A different way to think about estate taxes.

[Mina]

Imagine someone offered to sell you a business at a 60% discount. Let's say the business has been producing about $1 million in revenues per year, which suggests a value for the business of about $5 million (based on investors generally looking for about a 20% ROI on small businesses). And you're offered the business for just $2 million. Do you take it? For most investors, it would be a no brainer. If it's expected to produce a 20% return on investment at $5 million, that's a 50% ROI at $2 million.

Yet, this is exactly the kind of situation that those who inherit small businesses insist is a terrible hardship, if they were to be taxed on that value. A 40% tax on an inherited business, with no exemption, is functionally equivalent to being able to buy that business at a 60% discount. So, when one hears sob stories from such heirs about not being able to afford to carry on a business (or farm, etc.) left to them, thanks to the tax bill, what we're basically hearing is an admission that these heirs are shockingly incompetent business people. They're so bad that when given a business that most business people could get a very respectable profit out of if purchasing it at 100% of its value, the shiftless heirs can't even keep it afloat when "purchasing" it at 40% of its value.

I'm not saying these tax-induced sales never happen. I'm saying that's a feature, not a bug. If a business is going to wind up in the hands of someone epically incompetent, thanks to Chad winning the lucky-sperm lottery, it's actually a GOOD thing for society if taxes force him to sell that business to a business person who can actually manage it productively.

So, this would be a great place to start, if you're worried about budget deficits, or if you're looking for more revenues to finance expanded government programs: greatly reduce the estate tax exemption. Why should the first $12.06 million of an estate be exempt from taxes? Why should the first $1 million be exempt, for that matter?

Why not set the exemption at, say, the value of a median home, or a little north of that -- $500,000, for example? Then nobody is going to be thrown out of a modest family home or have to sell everyday treasured personal items based on an estate tax bill, but we also won't be perpetuating this multi-generational aristocracy we have.

 

[gdgyva]

Imagine someone offered to sell you a business at a 60% discount. Let's say the business has been producing about $1 million in revenues per year, which suggests a value for the business of about $5 million (based on investors generally looking for about a 20% ROI on small businesses). And you're offered the business for just $2 million. Do you take it? For most investors, it would be a no brainer. If it's expected to produce a 20% return on investment at $5 million, that's a 50% ROI at $2 million.

ugh...NO

my business does a little under 1m in revenues a year......and after all expenses, i net approx 150-175k before taxes

now maybe your terminology is what is mixed up?

are you talking 1m in net profits?

and if that is the case, i believe your valuation is off

 

[Mina]

Imagine someone offered to sell you a business at a 60% discount. Let's say the business has been producing about $1 million in revenues per year, which suggests a value for the business of about $5 million (based on investors generally looking for about a 20% ROI on small businesses). And you're offered the business for just $2 million. Do you take it? For most investors, it would be a no brainer. If it's expected to produce a 20% return on investment at $5 million, that's a 50% ROI at $2 million.

ugh...NO

my business does a little under 1m in revenues a year......and after all expenses, i net approx 150-175k before taxes

now maybe your terminology is what is mixed up?

are you talking 1m in net profits?

and if that is the case, i believe your valuation is off

Yes, sorry, I was thinking net income and wrote revenues.

Anyway, in what way do you think the valuation is off? If a business is producing $1 million in net income, and you could buy that business for an investment of $5 million, then your annual return would be 1/5, or 20%. If you could buy it at a 60% discount, that would be $1 million, making the ROI 1/2 or 50%.

 

[dmpi]

Estate tax exemption at the federal level may be at 12 million but at the state level it can be quite low. In my state (WA) it's just 2.1 million.

 

[Lucky 1]

Why do we pay estate taxes at all????? The owner of that business already payed taxes on what the business earned and the government doesn't deserve any part of it after he passes away......and then the new owners, perhaps family will pay taxes on whatever they earn with it

I think its bullshit and just another money grab by the government!

Abolish estate taxes!!!

 

[Mina]

Estate tax exemption at the federal level may be at 12 million but at the state level it can be quite low. In my state (WA) it's just 2.1 million.

I'd say $2.1 million is quite high, not quite low.

