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Comment by ntumlin | Hacker News Reader

Maybe this isn't the right place to ask, but could someone explain the rationale for taxing gifts within a family? Ignoring the possibility of using it to circumvent an income tax, etc., my initial thought is that if my dad wants to give me $30,001 this year, or even $300,000 this year, that he's already paid taxes on it and it's not the government's business. I feel the same way about inheritance taxes, although those are high enough I'm not too concerned about it.

I hope this doesn't start any arguments, but that's just my take on it and I'm open to hearing why it's a bad idea.

Edit: I appreciate the responses, they've cleared up some misconceptions I had and moved my viewpoint a bit.

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The gift tax exists largely to prevent people from avoiding estate tax by gifting large sums of money just before death. That's why they're linked. If there was an estate tax and no gift tax, people would just give all their money away in the years leading up to death.

The gift tax exemption is co-mingled with the estate tax exemption, so you can just think of the gift tax as pre-death estate taxes.

As for why we have an estate tax, the general idea is that oligarcies and plutocracies are bad; that while you should be able to give your kids (and grandkids, and even great-grandkids) every leg up in the world, they should have to work and contribute to society; that the pernicious effects of wealth snowball as generations pass; etc. Add to that the fact that an estate tax has the least negative impact on the taxpayer (and their spouse), given that the taxpayer is dead, it's a pretty good tax. Especially now that the exemption is so high, I feel like the value proposition is pretty good.

Very much depends on the policy country. In Belgium you can gift any arbitrary amount ($10,000, $5m, $100m) through a notarial deed (up to a day) before death and pay 3% "gift tax".

But the estate tax gets to 27% in the low hundreds of thousands.

Fascinating. Do you see a lot of deathbed transfers of wealth? Certainly, there are some illiquid assets that are going to be hard to transfer at deathbed in any country. In the US, you would see tons of deathbed transfer (they had to create a look-back period for gifts to prevent people from "improvishing" themselves via gifts to kids to qualify for government-paid nursing home care through medicaid). Is it just a cultural difference in Belgium, or something else?

Definitely possible. Most wealthy people do transfers before death and avoid (most of) the estate tax. Normal people with a low net worth generally don't do this, because they are unaware of the avoidance mechanisms.

It's even better - in Belgium you can avoid even the 3% gift tax by simply donating the money AND not dying within 3 years (if you do, however, the donation then gets taxed as if it were part of the inheritance, so it may be worth just paying the gift tax).

This is not possible for all assets, but yes.

Yes, 'money'. Not real estate.

In New Zealand you can gift “people for whom you have natural love & affection” any sum and it will not be taxed.

$1k, $100k, $100MM, any amount.

A recent (2011) policy change, remains to be seen how it will play out.

>> oligarcies and plutocracies are bad >> the pernicious effects of wealth snowball as generations pass

I feel like the exact situation that our country is in right now is the exact outcome I would fear from such a situation as you describe.

> As for why we have an estate tax, the general idea is that oligarcies and plutocracies are bad

No, the reason we have an estate tax with broad exemptions rather than taxing generational transfers as income is the general idea in the ruling class that oligarchies and plutocracy are good.

The original estate tax rate was over 45%, and the exemption was under $1mil. I think you can make the case that the oligarchs and plutocrats have pushed hard to change that law over the past 15 years. They're succeeding, unfortunately.

At the generational time frame, the estate tax serves to capture otherwise untaxed asset appreciation…

Consider Grandpa buys an asset; as company, land, a football team, whatever. 50 years later Grandpa dies and his will transfers it to you. If Grandpa had sold it the day before he died and given you the stack of money, he would have been taxed on the appreciation of the investment. If there were no estate tax, then that appreciation would never be exposed to taxation as long as families pass their assets down to heirs.

The estate tax isn't so much about controlling plutocracy as it is leveling the taxation field between people who buy and sell assets and people with so many assets that they don't need to sell them.

