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Yellen's idea to tax unrealized capital gains

Uncle Paul

Well-Known Member
Nov 1, 2013
6,299
7,647
Canyon Lake,CA
Boomers have been highly successful in building substantial estates. They want to pass this down to their families, while of course the government would like all that money transfered to them on death. The kids want that money to pay off their student loans, buy a house, start a business or start a family. Then they will want to pass some of it to their own kids to keep them from poverty.

People with poor parents want the wealthy taxed heavily. People with wealthy parents would like to get that as an inheritance.

If government levies a new tax on financial transactions it will start out small, but then become a honey pot for funding future pet projects.
Like sales taxes, income taxes, unemployment taxes, and Social Security taxes it will tend to grow larger over time.

Tax the rich policies tend to become tax everybody over time as well.

Take a look at how many taxes you see tacked onto your utility bills and property bills. They start at insignificant amounts, but grow continously.
 

hcsharp

Active Member
Jun 7, 2011
3,490
1,615
Vermont
Isn't the death tax levied on the estate, at a rate determined by the size of the estate, and paid by the estate? If it were a tax on the heirs, wouldn't the heirs pay the tax?

The tax is levied on the estate which means it comes out of the money and property that would otherwise be distributed to the beneficiaries (heirs). So in effect the heirs do pay the tax.
 

hcsharp

Active Member
Jun 7, 2011
3,490
1,615
Vermont
Boomers have been highly successful in building substantial estates. They want to pass this down to their families, while of course the government would like all that money transfered to them on death. The kids want that money to pay off their student loans, buy a house, start a business or start a family. Then they will want to pass some of it to their own kids to keep them from poverty.

What did those boomers' kids do to deserve the money from their successful parents? The only thing they've done is be born into the right family. What about the kids who weren't raised by boomers with money? If they work just as hard, get a good education and otherwise make good choices, why is it fair that they have nothing to help them "pay off student loans, buy a house, start a business or family"? Not that I think the government should necessarily pay for those things, but it would be nice if these benefits were not simply based on family ties.

That's why we need a strong estate tax. It makes our economy more efficient by helping to reward people for their productivity rather than their parent's productivity.
 
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hcsharp

Active Member
Jun 7, 2011
3,490
1,615
Vermont
What did the government do to entitle them to take that money for themselves. Greedy...
It's pretty obvious that the government is entitled to raise tax revenue to pay for the services they provide. Far more "entitled" and "greedy" are the people who don't want to pay their fair share for our democratic society to exist. We may argue about how that's done, but few people would argue that we should have no government.

As long as we have to raise taxes, we should do it as efficiently as possible, using methods that have the least impact on our economic system. That's why it makes sense to have a strong estate tax.
 

tes-s

Active Member
Oct 6, 2013
3,432
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Connecticut
The tax is levied on the estate which means it comes out of the money and property that would otherwise be distributed to the beneficiaries (heirs). So in effect the heirs do pay the tax.
Ok, but it is paid at a rate determined by the estate, not the heirs, and it is paid by the estate, not by the heirs. By your logic income tax paid by a parent is really paid by their heirs, because it comes out of their inheritance.

Also, if it is a tax on the heirs, wouldn't the tax rate be based on the heirs? Why would two sisters that are equal beneficiaries of an estate, one with $2M a year in income and 100M in assets and the other with $0 in income and student loan debts, be subject the same inheritance tax?

As long as we have to raise taxes, we should do it as efficiently as possible, using methods that have the least impact on our economic system. That's why it makes sense to have a strong estate tax.

Seems my example shows the estate tax violates your principle - we should instead have an inheritance tax paid by the heirs so the rich heir pays more tax then the poor heir.
 

tes-s

Active Member
Oct 6, 2013
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Connecticut
You make a good point.
Thanks, but not really. Taxes are complicated and have been thought about for a long time. Most ways of squeezing money from constituents, while still getting re-elected, have been thought about or tried.

Good economic proposals often die on the political grapevine. That is why there is usually a bunch of fiddling with rates, but the structure stays pretty much the same.

Biggest changes in recent times are the Obamacare tax, and some changes to deductions and AMT with Trump - still mostly tweaks.
 
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tes-s

Active Member
Oct 6, 2013
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Connecticut
It is already done in the Netherlands. There you pay 1.2% of your wealth every year except for the home you live in. There is no capital gains tax though. Just the 1.2% of your wealth above a certain threshold.
How do they calculate the wealth annually for someone like Donald Trump with large real estate holdings or Charles Koch with private company ownership? Currently we only do it once in a lifetime (and just once for a married couple), not every year, and quite often involves litigation to reach agreement between the estate and government.