Think of what it means in practice. Let's say you leave $2.1 million -- $1.05 million to each of your two kids. And let's say they each liquidate that and put it into an index fund returning an average large-cap rate of return, like 10.4% (which is what the S&P 500 averaged per year, with reinvested dividends, over the past half century).

Well then, that inheritance is enough to produce an annual income of $109,200 per year for each of them forever. Even assuming a little under 4% of that is eaten up by inflation that's still an income equivalent of around $67,500 per year for the rest of their lives.... which, is equal to the median household income in the US.

In other words, a fortune that gigantic, even split between two heirs, could allow each to live a richer lifestyle than half the American population, without ever working another day, and without touching the principal. A fortune big enough to let two people live comfortable lives of total leisure forever is a big damned fortune. Allowing that to be handed off without a dime of taxation, while people who actually work for their money pay taxes, is absurd.

 

[EMNofSeattle]

Imagine someone offered to sell you a business at a 60% discount. Let's say the business has been producing about $1 million in revenues per year, which suggests a value for the business of about $5 million (based on investors generally looking for about a 20% ROI on small businesses). And you're offered the business for just $2 million. Do you take it? For most investors, it would be a no brainer. If it's expected to produce a 20% return on investment at $5 million, that's a 50% ROI at $2 million.

Yet, this is exactly the kind of situation that those who inherit small businesses insist is a terrible hardship, if they were to be taxed on that value. A 40% tax on an inherited business, with no exemption, is functionally equivalent to being able to buy that business at a 60% discount. So, when one hears sob stories from such heirs about not being able to afford to carry on a business (or farm, etc.) left to them, thanks to the tax bill, what we're basically hearing is an admission that these heirs are shockingly incompetent business people. They're so bad that when given a business that most business people could get a very respectable profit out of if purchasing it at 100% of its value, the shiftless heirs can't even keep it afloat when "purchasing" it at 40% of its value.

I'm not saying these tax-induced sales never happen. I'm saying that's a feature, not a bug. If a business is going to wind up in the hands of someone epically incompetent, thanks to Chad winning the lucky-sperm lottery, it's actually a GOOD thing for society if taxes force him to sell that business to a business person who can actually manage it productively.

So, this would be a great place to start, if you're worried about budget deficits, or if you're looking for more revenues to finance expanded government programs: greatly reduce the estate tax exemption. Why should the first $12.06 million of an estate be exempt from taxes? Why should the first $1 million be exempt, for that matter?

Why not set the exemption at, say, the value of a median home, or a little north of that -- $500,000, for example? Then nobody is going to be thrown out of a modest family home or have to sell everyday treasured personal items based on an estate tax bill, but we also won't be perpetuating this multi-generational aristocracy we have.

What’s wrong with multigenerational aristocracy?

 

[dmpi]

Why do we pay estate taxes at all????? The owner of that business already payed taxes on what the business earned and the government doesn't deserve any part of it after he passes away......and then the new owners, perhaps family will pay taxes on whatever they earn with it

I think its bullshit and just another money grab by the government!

Abolish estate taxes!!!

I sort of agree with you. But the 'problem' is that people have dodged paying captial gains taxes their whole lives and now they're going to dodge them when they die and a new generation will continue this on. Taxes need to be either 'pay as you go' or 'pay at the end'. Also stocks are handled much the same way. If you die with a large capital gain, nobody will pay it. Estate tax is the only way the government can claw back some money.

 

[Mina]

Why do we pay estate taxes at all????? The owner of that business already payed taxes on what the business earned and the government doesn't deserve any part of it after he passes away......and then the new owners, perhaps family will pay taxes on whatever they earn with it

You could as easily ask why we pay income taxes at all.

Think of two scenarios:

(1) Scenario A: I hire you to be my personal assistant, at $75,000 per year. For 40 years, you do whatever work I assign to you, from picking up my dry-cleaning to weeding my garden.

(2) Scenario B: I die and leave you $3 million.

