Too Rich to Live? | Hacker News Reader

Too Rich to Live?

online.wsj.com

27 pointsgrellas60 comments

Many of the wealthiest people in America opposed the repeal of the tax in the first place - http://news.bbc.co.uk/1/hi/world/americas/1170874.stm

Warren Buffet has been quoted as saying "The idea that you get a lifetime of privately funded food stamps based on coming out of the right womb strikes at my idea of fairness."

There's a strong argument for high estate taxes on the principle that the inheritance of wealth is inherently anti-democratic. Most historical dictatorships have been based on the simple principle of compound interest. In Britain two thirds of our land is still owned by just 6,000 people, most of them aristocrats. I think any American would be a fool to forget that their nation was founded as a rejection of British serfdom, and that their nation is perhaps the only one in history that has not lived under the tyranny of oligarchy. It seems to me to be no coincidence that America is almost unique in the world in not having a common cultural sense that economic wealth inevitably translates into political power.

For a contemporary example of the perils of unearned wealth, we need look no further than Russia - in less than two decades it has descended to a state of pure plutocracy, based on little more than unchecked accumulation of wealth and simple corruption. Those opposing campaign finance laws and regulation of that sort would be wise to look at the career of Vladimir Putin as a cautionary example of what happens when wealth is allowed to dominate democracy.

I consider myself a classic liberal, on largely utilitarian grounds - I believe that a free market is good for us all and that any regulation of that market is likely to do more harm than good. However, I fail to see the harm done to society by considering a dead person's assets to be essentially 'dead money', beyond that which is necessary to sustain his family. If you truly wish to have a lasting influence on the world after your death, trust laws give you ample opportunity to leave a permanent economic legacy. The likes of Gates, Buffet, Carnegie and Rockefeller seem to recognise this. I fail to see what good comes of inheritance, but do see a long history of great wrongs resulting from it. From the perspective of this Brit, inheritance seems to be more fundamentally un-American than most things condemned as such.

The majority of the harm, as I see it, stems from the government attempting to regulate the market and the unintended consequences of that regulation.

Very wealthy people have the resources and probably the smarts find ways to lessen tax liability - setting up trusts, moving money offshore, etc.

Yes, very wealthy people... like a two-income family of programmers that saved 20% of their money and invested prudently.

And with this law passing, the death of the family farm is complete. Now instead of the midwest being full of family farms passed from father to son, we'll only have corporate farms, since the typical family can't come up with the cash to cover half the value of their land that now belongs to the government.

I have little sympathy for the mega-millionaire trust fund kids this impacts, however, the estate tax completely destroys a way of life for millions of people in fly-over-country that has existed for generations. Sad.

Being able to preserve wealth within a family is a skill in itself.

If anything, million dollars fund is one of the biggest challenge that any kid would have. Any kid who have managed to keep their fund growing deserve a kudos in my book because they didn't squander their money in questionable investment schemes.

Remember, lottery winners typically all went broke. Very few have the financial skills to grow it.

If anything, million dollars fund is one of the biggest challenge that any kid would have.

It is a challenge most people would gladly take.

From what the article says, it sounds like the tax is reverting back to a previous level. I'm sure this will do little to help family farms. However, if it didn't kill them off the last time it was there, then what makes this time around so much more terribly.

According to the article, the lowest exemption amount being discussed is $1 Million. According to wikipedia, the average value of a family farm is $250,000 in the US, so in other words this will not impact the average family farm at all. (As a side note, my mother's side of the family does maintain a family farm passed through generations and it is currently worth substantially less than that...)

When you are talking about the truly large family farm worth over $1 Million, remember, that first million is still exempt, only the value over a million is taxed. This means that only a farm worth substantially over a million is at risk of unmanageable tax bills. A farm that large will look a lot like a corporate farm even if sole ownership has been passed through generations, and a farm owner with that kind of resources likely has a large life insurance policy that will help defray those taxes somewhat.

[Edit: spelling and grammar]

Family farms in Iowa have been dead for a generation. My brother is the youngest member of his "future farmers" group - he's 55. Corporations manage most of the land in my county, and its not very different elsewhere.