I’d argue that we should eliminate the step up basis at death despite having an estate tax. The estate tax after all only starts at $11 million dollars. Why should an estate with $10 million worth of appreciated assets pay no capital gains and no estate tax?

Why should an estate with $100K worth of appreciated assets pay no capital gains and no estate tax?

Right. I don't see why we need a step up basis at death. If you want to put it at $10,000 or something just to avoid a lot of paperwork for a de minimis tax loss, that'd be fine. But otherwise the tax basis of an asset should be whatever it was bought for, by whoever bought it.

The problem here is that the buyer is dead and knowledge of the basis may be lost. It could be written down in a safe place, but not known to estate's executor.

That was the historic reason, and it certainly had value. In the information age, I think we could consider requiring the recording of cost basic for assets purchased after some date. (The SEC started requiring brokerage firms to record cost basis a few years back, so we're on the way)

At low levels, which aren't taxed, it's not going to affect anything.

At high levels, like giving your kid ten billion dollars, you're making it impractical or impossible for others to advance economically. You're creating a class of people with indestructible inherited wealth that never have to work, that only have to collect interest and rent on the backs of everyone else.

That's what inheritance tax and gift taxes seek to disrupt.

I don't think so, this certainly has never been effective at that.

I'd say that historically billion dollars fortunes got diluted between the 10 children then the next generation, some of whom might actually burn it stupidly very quickly. Otherwise, it's diluted by wars and calamity.

However, there are no major disaster in the past decades and the number of children per family have dropped dramatically. It surely breaks the balance.

That explains why the Grosvenor Family, a family who've owned the same company for 100 years longer than the united states has been in existent, is so poor.

Comcast is a better example of a family owned business.

> I'd say that historically billion dollars fortunes got diluted between the 10 children then the next generation

Throughout history and across most cultures, it was usually the first born son who got the father's legacy and the lion's share of the wealth. It's why it was so important for wives ( especially of the powerful and wealthy ) to produce a male heir. Sometimes it was a matter of life or death. We all know of king henry's wives.

"When Anne failed to quickly produce a male heir, her only son being stillborn, the King grew tired of her, annulled their marriage, and a plot was hatched by Thomas Cromwell to execute her."

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

> like giving your kid ten billion dollars, you're making it impractical or impossible for others to advance economically.

Zero-sum is one perspective, but not one that I subscribe to.

Does your neighbor having $10b of stuff make you better or worse off than if than if there's $10b of stuff at the bottom of the ocean?

I don't believe the economy is zero-sum either but handing $10B in capital to your child gives them a significantly unfair advantage compared to most others.

Image that the economy is a field of wheat. It grows bigger every year as workers become more productive and learn how to fertilize and water more efficiently. At the end of the season, everyone gets a chance to head into the field and collect some wheat.

Some people don't have any tools. They pick the wheat by hand. Others have managed to fashion scythes and can collect a little more. But, the kid who inherited $10b has a fleet of combines that race into the field and collect 75% of the wheat in a flash.

The economy (wheat field) grew bigger and everyone had a little more wheat but the $10b kid got way more than the others and can now buy another combine for the fleet to get even more next year.

Without some rational tax on inherited wealth, we will create (and already have created in the United States) a plutocracy.

I'm sorry if someone mislead you into thinking wealth was, or could be, fair.

Your analogy is so far off the mark on how wealth is created, it's laughable.

$10 billion in family wealth is almost never held in cash, it's invested in companies, land, and other ventures. Wherever an investment is made, people are put to work collecting salaries and benefits, generally speaking.

You've made a gross oversimplification, and a misleading one at that.

I never said everything had to be fair. If a worker with a scythe hands it down to their child, that child has an unfair advantage compared to the child of a worker with no tools. It's the degree of the unfairness that matters.

No, not misleading at all. I never said the $10b kid had cash. Obviously, wheat expires (cash) and would be converted into another form of wealth. In this instance, he buys combines which have to be built by someone. You might even say he's a job creator.