In each case, I probably already paid taxes on much of the value of what ends up being transferred to you (back when I first earned it). In each case, the transfer is identical in total value: $3 million. Yet in the case where you busted your ass for 40 years to actually earn that money, the government expects you to pay a lot of taxes on it, such that you only see a fraction of it, whereas in the case where it was a pure windfall, that you did nothing to deserve, the government treats is as exempted and you get all that money.

How does that make sense?! Why do we punish productive labor with taxes, relative to how the exact same transfer would be treated if a person didn't actually work for it? It's exactly backwards.

But, I think this really points to the fundamental mindset of right-wingers. They despise people who work for a living. That's why they think taxes should be lower on investments than on salaries, and why they think taxes should be nothing on inheritances. They see labor as something shameful -- that those who get dirt under their fingernails earning their way should be punished by the tax code, while idle heirs should not be expected to do anything to contribute to our shared government.

It's actually a very medieval notion. In medieval times, taxes were to be paid by the little people who sweated their way through life, not the idle classes.

 

[Mina]

What’s wrong with multigenerational aristocracy?

It can be hard, sometimes, to spot the difference between someone lampooning right-wing dummies and the genuine article. I'm not sure whether to laugh with you or at you.

 

[EMNofSeattle]

It can be hard, sometimes, to spot the difference between someone lampooning right-wing dummies and the genuine article. I'm not sure whether to laugh with you or at you.

So you don’t have an argument? Got it.

 

[Mina]

So you don’t have an argument? Got it.

Ah, the genuine article.

Multigenerational aristocracy is a problem in four ways:

(1) Basic fairness. Why should the quality of someone's life be determined almost exclusively by way of what family he or she was born into?

(2) Productivity: multi-generational aristocracies tend to have lower productivity, because the means of production are pooling in the hands of less competent people -- those who acquired those means by the luck of birth rather than by diligence and intelligence. That ultimately makes everyone worse off.

(3) Stability: multi-generational aristocracies, if they're allowed to continue accumulating greater shares of the society's total wealth, make a society increasingly top-heavy, which eventually puts the majority in the position where they have nothing to lose by rebelling, and things tend to get pretty nasty for everyone after that (see, for example, the French Revolution). Higher inequality also tends to drive other forms of instability, short of outright collapse of the system, such as violent crime and terrorism.

(4) Total happiness: accumulations of wealth have diminishing returns for happiness: handing a poor person $1,000 produces a lot more happiness than handing the same $1,000 to a billionaire would. So, multigenerational aristocracy tends to make a given amount of wealth less efficient at increasing overall happiness.

Breaking up multi-generational fortunes makes life fairer, makes the economy more productive, makes the society more stable, and makes people generally happier.

 

[dmpi]

I'd say $2.1 million is quite high, not quite low.

Think of what it means in practice. Let's say you leave $2.1 million -- $1.05 million to each of your two kids. And let's say they each liquidate that and put it into an index fund returning an average large-cap rate of return, like 10.4% (which is what the S&P 500 averaged per year, with reinvested dividends, over the past half century).

Well then, that inheritance is enough to produce an annual income of $109,200 per year for each of them forever. Even assuming a little under 4% of that is eaten up by inflation that's still an income equivalent of around $67,500 per year for the rest of their lives.... which, is equal to the median household income in the US.

I wish investing was that simple. First off the market goes up and down and it can be down when you need to sell. Also it would foolish to be 100% invested in stocks if you're over 45. And the money that you do gain you still have to pay taxes on it. But going back to the point. You're kids have put up with you their whole lives. It's not evil or bad to hope they get some sort of compensation and good chance at life.

 

[EMNofSeattle]

Ah, the genuine article.

Multigenerational aristocracy is a problem in four ways:

(1) Basic fairness. Why should the quality of someone's life be determined almost exclusively by way of what family he or she was born into?

So what? Life isn’t fair. An egalitarian society is impossible and some people will always be privileged by birth, whether their family had money, or two married parents, or was born without physical impairment etc.

(2) Productivity: multi-generational aristocracies tend to have lower productivity, because the means of production are pooling in the hands of less competent people -- those who acquired those means by the luck of birth rather than by diligence and intelligence. That ultimately makes everyone worse off.

This only matters in a closed system where new people can’t circulate into an elite, and in any event proving this point requires a lot of data that you probably don’t have.