Anyway, most canny farmers have incorporated. The heirs get stock, not the farm. So taxes are avoided/deferred.

The family farm has always qualified for a $1,000,000 deduction from the estate tax.

http://www.irs.gov/businesses/small/article/0,,id=108143,00....

The fact is that most of the "family farms" that still exist are actually huge multi-million dollar operations.

That is the problem nobody talks about - illiquid assets. The estate tax destroys value when sales are forced to cover the taxman's bill. It's not just farms, but any illiquid business.

The ongoing death of the family farm is a complex and challenging process. First, few other walks of life saw technology improve productivity by an order of magnitude or more in the space of a generation. During one stretch of personally observable time, between the time I was 3 and the time I was 13, the cost of a particular tractor went from 1300 bushels of wheat to 6500 bushels of wheat.

Farm subsidies have had interesting impacts on not only how farms have run, but shifts of political power and in fact the structure of that society.

And as another commentor says, other structures of ownership (corporations, LLC, trusts) can protect the family's ownership.

In any practical sense, inheritance tax doesn't really hasten the death of the family farm at all.

What's the hit on passing your estate to your kin BEFORE you die?

Gift tax is similar (has been 45%, might go up), on amounts over $10,000.

It's now $13,000 as of last year, I believe.

Charitable giving is exempt, though...

And if it's a married couple, that's per person, not per estate.

Depends on how you do it. There are lots of ways to transfer assets down to the next generation to avoid tax. I won't list them all here, but the key point is that most of them take time to implement and the important part is to plan ahead and not wait until you're nearing the end of your life.

To counterbalance the tone of impending doom in some of these comments and the article, it's worth remembering that the article is from WSJ and might bear the slighest hint of bias. J

a 45% estate tax? That seems kind of insane! Is that on all your assets, or the property you own, or what?

I can't believe the government gets half of everything you've got when you die. What ever happened to wills?

The argument for this is that you're getting a large windfall (and in most cases you haven't done anything to earn it) so you must be taxed on it.

Also note that there is a huge exemption (apparently $3.5m last year, and $1m next year if they don't change it). It's only 45% beyond that point, like tax brackets.

Only 45% at the federal rate. Don't forget (in most cases) the state taxes that get levied as well.

There are a lot of ways of avoiding this,

EX1: you can give your wife unlimited assets without tax implications.

EX2: Let's say you and your wife have a 7 million$ 50% of which is appreciated assets, and 2 million in life insurgence and 3 children. Each of you can give 1 million to each child, so 6 million is exempt, as is all life insurgence thus only the last million is taxed at 45%. Resulting in a 0.450 / ( 7 + 2) = 5% effective tax rate.

Note: If they actually sold their appreciated assets they would pay more in taxes.

EX3: 1 billion in assets. Set's up a blind trust = zero direct taxes on death. Money can compound tax free in the trust and is only taxed on disbursement.

EX4: 1 billion donation to the red cross = zero tax.

PS: If you do nothing and leave 5million to 1 person the effective tax rate is still only 36%. You really have to have huge amount in assets and stupid tax advice for this to be a major issue.

That argument happens to be full of shit. Even if you win $36 million in the lottery (surely the stereotypical "windfall"), the feds won't tax you 55%. The highest marginal tax rate is 35%.

Estate taxes are morally repugnant. If the idea of people passing along large fortunes to bratty kids is so bothersome, take comfort in the fact that money tends to "find its level". Spendthrift fools will eventually lose it all to mismanagement anyway. It might take more than one generation, but it'll happen.

Estate taxes are only morally repugnant if you believe that the children of the elite have a unique right to the accumulated wealth of the society (which tends to build up in those who own property and capital). Why should all of us whose ancestors for generations actually built this society with their hands end up with nothing while the man whose ancestor was a robber baron, land speculator, or plantation owner receives a handout of a giant pile of cash? Especially when such dramatic wealth inequalities severely distort people’s economic behavior, depressing the overall growth of the whole economy and wealth of the whole society?

It's not that the children are entitled to it, but the deceased wanted to give it to them. It's their assets, shouldn't they be allowed to decide what to do with them?

