a break. Or put another way, if it's not possible for you to experience a capital loss, then it's not possible to experience a capital gain. Most VCs and hedge funds also invest a substantial amount of their own capital in the funds they manage, so it's not like it would be a radical change.

A few years ago I went to the Aspen Ideas Festival. One of the speakers was David Rubinstein of the Carlyle Group. Someone cheekily asked him what the tax on carried interest should be. He said "It should be zero. But politicians 'earn' so much money in donations by by threatening to repeal it, I predict it will always come up as an issue every three or four years, and will always stay about what it is now."

I generally agree with you about risk, though the counter argument is that they are putting capital at risk. They are taking some portion of their compensation as equity that may or may not turn out to have any value. It might not be actual dollars coming out of a bank account but the risk is still there.

Incidentally, since this is HN, one might ask if startup employees are doing the same thing to which I would generally nod and agree with you.

And it makes sense as there would be no incentive to invest in business if you are taxed the same on T Bills, Bonds Consols, Guits etc

But Buffett does make his capital gains exclusively through Berkshire who absolutely does make money through fancy lawyers and tax loopholes.. See the pointless Burger King / Tim Horton's inversion they shepherded through last year;

http://www.bloomberg.com/news/articles/2014-12-15/berkshire-...

This isn't productive work on any scale except tax optimization and is only available to massive companies and their teams of lawyers.

Shares of BRK.B are available to anyone who wants to buy them. So they can participate in those gains as well.

What you're really getting at is tax incidence. Ultimately corporate taxes are still taxes on people. It's a complicated question to figure out which people. Sometimes it's shareholders like buffet, but it's also often employees or customers.

I do generally agree with you though that corporate taxes probably fall disproportionately on rich shareholders so to whatever degree there are shenanigans it's probably benefiting those rich shareholders.

Personally this makes me question the value of corporate taxes entirely. Just get rid of them and tax people directly. It would save a lot of paperwork and be easier for everyone to understand. Most people disagree with me on this point (though I would say that's because they don't think about tax incidence!).

Not everyone can obtain very many BRK shares. Buffet has very many.

Yes. Clearly. Hence "I do generally agree with you though that corporate taxes probably fall disproportionately on rich shareholders."

This is why I actually favor doing away with the corporate income tax. Hundreds of thousands, maybe millions, of accountants and tax lawyers would be out of work, but on the flip side companies would have no incentive to play all these games and keep money offshore. Just pay a dividend, or don't, and let the investors figure it out.

Then you'd need a property tax or else the investors can keep accumulating value and never paying tax.

No, you'd still tax distributions to investors. Basically, once money touches a personal bank account, it becomes taxable. The difference is that corporations would have much less incentive to hide their earnings.

How much one "should" pay in property/income forfeiture is, of course, a matter of political policy.

Just think how much money goes into the economy to preserve income...if we simplified the tax code in any way, so many people would be out of work in both the private and public sectors.

> if we simplified the tax code in any way, so many people would be out of work in both the private and public sectors.

This is an excellent demonstration of the broken window fallacy.

From 2003 to 2013, the top marginal and capital gains tax rates were 35% and 15% respectively, and the top 0.01% of taxpayers faced an average tax rate of effectively 25%. The last time rates were that low was before WW2, leading up to a period we remember as the Great Depression. During the nation's most prosperous decades, those rates were consistently above 40%, and leading up to them, ranged between 60% and 40%.

The issue isn't that the mega-wealthy pay no taxes, but that the value of the taxable income of a handful of people vastly supersedes that of most of that of the rest of the population. In essence, lower tax rates didn't fix anything about the economy unless you thought taxes were the problem and provided no overall boost to the economic security or general prosperity of the public.

So when GE Capital pays no corporate taxes and someone points that out, you're likely to hear that they pay those taxes through the number of people they employ. This is deceptive, since a legitimate small business would be paying both taxes. That entities like GE Capital exist is the trope that you need to dispel. Or did those estate taxes not come from the earnings of mom and pop shop owners and people who put in their 40 quarters with a little wise investing?