BTW, not too excited about their "all of the above" tax model. Income tax, sales (VAT) tax, asset tax, death tax.... :)
 

cpa

Active Member
May 17, 2014
3,616
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Central Valley
Also, if it is a tax on the heirs, wouldn't the tax rate be based on the heirs? Why would two sisters that are equal beneficiaries of an estate, one with $2M a year in income and 100M in assets and the other with $0 in income and student loan debts, be subject the same inheritance tax?

Yes, this is an indirect tax on the heirs because it reduces the amount available to inherit. Probate laws vary from state to state. I cannot comment on the other 49 states and DC. The inheritance tax and all estate liabilities are paid from the residue in California. Generally, testamentary bequests fall into two categories: pecuniary bequests and residue. Pecuniary bequests are those where assets are specifically bequeathed to the heirs.

"I hereby award my daughter $500,000. I hereby award my son 500 shares of TSLA." Those are pecuniary bequests. So are other assets that are titled in joint tenancy or pay upon death. Qualified pension plans are also pecuniary bequests if individuals are named beneficiaries instead of the Estate of Deceased Person.

"The balance of my estate is to be divided equally among all my grandchildren" would be residue. If we assume that this estate is large enough to pay any inheritance tax, the grandchildren would receive proportionately less. Not every estate awards pecuniary bequests, so then everyone shares and shares alike in the inheritance tax haircut. You can see where the beneficiaries of larger estates could get hosed if Mom and Dad never bothered to revisit their estate plan that was established in 1994.


How do they calculate the wealth annually for someone like Donald Trump with large real estate holdings or Charles Koch with private company ownership? Currently we only do it once in a lifetime (and just once for a married couple), not every year, and quite often involves litigation to reach agreement between the estate and government.

Good question. Fortunately, there are not that many individuals with wealth like these folks. Curiously, this is one of the matters that New York is investigating for civil and/or criminal liability against the former president. Valuation of assets is one of the most difficult areas to litigate. It boils down to willing buyer versus willing seller thinking. One hundred percent ownership is valued at 100%. But 60%, or 30% or 10% ownership interests are valued at discounts--perhaps as low as 50%, 22%, and 7.5% respectively. Then you get into dueling appraisers with their bona fides in the industry.

Thanks, but not really. Taxes are complicated and have been thought about for a long time. Most ways of squeezing money from constituents, while still getting re-elected, have been thought about or tried.

I can say with almost absolute certainty that there are two or three comprehensive income tax legislative changes sitting on a shelf somewhere in the House. How else do you think the TCJA in 2017 and its 1,000+ pages of legislation got through Congress so quickly in November-December 2017?
 
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tes-s

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Oct 6, 2013
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Valuation of assets is one of the most difficult areas to litigate.
Imagine going through that every year.
I can say with almost absolute certainty that there are two or three comprehensive income tax legislative changes sitting on a shelf somewhere in the House.
Maybe some in the House; most in the lobbyists' offices. :)

I can't remember any real changes in the federal tax law that I can remember - just window dressing changing some rates and deductions, depreciation rules, and some credits (EV and clean energy credits for example) here and there. Still a progressive income tax. Not a consumption or asset tax (other than the death tax). At least not yet.
 

Big Dog

Active Member
Mar 7, 2016
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Irvine, CA
The "death tax" (really it is a net worth tax) dovetails with the gift tax. They are two sides of the same coin. As the law stands today, a married couple can shelter over $23 million of net worth. In addition, there is the "deceased spouse unused exemption" provision. This effectively permits the surviving spouse to realize the entire $23 million exemption from inheritance tax upon death. The old rules did not permit this carryover. Hence all the complex marital trusts and other estate plans to push the amount subject to inheritance taxes into the future. Gifts of a present value merely eat into this exemption; all lifetime gifts made are included in the decedent's estate at the value on the date of the gift. (If I give a piece of property to my son that I paid $100 for and is worth $125 when I give it to him, that is the value that included in my estate when I die even though the property may have appreciated to $300 upon my death.)

The exemption amount in the '90s was $600,000. Under Bush II, it climbed from $1,000,000 to around $6 million (but don't hold me to the amount--that was long ago and far away for me.)