I believe that you are limited in that, too - you can only give away so much money to relatives before it starts being taxed as well. I can't really cite anything, though, so feel free to disregard this.

Why? By common cultural and legal convention (and in my firm opinion), the accumulated wealth of most countries partly belongs to all who are citizens. You’re suggesting that the rest of us cede complete social and economic control to those who own property. Such is the typical libertarian utopian ideal, but in practice the result is a sort of quasi-aristocratic society with sharply limited opportunities for those at the bottom.

If you change your perspective, recognize that every fortune depends just as much on the context and the society it was built in as it does on the individual who built it, that our definitions of wealth and property are essentially arbitrary human constructions, defined to be whatever we can mostly agree on (through our institutions of government), and decide that the accumulated wealth created by all our ancestors should "rightfully" (another human construction) belong somewhat to all of us, then suddenly inheritance in general becomes a way for some people (the rich) to take our property (that is, your property and mine and everyone's) and give it to a few people that they personally selected.

Now, in practice, there's some kind of balance between these positions (full inheritance or no inheritance), because again, our culture and laws in a republican society are based on what we can agree on. In America, there's more of a cultural and legal emphasis on inheritance and personal wealth than in any of the Scandinavian countries, for example.

But for someone to say that the very concept of broader societal input into inheritance is "morally repugnant" is in my opinion a pretty narrow and socially destructive morality, and I’m glad I don’t live in a country where a small elite has enough power and influence to impose such cultural definitions through force.

As with all these funny little arguments I'd like to ask a simple question.

Do you mind sending me some money that you have since it somewhat belongs to all of us? I mean really, like cut me a check and mail it? Or instead are you going to be like every other person sane person out there that says, I earned it, I keep it?

Your argument is invalid because during the accumulation of wealth by people, there are taxes at each stage where society claims it's cut. In essence, a death tax is double taxation.

I send "you" a check every time I do any work, in the form of an income tax, paid to the government. I can both believe that you have a partial stake in the portion I send to the government, and also not see the social benefit in sending you personally a check.

What's your point?

> every other person sane person out there that says, I earned it, I keep it?

These naive and self-important “sane” people have not thought very hard about the problems of running a society, or at least don’t have much experience with its practical constraints (and I would guess also have little close experience with non-functional governments/societies such as those in most of the developing world).

> Your argument is invalid because [inheritance tax] is double taxation.

There is no "law of the universe" which prevents our duly elected representative government from deciding to tax both income and inheritance. My "argument" is that we make these essentially arbitrary decisions about how to organize ourselves (our economies, our property systems, our governments) via a process which involves agreement and compromise (and a fair amount of disagreement and controversy too, of course; no one ever said governing ourselves would be easy).

Since you haven't addressed "my argument" at all (as far as I can tell from your response you didn’t even read/comprehend it), I do not understand the basis by which you have decided that it is invalid.

people have not thought very hard about the problems of running a society

It depends on what type of society you are trying to run. Are you trying to run a society full of social benefits (handouts) or a society of individual accomplishments?

My "argument" is

What is your argument? The following sentence is simply a description of how we arrive at where we are and not why.

> Are you trying to run a society full of social benefits (handouts) or a society of individual accomplishments?

Neither is a good characterization (both are shrill bullshit buzzwords intended in this context to limit discussion).

Trying to run a society with reasonable physical infrastructure (transportation, public utilities, public health, etc.), a functioning economy, a low unemployment rate, a decent standard of living, a lack of structural violence, a support for individual freedoms, protections against fraud and abuse of information asymmetries, a legal framework under which to peacefully resolve disputes, an ability to respond to disasters and foreign invasions, a government which is responsive to the changing needs and circumstances of its citizens and responsive at a local level to local differences, etc.

* * *

The why is in my opinion best described in Machiavelli’s Discourses on Livy, Montesquieu’s Spirit of the Laws, Tocqueville’s Democracy in America, and Madison/Hamilton/Jefferson’s Federalist Papers (and you might look at Locke, Rousseau, Hobbes, etc. too if you’re feeling extra ambitious). The complexities are somewhat longer and more involved than is appropriate for this venue.