(3) Stability: multi-generational aristocracies, if they're allowed to continue accumulating greater shares of the society's total wealth, make a society increasingly top-heavy, which eventually puts the majority in the position where they have nothing to lose by rebelling,

Again. This is not because “multigenerational” aristocracy exists, those conditions are caused by having a bad elite, not an old one.

and things tend to get pretty nasty for everyone after that (see, for example, the French Revolution). Higher inequality also tends to drive other forms of instability, short of outright collapse of the system, such as violent crime and terrorism.

The French Revolution is an example of new money merchants wanting a radical system, it was not a revolution of the masses against aristocracy, but of the urban educated.

(4) Total happiness: accumulations of wealth have diminishing returns for happiness: handing a poor person $1,000 produces a lot more happiness than handing the same $1,000 to a billionaire would. So, multigenerational aristocracy tends to make a given amount of wealth less efficient at increasing overall happiness.

This is not a moral question and should thus be ignored

Breaking up multi-generational fortunes makes life fairer,

Life isn’t fair and so this doesn’t matter

makes the economy more productive,

Not proven

makes the society more stable,

Not proven

and makes people generally happier.

Again, not proven

 

[Mina]

I wish investing was that simple.

I find it pretty easy. I've been beating the S&P 500 for pretty much my entire adult life. But, I'll grant, if you've got less risk tolerance, a 10%+ average annual return is a bit much to ask. But even if you're averaging just 3.5% over inflation, in the example I provided (about half what you'd average with a generic large-cap-stock portfolio), that tax-free inheritance would STILL be enough to hand two heirs $36,750/year for life, adjusted for inflation and without drawing down principle. Median personal income is $35,805 in this country. So they would be out-earning half the population without doing a lick of work. It's a pretty huge fortune that can basically set two people up for life even with a conservative investment portfolio, don't you think?

And the money that you do gain you still have to pay taxes on it.

Yes, but the taxes actually would tend to be LOWER. For a single filer, long-term capital gains are at 0% up to $41,675. So, if you earned $36,750/year by way of capital gains, you wouldn't pay a dime. By comparison, the standard deduction for a solo earner is just $12,950. So your $36,750 of investment windfall would actually produce a lot more take-home money than would $36,750 that you'd actually earned with hard work. So, we'd be talking about that hypothetical inheritance financing a permanent income even farther above the national median, once taxes on investment gains and incomes are factored in.

But going back to the point. You're kids have put up with you their whole lives.

Or, another way to put it is that your kids have had you put up with them for their whole lives, and yet they get this windfall, too. The kind of kids who are heirs to a $2 million fortune almost certainly had HUGE advantages relative to ordinary people long before their parents died. They probably lived in nice neighborhoods, in a decent house, with excellent schools, and probably were handed stuff like cars, the cost of weddings and honeymoons, and college tuition payments. So, to throw on top of that a big untaxed inheritance, as well, is really adding insult to injury for others who had fewer advantages all along thanks to poorer parents..

It's not evil or bad to hope they get some sort of compensation and good chance at life.

It's not evil or bad. Just entitled. But think of it this way: if that inheritance is subject to 40% taxes, they still get 60% of it as a windfall all for themselves, while the 40% that's taxed is available for other things, such as helping out those who didn't have the good fortune of being born into rich families. Using 60% of that estate to further enrich those privileged kids, while only 40% goes to everyone else combined, seems like a damned good deal for the heirs, doesn't it?

 

[NWRatCon]

Imagine someone offered to sell you a business at a 60% discount. Let's say the business has been producing about $1 million in revenues per year, which suggests a value for the business of about $5 million (based on investors generally looking for about a 20% ROI on small businesses). And you're offered the business for just $2 million. Do you take it? For most investors, it would be a no brainer. If it's expected to produce a 20% return on investment at $5 million, that's a 50% ROI at $2 million.