But.... and this is a big but.... all investments are not job creating investments. Financial services, speculative investments, automation and robotics that increase worker efficiency but reduce the number of workers. I would argue that the efficiency of $10b in capital in the hands of a single person is far, far less efficient than $10b distributed across many people who use it to consume goods directly. The control of wealth by a small group produces a system where the rules favor the wealthy minority at the expense of the less wealthy. You can only go so far before the guillotines come out and the people take matters into their own hands.

Yeah but a majority of us believe it should be taxed and not just cross our fingers that some jobs are created for a while.

Reading to your kids gives them a huge leg up. Should we stop parents from doing that?

Image the economy is a field of wheat.

Someone comes in with a tractor plough and plants twice a much wheat as last year. There is now lots of food in the economy and bread and pies.

In fact, the tractor plough plants so much wheat year after year that a few of the farmers stop planting and start working on building and maintaining tractors.

Eventually the tractors do well enough and wheat is cheap enough that the some farmers can afford to raise wheat-fed cattle.

It's a problem if you care about any of the measurable real-world consequence of wealth inequality.

It's also a problem if you view it as a symptom of a system that isn't functioning well at giving everyone a fair shake in life, in participating economically or politically.

The number itself isn't a problem, it's what it causes and what it's caused by that's the problem.

Get money out of politics, get everyone a vote and the capacity to use it, make sure everyone's fed and housed adequately, everyone has access to health care and education ... make it so we're living in a Star Trek TNG universe, and I don't care about how much the next guy has either.

Until then, it's worth looking at, at least the very least to help us to see why we don't have all those nice things.

No, but other people having $10bn of disposable income increases prices for you. Or if you look over the long term, skews the economy towards producing luxury goods rather than meeting the basic needs of ordinary people.

Pretty sure a guy/gal who has $10Bn of disposable income isn’t buying underwear at Target like me, driving up the price.

But owning property in your neighborhood my drive up your rents so you need to move.

They're not driving up demand, they're driving down supply, by making it relatively more profitable to make the goods that they do want, and thus relatively less profitable to make budget underwear (and other basic goods).

It does when that neighbor buys my apartment building and hikes my rent.

It also does when your neighbor wields such enormous political power they can get you evicted from your building under eminent domain, bulldozes it, and replaces it with condos you can't afford.

>You're creating a class of people with indestructible inherited wealth that never have to work, that only have to collect interest and rent on the backs of everyone else.

That wealth is invested in profitable ventures that either create benefits in the system (assuming rational actors) or 2) lose value due to poor choices.

Capital is rewarded because the investors are taking opportunity cost risks that advance the sum value of humanity's wealth.

> Capital is rewarded because the investors are taking opportunity cost risks that advance the sum value of humanity's wealth.

And the vast majority of that advance in humanity's sum wealth accrues in the hands of those very capitalists. How peculiar!

  assuming rational actor

There is a reason such toy models are called "toy models". They are very useful for understanding and interrogating ideas. They aren't so useful for modeling real systems. One can only hope that policy making is a little more sophisticated (alas, often in vain).

I think you have a profound misunderstanding of what someone with billions of dollars in inherited wealth does with their money.

It's not investing in "profitable ventures" that "create benefits", it's tied up in businesses they inherited, it's squirreled away in tax havens, it's spent on lavish properties, club memberships, expensive cars, and tuition for their children. If you're lucky a tiny fraction of that trickles down in the form of scholarships or charity work.

Then that money generates enough of a return that their kids can inherit billions in turn and the cycle repeats.

There's a point at which you have so much money that you will no longer ever have to work, but your kids will never have to work, and neither will their kids. It has such a heavy gravitational pull that in the long run there's no way you can lose.

If you have even half competent people managing your money an estate worth $10B can pretty much exist forever and grow at or beyond the rate of inflation even when extravagantly luxurious cost of living expenses are deducted. A million dollar a month allowance won't put a dent in this money.

> it's spent on lavish properties, club memberships, expensive cars, and tuition for their children.

All of that is trickle down to workers for those jobs

> it's tied up in businesses they inherited

That means the sum benefit to humanity is still going!