If you haven’t read it, Tocqueville’s book is truly fantastic, highly recommended to anyone interested in democracy or American government, and just about as relevant today as anything written since.

Of course it's to limit the discussion. That's the reason to ask. If you believe in individual accomplishment then a death tax is abhorrent to that cause. If you believe in social benefits and wealth redistribution based on society having a part in the deceased's property then it's legit. I'm simply asking where you stand, and from how you respond, you don't stand for anything and it's impossible to carry on in such a case. Don't give me some list of books to read as if I'm some peasant trying to talk to some magnate. You have a definite flourish but there is no point to your jab.

> If you believe in individual accomplishment then a death tax is abhorrent to that cause.

You keep repeating that like a mantra (which would be unsurprising for a Republican political candidate given that it is part of the official party platform and talking points for the last couple decades, and is pushed endlessly by the Heritage Foundation, Club for Growth, and similar organizations), but you haven’t (and they never do either) actually explained the logical connection between the two parts of that statement (and you keep dodging every other question and ignoring every other answer).

I believe in individual accomplishment, and I believe that estate taxes are quite reasonable and well justified by essentially all of the commonly accepted moral principles of mainstream philosophical liberalism on which the society and legal system of this country (i.e. the US) are based.

Basically, you are attempting to establish your logical claim with no logic, and no explanation of any kind, simply through inane repetition. That's not a discussion. That's a religious crusade.

By the way, “abhorrent” is usually reserved for things like torture and mass killing. Its use in relation to changes in the marginal tax rate are absurd.

Then you don't really believe in individual accomplishment. I've stated that the wealth that is created is taxed as it is made. Taxing wealth more after a person dies just to transfer it to the inheritor is a slap in the face to the person that created the wealth in the first place. Society has no claim on a dead mans property as the property has been paid for by the income taxes each year, sales tax of the state, property taxes, SS, and all the other little taxes out there. By taxing property/wealth after death and ignoring the taxation that already occurred on that wealth you simply support redistribution and do not support individual accomplishment. I have to repeat because you don't seem to acknowledge this.

Do you really believe that your country don't have snotty brat elite politicians who thrive on greed and corruption?

You make me laugh.

Never mind the fact that libertarians are just a bunch of weak ideologues who have no power anywhere on the planet, let along being capable of enforcing some kind of so-called elitist classist ideas about wealth allocation.

Yes, my country has a complex system of government which does not allow individual people to rule by whim.

Sure, there are elites with disproportionate influence.

The government cannot remotely be compared however to the roman empire, a feudal society, a fascist dictatorship, etc.

In other words, there are immense social and governmental problems, but it remains fundamentally a republic nonetheless.

It seems there are two issues here: a moral one and a pragmatic one. [edit grammar]

1. Moral Issue: Does society have some claim to the wealth that is created by the most successful members of that society? This is a complicated issue. When we are talking about natural monopolies due to network externalities I might agree with this. Mark Zuckerberg hasn't created billions of dollars of value. Facebook is valuable because everyone uses it. Zuckerberg just created a marginally better website marginally quicker than the next guy.

However, it is inane to say that "every fortune depends as much on society as it does on the individual." That's selling creators short. There is a scarcity of people who create things; people with vision who can make that vision a reality. People who create great things should have a right to the fruits of their labor. They should have a right to share those fruits with their loved ones.

2. Practical Issue: We want to put the incentives in place to encourage people to create wealth and produce things. You argue that wealth inequalities distort economic incentives, but I think the arguments for that are pretty questionable. See my post on guard labor. http://aspiringeconomist.com/index.php/2010/02/04/guard-labo...

Taxes are bad because they distort people’s behavior. We want to raise revenue for society by taxing people who won't change their behavior in response to taxes. See Ramsey Optimal taxes. So the question is: are estate taxes a good way to tax people without discouraging them from working as much? It's an empirical question I don't know the answer to. I do know that the estate tax encourages people to spend lot of time and resources trying to get out of paying taxes (trusts, offshore accounts, consulting lawyers). That is definitely a waste.

Because most of the inheritances in the U.S are leftovers from robber barons, land speculators, and plantation owners? Wealth, at least in the U.S. simply doesn’t persist from generation to generation. The wealthiest people today were not the wealthiest people 50 years ago.