Yet, this is exactly the kind of situation that those who inherit small businesses insist is a terrible hardship, if they were to be taxed on that value. A 40% tax on an inherited business, with no exemption, is functionally equivalent to being able to buy that business at a 60% discount. So, when one hears sob stories from such heirs about not being able to afford to carry on a business (or farm, etc.) left to them, thanks to the tax bill, what we're basically hearing is an admission that these heirs are shockingly incompetent business people. They're so bad that when given a business that most business people could get a very respectable profit out of if purchasing it at 100% of its value, the shiftless heirs can't even keep it afloat when "purchasing" it at 40% of its value.

I'm not saying these tax-induced sales never happen. I'm saying that's a feature, not a bug. If a business is going to wind up in the hands of someone epically incompetent, thanks to Chad winning the lucky-sperm lottery, it's actually a GOOD thing for society if taxes force him to sell that business to a business person who can actually manage it productively.

So, this would be a great place to start, if you're worried about budget deficits, or if you're looking for more revenues to finance expanded government programs: greatly reduce the estate tax exemption. Why should the first $12.06 million of an estate be exempt from taxes? Why should the first $1 million be exempt, for that matter?

Why not set the exemption at, say, the value of a median home, or a little north of that -- $500,000, for example? Then nobody is going to be thrown out of a modest family home or have to sell everyday treasured personal items based on an estate tax bill, but we also won't be perpetuating this multi-generational aristocracy we have.

It's not that I agree with all of your points, but this is a great start to a conversation.

 

[NWRatCon]

Estate tax exemption at the federal level may be at 12 million but at the state level it can be quite low. In my state (WA) it's just 2.1 million.

And?

 

[BirdinHand]

The kind of kids who are heirs to a $2 million fortune almost certainly had HUGE advantages relative to ordinary people long before their parents died. They probably lived in nice neighborhoods, in a decent house, with excellent schools, and probably were handed stuff like cars, the cost of weddings and honeymoons, and college tuition payments. So, to throw on top of that a big untaxed inheritance, as well, is really adding insult to injury for others who had fewer advantages all along thanks to poorer parents..

Another way of saying this is that the "kind of kids" that are heirs to $2M have had parents that have worked hard to assure that their family is in a good position. Not only working, but likely keeping a business afloat, planning for the future, saving, paying taxes, sacrificing, etc. along the way.

But you think that there should be MORE taxes paid, simply because someone else has had fewer advantages and you deem that "unfair"?

Man, I'm so grateful for our financial planning/tax/accounting guy. People like you would happily take decades of hard work, sacrifice, etc., and "redistribute" it in a heartbeat. Is it jealousy? Laziness? What's your reasoning?

 

[Mina]

So what? Life isn’t fair

Yes, but it can be made more fair or less so, and I'm arguing in favor of a policy that makes it more fair.

This only matters in a closed system where new people can’t circulate into an elite, and in any event proving this point requires a lot of data that you probably don’t have.

No, it matters in any society where a significant portion of the elite remains the same from one generation to the next. Every person who has control of a lot of the means of production without having earned it by diligence or intelligence represents lower likely production than if the same means were in the hands of a more intelligent or hard-working person.

Again. This is not because “multigenerational” aristocracy exists, those conditions are caused by having a bad elite, not an old one.

No, the issue exists wherever a large portion of national societal wealth is in few hands. It creates the appearance that most have little invested in the system, which breeds instability and violence. People who feel they're playing a game they have no hope of winning, because the rules are fixed against them (as evidenced by the same families winning generation after generation) are more likely to just throw the board in the air and let the pieces fall where they may.

The French Revolution is an example of new money merchants wanting a radical system, it was not a revolution of the masses against aristocracy, but of the urban educated.

The joke was that the urban educated saw the people go by and jumped out in front of them to lead. In pre-revolutionary France, there were far too few educated urban people to overturn the system without having the manpower of massive numbers of dirt-poor people who felt they had nothing to lose.

This is not a moral question and should thus be ignored

It is a moral question. You may choose to ignore morality, but understand that's a choice, not a compulsion. I consider promoting happiness to be a worthy goal.

Life isn’t fair and so this doesn’t matter

It matters very much how fair life is. If you support greater degrees of unfairness, that's a choice. I support reducing unfairness.