> Then that money generates enough of a return that their kids can inherit billions in turn and the cycle repeats.

I cant imagine someone who more deserves to direct the money after their death than the one who earned it. I'm sure many parents (not Buffet though) would rather their child have it than the government.

> If you have even half competent people managing your money an estate worth $10B

I'm sure those half competent people are well compensated for their skills. Shame that billionaires are so evil as to provide those jobs...

You are missing the point. For a society to work, it's members have to perceive it as somewhat fair. The naive idealist would demand equal opportunity for everyone born. But we humans want to use the means available to us to directly improve out children's opportunities. Our freedom to do so makes our society inherently unfair. Especially when we expect those "investments" like education to pay for themself...

The interesting question is, like always politics, how to balance those trade-offs for bests outcomes.

Yes, that means both giving parents the chance to help their kids while also not having a disillusioned crowd without perspective demanding to tear down society in favor of whatever promises to be better. And yes, that requires some degree of wealth redistribution like decent public eduction.

Working for less than minimum wage on a temporary worker permit is not in any way 'trickle down'.

These ultra-rich people can dictate terms, can sway policy, in ways you can't even fathom. The person earning almost nothing has no say, no vote, no power at all.

There's no benefit to humanity when all their money is being squirreled away in offshore accounts where it creates only a handful of jobs.

When you're talking about giving something to your kids you usually mean, at most, a million dollars. Estates under $4M aren't even taxed. It's only in cases beyond that where the taxes get stiffer, and they should.

You don't want what happened in Europe where for hundreds of years the same families control everything with almost zero change in the status-quo despite countries and empires coming and going, long, vicious wars, famines, disease and conquest. Money doesn't move down the chain unless you make it move.

Trickle down is what the ultra-rich tell people is going to happen so they can hoover up more money.

In a perfectly ideal society every child born has the same opportunity as any other, they're all free to make it or blow it. That's obviously never going to happen, but letting the ultra-rich maintain their wealth indefinitely creates a permanent and insurmountable advantage for that class to the detriment of everyone else.

How does someone having $1B of inherited wealth have any impact on my own life?

I’d be paying rent to someone, whether they have $1 or $1B to their name.

What would really make sense -> a wealth tax What we have instead of that -> an estate tax What you need to make an estate tax work -> a gift tax

Wealth taxes and income taxes are kind of orthogonal. Why do you need a wealth tax? For the same reason you need a progressive income tax, power naturally accumulates and without a force pushing against that you slide towards feudalism. It's also important to note that wealth doesn't work like "I earned a pile of gold and if I do nothing I/my children will gradually deplete it". Wealth makes higher returns the more wealth you have, returns /above/ inflation, meaning that if you throw it into a managed fund it will make you money (on average) forever. So it's less like you own a pile of gold and more like you own a boatload of land and rent it to other people to passively get you money (equity same deal but more steps). So half the people are born into the world effectively owning not a pile of gold but shares on the other half! (Try earning a living without land, water, telecoms, probably soon air, which we allow people to own). If you don't think this is bad because of some sense of fairness and morality, accept that it's bad because "those who make peaceful revolution..." - eventually you get the French revolution.

A common misconception is that gifts within a family are taxed. They are, but only after one exceeds the lifetime limit. That limit is around $11M (per parent). It is true that if you exceed a certain amount per year you have to fill out a form, but that is not to be confused with paying actual tax on the excess gift. It's good that you feel the same about the inheritance tax because it's the same tax code that govern each.

Note that it's only if reportable gifts exclude the limit, nonreportable gifts (below the annual limit) don't count against the lifetime limit.

Also, both limits tend to go up over time, so it's a moving target.

You can make an argument that any tax isn't fair. Why should you have to pay a sales tax on money you already paid income taxes for? Why should a company pay a payroll tax to pay their employees?