The tax rate on inheritances is 40%. (Ignore the lower rates; they are irrelevant because of the exemption.) So, a single person dying with an estate of $15,000,000 would effectively pay tax on the $3.5 million excess over the exemption at forty percent. (Note that the exemption takes the form of a tax credit. That means one calculates the estate tax using all the lower brackets, then subtracts the amount of the exemption credit to get the net tax owed.)

I think the inheritance tax exemption should be reduced to the $5 million range. I also think the rates should be lowered and the brackets larger. Have higher rates like the old days of 55% for estates > $25 million or so. Keep the step up. More estates would be subject to the tax, but would pay a lower overall tax rate at that amount.


Bad idea.

Done! (the estate tax will automatically snap back to $5m+inflation in 2026, so that is already factored into the Budget.)

With regards to the OP, most of Europe tried the wealth tax and dropped it as ineffectual.
 
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Big Dog

Active Member
Mar 7, 2016
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Irvine, CA
The tax is levied on the estate which means it comes out of the money and property that would otherwise be distributed to the beneficiaries (heirs). So in effect the heirs do pay the tax.

It's one thing to sell the parent's house for several mill and have cash to pay the tax. It's quite another to be forced to sell the business that mom built to pay the tax.
 
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tes-s

Active Member
Oct 6, 2013
3,432
5,723
Connecticut
Done! (the estate tax will automatically snap back to $5m+inflation in 2026, so that is already factored into the Budget.)
They could change it starting in 2021. And it does not have to be $5M - could be more or less.

Death rate of old people may be down in the next 5 years due to all the ones that succumbed to COVID, so an earlier change may not yield that much. But if they change it effective 2021 it would catch all the people that thought they would gift using the large exclusion before it sunsets. Then again, not sure it is about the money to the people in congress - probably more about how CBO scores it and the principle.
 
Well, if you have any ideas how I can get the cost basis of the mutual fund my MIL purchased 50 years ago, I'm all ears. How about assets other than securities?

My view is the people that will benefit from removing the step-up are the "helpers" - forensic accountants and lawyers.

You still have to figure this out when you sell it. And since it's been 50 years(?) you can probably use a reasonable estimate
 

Big Dog

Active Member
Mar 7, 2016
1,941
2,197
Irvine, CA
They could change it starting in 2021. And it does not have to be $5M - could be more or less.

Death rate of old people may be down in the next 5 years due to all the ones that succumbed to COVID, so an earlier change may not yield that much. But if they change it effective 2021 it would catch all the people that thought they would gift using the large exclusion before it sunsets. Then again, not sure it is about the money to the people in congress - probably more about how CBO scores it and the principle.

Not likely to retro something that big for '21, that means any change starts in '22; and, then at what political cost just to get it in a few years earlier?

IMO, a big tax gain would be just to eliminate the step-up cost basis upon death and that could be done pretty quickly.
 

heltok

Active Member
Aug 12, 2014
1,956
19,883
Sweden
Sweden tried some versions of wealth taxes. We had to cancel these, the last one we cancelled in 2007 because it became to obvious that not only was the tax detrimental to the companies, it ended up reducing the amount of taxes collected as companies moved to other countries etc.

Some of the Swedish left stil think we should have them, even knowing the consequences, just to even the playing field. Even if this means that everyone is worse off, at least the gap is lessened. Imo this is evil, making it worse for the poor people just because you hate the rich. Imo no matter if you are aristotelian, objectivist, utilitarian or communitarian one should be against those policies with so clear detrimental effects. People who are for it need to go back to their drawing board and remake their philosophical moral compass. My 2 satoshis.
 

Tiger

Active Member
Oct 31, 2016
2,117
2,719
UN
You can see this happening in more Socialistic communities, where the taxes are much higher than the USA, and the government gives more services in exchange (No charge health care, subsided mass transportation, larger governments with better paid employees etc.)

I think it's just an illusion that USA has low taxes. It just wastes them on non cost-efficient military and non cost-efficient medical care. I'd also argue that student loans are a form of tax which is overpriced for what you get ("You wasted $150,000 on an education you coulda got for $1.50 in late fees at the public library"). I believe those are just a way to scam people out of their money and keep taxes unpopular.

We have zero corporate taxes (unless dividends are paid) and a doctor's visit is 5€. Healthcare tax from salary is 35% (effectively paid by employer) and salary tax is 20% (same 20% for paid dividends). VAT (sales tax) is symmetrically also 20%.
 
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