Not proven

Well, in the sense of scientific proof, nothing will ever be proven in sociology and economics. We have one world and we can't run history over and over while tinkering with the variables until we can definitively prove cause and effect. But it's reasonable to think that those who earn money will tend to be more productive in its use than those who are merely handed it by being born in the right family. And we have the medieval period as a test case for how one can have 1,000 years of painfully slow progress in large part because a multi-generational aristocracy had little incentive to innovate or work hard. When, for example, you have vast acreage going under-used just so it can be a game reserve for the personal hunting pleasure of one family, it's hard to advance your society.

 

[Mina]

Another way of saying this is that the "kind of kids" that are heirs to $2M have had parents that have worked hard to assure that their family is in a good position. Not only working, but likely keeping a business afloat, planning for the future, saving, paying taxes, etc. along the way.

But you think that there should be MORE taxes paid, simply because someone else has had fewer advantages and you deem that "unfair"?

Yes. It's absurd that those of us who work for a living pay high taxes, while shiftless children of the rich get handed those windfalls untaxed.

People like you would happily take decades of hard work, sacrifice, etc., and "redistribute" it in a heartbeat.

Yes, I'd happily do so.

Is it jealousy? Laziness? What's your reasoning?

See my reasoning above, where I laid out four separate arguments: fairness, productivity, stability, and happiness. How about you? Why do you oppose it? Is it jealousy? Remember, jealousy isn't the same as envy, though the uneducated tend to use the word that way. Is it laziness: are you too lazy to give your kids a leg up by way of educating them well and building their character so they can earn their own way in the world, and so you'd rather just have them get a big financial windfall when you die? What's your reasoning?

 

[aociswundumho]

I sort of agree with you. But the 'problem' is that people have dodged paying captial gains taxes their whole lives and now they're going to dodge them when they die and a new generation will continue this on. Taxes need to be either 'pay as you go' or 'pay at the end'. Also stocks are handled much the same way. If you die with a large capital gain, nobody will pay it.

Not selling something is dodging taxes?

Estate tax is the only way the government can claw back some money.

The thieving government can go f itself.

 

[reflechissez]

Why do we pay estate taxes at all????? The owner of that business already payed taxes on what the business earned and the government doesn't deserve any part of it after he passes away......and then the new owners, perhaps family will pay taxes on whatever they earn with it

I think its bullshit and just another money grab by the government!

Abolish estate taxes!!!

Estate taxes applies to all assets, including those with unrealized gains.

 

[reflechissez]

I wish investing was that simple. First off the market goes up and down and it can be down when you need to sell. Also it would foolish to be 100% invested in stocks if you're over 45. And the money that you do gain you still have to pay taxes on it. But going back to the point. You're kids have put up with you their whole lives. It's not evil or bad to hope they get some sort of compensation and good chance at life.

You don't pay taxes on unrealized gains.

 

[BirdinHand]

Yes. It's absurd that those of us who work for a living pay high taxes, while shiftless children of the rich get handed those windfalls untaxed.

I wouldn't classify a few million as "rich". If that's your standard for what "rich" means, then you're WAY off base.

See my reasoning above, where I laid out four separate arguments: fairness, productivity, stability, and happiness.

Life isn't fair. Whoever told you that lied to you.

are you too lazy to give your kids a leg up by way of educating them well and building their character so they can earn their own way in the world, and so you'd rather just have them get a big financial windfall when you die? What's your reasoning?

My reasoning? He's my kid. My husband and I are setting him up so that he has everything and anything we can POSSIBLY give him for life, including financially. It isn't an "either/or". He's getting top education, top experiences, and will also inherit from not only us but his grandparents that are still living. It is called being a good parent.

 

[What if...?]

Why do we pay estate taxes at all????? The owner of that business already payed taxes on what the business earned and the government doesn't deserve any part of it after he passes away......and then the new owners, perhaps family will pay taxes on whatever they earn with it

I think its bullshit and just another money grab by the government!

Abolish estate taxes!!!

It’s been going on since the Egyptians and is openly a tool to keep personal dynasties from reaching economic parity with the state they exist in and all the issues that devolve from that.

And since elected folks pander to them as it is, it’s not a good idea for the rest of us to have more people for them to pander to more sycophantically.