What really matters is the economic consequences of these taxes. For example, you can't make sales tax too high because it discourages people from buying things and hurts poor people disproportionately. There isn't much of a economic downside to taxing large gifts. Sometimes taxing an inheritance runs the risk of closing a family owned farm or business.

Disclaimer: I'm not a tax advisor or anything, just a humble payer.

The notion of "the family" is not a thing unless you're talking about dependents. Transferring money from one person to another is income for the person receiving the money. It's not being taxed twice, just once per time "earned". (and it's not even taxed until the limit per the comment in this thread! TIL)

To allow for these kinds of gifts they limit the amount that is tax free. Allowing unlimited gifts to "family" would likely result in all businesses being "family" businesses, etc etc. Lots of downstream ramifications.

So this seems to answer "how do I help my kids a reasonable amount without being taxed without creating a giant dodge"

Giant dodges are best done using LLCs and ownership by other family members. Typically this overhead costs a lot more to manage though, so it's only available to the super wealthy.

I kid here, a bit. But it's clearly also something being done quite often.

> it's only available to the super wealthy.

> I kid here

Indeed, you don't have to be super wealthy to dodge taxes.

In the UK some people who consider themselves poor will happily talk to a solicter about "inheritance tax planning".

https://www.moneysavingexpert.com/family/inheritance-tax-pla...

> if my dad wants to give me $30,001 this year, or even $300,000 this year, that he's already paid taxes on it and it's not the government's business

Surely you agree that if he instead were to hire an extra gardener with the same $30,000, that money would be taxable as the gardener's income? So why should somebody who works for their money pay taxes on it, but not somebody who receives the money as a gift?

I assume therefore that you dutifully calculate and pay income tax on any and all birthday or Christmas presents?

To the extent that we have received large gifts from relatives, yes, we've reported those accurately to the tax authorities in two different countries. There was no tax due, but I would not have objected philosophically to the gifts being taxed.

Huh, sorry, as a Briton it's quite literally a foreign concept to me; I thought I was joking.

In the UK there's inheritance tax to pay over a threshold if you die within 7 years of making the gift, but otherwise there's not a 'gift tax'.

The situation you describe still isn't the same as declaring it as income though - assuming you are working, if it were taxed at your marginal rate of income tax you'd already be over any threshold no matter how small the gift.

Yes, I have calculated and paid tax on all gifts that I have ever given in excess of the reporting threshold (i.e. none, because I don't give away gifts worth tens of thousands of dollars).

Ditto reply to sibling https://news.ycombinator.com/item?id=18335478

Because the money has already been taxed?

But to your point, a gift tax also stops people from “gifting” their gardener and avoiding taxes on both ends.

> Because the money has already been taxed?

I stipulated that it is the SAME money. In both cases, it has "already been taxed" by the person spending the money. Yet in one case, the person receiving the money pays taxes, in the other, they do not.

Yes, but one is a business transaction (exchange of goods or services) and one is not.

So i would argue they aren’t the same.

> Maybe this isn't the right place to ask, but could someone explain the rationale for taxing gifts within a family?

Could you explain the rationale for excluding such unearned income, other than privileging generational wealth against wealth earned by personal work and investment?

> Ignoring the possibility of using it to circumvent an income tax, etc., my initial thought is that if my dad wants to give me $30,001 this year, or even $300,000 this year, that he's already paid taxes on it and it's not the government's business.

He's paid tax on his income. When it goes to you, you are the then receiving income—whether it's as a gift or a payment for goods or services, whether you are in the family or not.

Favoring one of those situations over another is just that, favoritism; it's not justifiable by “already paid” logic in one case but not the others.

> Could you explain the rationale for excluding such unearned income, other than privileging generational wealth against wealth earned by personal work and investment?

If I buy a round of drinks, do people have to pay tax?

(I assume there's some minimum threshold)

I'm fairly certain the United States Internal Revenue Service would consider the drinks received by others as income they should technically report on their taxes. For practical purposes, I suspect that almost no one ever does report this type of gift, but yes, technically it would qualify.