Oh, so it's only a matter of degree?

I think a 1% estate tax is too much.

The point of the comparison is that if we're basing how much someone deserves their windfall by the tax rates, then the message being sent is that eating Fritos and playing the lottery is a more acceptable way to earn a fortune than generations of savings and investment.

Could you provide some research supporting the "find its level" claim? I always believed the opposite -- without an estate tax, it's too easy to end up with an autocratic elite.

The government have no money. If they want to provide services, they have to take it by force, rather than engage in voluntary exchange.

Everything they have comes from the people, ungratefully or not.

Irrelevant - the money has already been paid for on the taxes.

And that what taxes are. Your money, my money, and everyone's money. It is not paid, it is taken.

You don't buy government services or products. They get provided for you.

Now that's an interesting thought. Two governments occupying the same space, selling you services commercial-style.

45% tax after the first million, right?

Denmark has a top marginal income tax rate of something like 60%. Why is a 45% marginal tax on estates “insane”?

If you think about it instead as descendants get a completely un-earned windfall of $1 million + 55% of whatever is left after that, while only 45% of everything after the first million reverts to the general society, then the tax might just as easily be characterized as insanely low.

Of course, this is just a legal agreement, hashed out in congress, and so “insane” is a pretty silly label either way. The legislative process may be messy, but I guarantee you the vast bulk of the people arguing on each side of inheritance taxes are perfectly sane, and there are compelling mutually incompatible arguments (compelling for some number of citizens anyway) on both sides.

I'm sorry, I have zero sympathy for anyone distraught over this issue. If you're contemplating whether to live or die based on how much tax will be collected from your estate, then I have an easy answer for you: your life obviously isn't worth even a penny, so might as well get it over with.

As for the issue of the tax itself, there is something to be said for using estate taxes to prevent the establishment of an aristocracy. I wonder how strong the correlation is between the estate tax rate and the wealth divide...

If you had children and a lot of money, were old and racked with health problems that left you bedridden, and the date of your death was by all accounts sometime in the next two years, would you actually insist on living an extra year and saddling your children with hundreds of thousands of dollars in taxes on the things you pass on to them?

There may not be a clear answer, but is it so insane to even contemplate these things? The elderly are not being greedy- they don't benefit monetarily. They are trying to care for their children in the last way they can, similar to those who choose to take out life insurance. Would you similarly condemn a parent who dies protecting their children from danger?

The danger of having .55n million rather than n million?

Those kids might not be able to bankroll their own space ships.

So you're comparing dying in order to protect a life with dying in order to avoid excess taxes?

The question is not "life == money" vs "life < money" vs "life > money", the question is why are you attempting to compare life and money in the first place?!?

I'm not equating dying to protect life with dying to avoid taxes. The first point was, it can be seen as reasonable to die to help your children. The second point is my stipulation that to say it's only ever reasonable in the case that your children are in mortal danger is silly.

If you value your life very low (for example, you are bedridden in the hospital, terminally ill, on the verge of death and will be in excruciating pain for the rest of your short life) and the well-being of your children very high, why is that so crazy? Soldiers in a country being invaded can go to war and die to protect their families from enslavement, rape, pillaging, and so forth, not just from death, and no one (well, usually) criticizes and demeans them for that. Are soldiers the only ones allowed to do that?

I can sense you're balking at the part money plays in the equation, and you do not like when money is assigned value beyond pieces of paper. Consider that the people making these decisions are likely not thinking of the dollar amount of the inheritance. I would bet they are thinking of the amount of good (whether getting lots of money = good can be debated, but let's assume it does, or at least assume they believe it does) they can do for their children when they pass. Being taxed on that money means giving up a lot of that good.

FWIW, Canada has no estate tax [1], but from what I recall, it scores better than the US in terms of wealth division and social mobility.

[1] There is no estate tax, but death does trigger the capital gains tax. So the estate pays tax as though its assets were sold on the day of death. Capital gains work differently here than in the US, but they will usually be (much) lower than 44%.

Reply on news.ycombinator.com