Taxes are for the 99% The 1% can and do pay lawyers to get out of paying much. Check out this loophole - it is complicated but basically if you can afford to set up one of these trusts you can give money to your kids tax free:

https://en.wikipedia.org/wiki/Grantor_retained_annuity_trust

> "the rich don't pay taxes because of their fancy lawyers and accountants" generally turns out to be false.

So why does Buffett keep on saying that he pays low taxes compared to his secretary?

Short explanation: capital gains, dividend income is taxed less than normal (wage, salary, etc) income. And I believe Buffett means that he pays a lower effective tax rate than his secretary, not fewer taxes in absolute terms.

Your first $5.3 million is exempt from inheritance tax when you die.

$5.45 million if you can hold out until 2016!

Relevant Monty Python:

"...rigged the market, made a cool forty million, payed off the Lord Mayor, and put the lot into diesel-powered nuns."

"Which is where he went wrong, eh?"

"Exactly"

"When's the funeral?"

"Oh, he hasn't killed himself yet."

"He hasn't?"

"No, waiting 'til April the fifth. Some sort of tax dodge."

Marking my calendar!

That's not a particularly meaningful number without knowing the total amount that was inherited.

American's 2014 GDP is 17.4 trillion dollars.

It seems reasonable to assume that some portion of it will accumulate among the wealthiest class and be inherited. Probably much more than ~0.1%.

Rather than comparing to GDP it's probably better to compare to net worth which is about 70 trillion dollars. With an expected lifespan of ~80 years that's roughly 875 billion passed on in any given year.

Let's assume that all inheritance taxes are paid by the top 1%. They own about a third of total assets. So that's about 290 billion being passed on.

19 / 290 = 6.5% being paid in inheritance taxes. To high? To low? I dunno, but that's my best guess back of the envelope math.

Nice estimates. The nominal US estate tax rate for estates $1M over the exclusion is 40% so I would say your estimate of 6.5% shows how effective the 1% have been at sheltering their wealth from estate tax. The GRAT was invented (and patented[1]) as a way to transfer money tax free after congress closed the GRIT loophole in 1990:

https://en.wikipedia.org/wiki/Grantor_retained_annuity_trust

[1] https://www.google.com/patents/US6567790

Completely separate from the rest of this discussion, but I am amazed that you can patent something like that.

Another thing you could do is a logarithmic flat tax, where everyone pays the same amount of relative resources. The value of money as people get richer is roughly logarithmic. The simplest plan I've seen along these lines is:

Figure your year's revenue. Find out how many times the poverty level that is, for your family size. (Twice the poverty level, 10x the poverty level, etc.) Take the log base 10. Multiply that by some constant that is the same for every tax payer in the nation (both people and businesses). Currently, that "flat" constant would be about 9. The resultant number is your tax rate.

(Hint: this would be a massive tax cut for pretty much everyone short of billionaires.)

What distributive effect are you talking about? Almost every free market economy today is an equal opportunity space. And that is only thing that should count.

If people can't even keep their own money earned for themselves, you are just killing the incentive to even earn it at the first place. You seem to suggesting we must periodically make the rich, poor. This kind of equality is more dangerous than inequality. Look up the failure of socialist/communist set ups in past century that will tell you why this is such a bad idea.

The whole scheme over time feels like punishing people for working hard and generating wealth, while remainder free loads on the assumption they are entitled to free money.

What follow next is exodus of smart, hard working people to better countries.

I think you may be confusing Atlas Shrugged with reality my friend.

Well, are his ideas/comments/arguments valid or invalid? Or are you simply dismissing it because it's too-similar to a line of thinking that is often popularized by a single book?

Lots and lots and LOTs of sectors are heavily regulated, which leads to rent seeking which leads to protectionism, either via foreign trade barriers or just making it bureaucratically difficult for competitors to enter (i.e. Uber getting flack from municipalities).

For a long time the rent-seeking was done by unions, but these days its more commonly done by corporations.

Care to explain your version of 'reality'?

If you can figure out how to use your money after you're dead, I'll make an exception for you in my Kingdom.

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