If I give someone $5 for their birthday, they should report it but won't. If I give them $50,000 for their birthday, they better report it or risk the IRS finding out and coming after them.

Gifts < $14K not necessary to report

> If I buy a round of drinks, do people have to pay tax?

Ideally, probably, but even in a system which tries to mitigate the advantage of generational wealth created by the current favorable regime of gift and inheritance tax by a purer income tax, the friction of taxing de minimis personal gifts as income to recipients is something you probably want to avoid.

They don't, because you do. That's sales tax at work.

Taxes are usually paid each time money moves hands.

If you bought a round of Dalmore 62, then yes, otherwise, no because only gifts of more than $15k per year per person incur the gift tax (and technically, you would pay the tax, because the tax is on the giver and not on the recipient).

It's a fair question. Personally though, I come down on the exact opposite side of the question – all gifts should be highly taxed, with maybe a nominal tax-free allowance of a few thousand dollars.

Making large gifts tax-free is just another big advantage that kids born to rich parents get over those born into less-fortunate circumstances. If we're in favor of equality of opportunity (and almost everyone claims to be), much stronger inheritance/gift taxes seem like a really obvious place to start.

I wrote some thoughts on this a few months ago: https://corbt.com/posts/2018/04/25/a-100-estate-tax.html

It's not just rich kids that benefit, and it's not just direct gifts that benefit.

If your parents live within commuting distance of London, you can probably take a very low paid job to get a rung on the ladder. Very few outgoings - no rent, no bills. £600/month for season ticket and nights out, and even on minimum wage you'll be saving £5k a year.

If your parents live in say Devon or Yorkshire, you can't do that. You'll be paying £1k a month just for rent.

IIRC Switzerland is introducing a "homeowner's tax" - the equivalent to the tax your landlord would be paying on your rent if you were renting instead of owning - essentially, they're considering you're renting to yourself, so you need to pay the tax. Now that's pro-equality (ironically, for Switzerland).

I believe they already have this (it's called "imputed rent") and are considering getting rid of this[1].

[1] https://lenews.ch/2017/08/24/a-swiss-parliamentary-commissio...

> If we're in favor of equality of opportunity (and almost everyone claims to be)

The problem with that notion is that people often talk around each other W.R.T what it actually means. For some people, the only value of that opportunity is to be able to create a better life for their kids, often through inheritance.

It's about inheritance taxes. Without a limit, an easy loophole would be that a parent could give all their money to their kids before they die and avoid inheritance tax entirely. (Instead, they need a more complicated loophole using a trust.)

But federal inheritance tax doesn't kick in until you leave over 11 million to an individual, and many states don't have an inheritance tax, so most people won't need to worry about this. (Not legal advice, states differ, etc.)

> Ignoring the possibility of using it to circumvent an income tax

you can't just ignore the reason why it exist.

> I feel the same way about inheritance taxes, although those are high enough I'm not too concerned about it.

Having just gone through this, your parents must be really, really wealthy if your inheritance taxes are high. You can inherit many millions of dollars and not pay a cent in taxes in the US.

Some states have their own tax which starts lower. Here in Massachusetts it kicks in at $1MM.

The yearly gift tax exclusion is $15K to each recipient. When it exceeds that, it will count against the lifetime estate tax exclusion which is $5.6M. Only then would they have to worry about the extra taxes. So for an average person they will never reach that limit.

And there are clever tricks to bump up the limits. The two parents can gift to the child/spouse separately to give 4x the gift tax limit.

AFAIK, many countries do not tax gifts or have an estate tax (ex. Canada).

Governments, like most living things, want to be at the top of the power hierarchy. Families are similar organisms that accrue power similarly. Where families are powerful, governments and corporations are weak. So, governments do things to cripple families so they cannot become powerful enough to be dangerous. Retaining wealth across generations is a thing that makes a family powerful.

Government, like Soylent Green, is people.

The US government has been the pet toy of a small cadre of powerful families for a long time now.

Explain the rationale for why certain people should be born into a massive inheritance of wealth and power while others are born only to starve to death.

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