Thursday, December 16, 2010

Death & Taxes

I've been reading arguments in favor and in opposition to the "death" or "estate" tax.  And while I understand the logic of those who are in favor of estate taxes, I do find myself falling under the category of those who are opposed to estate taxes (or at least opposed to estate taxes at their 2011 levels).

The Estate Tax:
For: Inheritances are generally considered "un-earned" income.  That is to say the transfer of income from the deceased to his/her benificiaries requires no "work" on the part of the benificiaries.  They inherit the money based on the wishes of the decedent.  As such that income should be taxable.  People shouldn't freely receive income without taxation.  They should have to work for their income.

Against: It's my understanding that we're not supposed to be taxed twice on the same income.  That is to say our income is taxed on interest earned in investments (Capital Gains) or on income earned in good old fashioned employment.  That being said, if a person over his/her life has managed his/her finances wisely.  That income has already been taxed by the government when it was earned, and possibly even twice if some of the income is the result of interest earned from wise investments.  And we often get taxed yet again (at the state & local level at least) based on our consumption of goods and services (sales tax).  With the understanding that we've already been taxed for income we've earned, why should our benificiaries be taxed on our earned income?

Now I understand it takes money to keep our roads in drivable condition, to maintain our postal service, to pay public servants (whether they be politicians, mail carriers, FBI agents, or military personnel) and that money has to come from somewhere-- our taxes.  I'm not against taxation but it does seem that by taxing income whether it be earned or unearned we're in effect punishing success and rewarding failure by rewarding that income to people who may not have earned it. 

Generally most people who lean right of center politically aren't against being taxed but are more against HOW they are taxed and how their tax dollars are being wasted/spent (depending on your point of view) and thus they're proponents of a complete overhaul of the tax code:

The Flat Tax:
The flat tax basically states that everyone-- across the board pays the same percentage of their income in taxes (I believe most proponents of the flat tax have suggested 17% as the ideal rate of taxation).  The logic does make some sense-- after all 17% of Bill Gates billions and billions of dollars is a much larger chunk of change than 17% of the income generated by a college student on a summer job.  Where the flat tax gets a bit "sticky" are our dependents... Why should two people earning the same exact amount of money-- one person supporting 5 kids have to give 17% of his income (or 17% of the combined income of he and his spouse) when someone without dependents is getting taxed at the same rate?  In this situation the flat tax would actually discourage propagation of the species and the growth of the nation's population (some might argue that in some regions or for some people this would actually be a positive thing but that's another argument for another time).

The Fair Tax:
The fair tax on the other hand calls for the abolition of income tax completely and a shift to taxing based solely on consumption.  Thus you're rewarded for the fruits of your labors @ 100% and taxed instead on how you choose to spend your money.  In this system we'd end up paying more for our goods and services but we'd also be taking home ALL of our net earned income (not our gross as some of the earned income would still go to pay for employee benefits).  Many proponents of the fair tax have suggested a voucher system for the economically disadvantaged... Similar to food stamps.  People of lower income levels would be issued vouchers that they could use to purchase essential items (food, clothing, etc.) tax free.  Thus they'd only actually be taxed on non-essential expenditures (entertainment expenses and etc.).   

Of the two the fair tax does indeed sound more "fair" than the flat tax as it is consumption and not income based but I do still see possible negative reprecussions of a fair tax-- that is to say taxing based on consumption leaves the door open to our government essentially "legislating" certain behaviors based on taxation and thus the potential politicization of taxation.  Although, I have heard stories of things like this already happening based on the existing tax code (employers sending letters to their employees prior to election day essentially saying, "we're not telling you who to vote for.... but keep in mind if you vote for candidate B over candidate A we will likey be taxed more and that is income we will not be able to use for pay raises/hiring/benefits/etc.  Please keep this in mind when you cast your ballots.")

A more obvious example of "taxation" legislating behavior actually already exists in the airline industry.  Airlines that choose to charge extra for checked bags have seen an increase of occurrences of people trying to bring on over-sized carry-ons and has led travelers to pack more "efficiently" and purchase fewer tsotschkes (sp?) while on vacation to try to prevent the need for additional baggage and thus the additional surcharges for those extra bags. 

And that's the private sector.  Can you imagine the federal government doing the same thing?

And in the end...
Maybe the whole problem is that economists are not sociologists or anthropologists.  Economic theories are generally only perfect when existing inside a vaccuum free of human interaction.  Thus theories only apply 100% of the time in fantasy and are at best, flawed and imperfect in reality as they often fail to fully take into account human nature. 

Perhaps the problem is that we're yet to come up with the perfect economic system.  Both socialism and capitalism carry with them a certain naivete due to a surplus of trust on the public or private sector (respectively) and that either the government or corporations are acting in our best interests, not their own.


Dan said...

The flaw in the estate tax argument is the idea that the money is being taxed twice. The recipient of an inheritance hasn't paid taxes on the money they are now receiving. If the CEO of my employer dies right before I receive a paycheck, it still gets taxed. The only difference is I'm not invited to the family picnics while he's still alive and kicking.

Person A gets taxed when he earns the money. Person A distributes money to person B, and B should be taxed on the new money whether he earned it or not.

I could make a case for B being taxed more because he/she didn't actually earn the money, but that's another can of worms.

As far as the flat vs. fair tax comparison, I suggest the government actually collect the taxes they are due from any number of large corporations. It's not like they don't need the scratch.

Perplexio said...

The trouble is, whether or not corporations can afford to pay those taxes they find ways around it. That is to say, if more of a corporation's taxes go up they figure out ways to find that money elsewhere and usually they make up the revenue lost to taxes by raising their prices or reduction of payroll (lay-offs/firings)-- sometimes a combination of both.

Jessica D'Amico (JeDa) said...

I suck at math but I'm still trying to grasp why I get taxed twice when I am given my paycheck (minus taxes) and then again when I buy products (add on the tax).

Perplexio said...

Jessica: I understand local sales taxes as cities/villages/counties generally don't collect any tax from our income (all those taxes go to the state and federal governments). At the local level all of the tax revenue comes from sales of consumer goods and services and taxes on property ownership.

On the flip side, there's no Federal sales tax in the United States. So none of our sales tax goes to the Feds that all goes to the state and local governments.

There is some variance from state to state. For example New Hampshire doesn't have a sales tax but I've heard their property taxes are extremely high.

There are some consumer goods (gasoline for instance) that are taxed and that tax is built in to the price so we never see it.

I don't know what the right solution to this issue is as I do see potential new problems arising from some of the alternatives to the current system of taxation that have been proposed. I will concur with you that it does seem rather unfair to be taxed both on our income and on our consumption. Our governments are having our cake and eating it too. We're left to fend for ourselves with our crumbs.

scottgreene said...

The Income Tax system is a psychotic legal system and only gets worse year after year after year.

Citizens and businesses of this country spend close to 140 Billion Dollars a year and spend 7 Billion Hours in attempted tax compliance.

The Income Tax code itself is 70,000 pages of arbitrary and contradictory laws and opinions.

This plus at least a million more pages of Revenue Rulings, Letter Rulings, Tax Memorandums, Tax Publications, Tax Court, Federal Court and Supreme Court Opinions that are written in an effort to explain the mind numbing Income Tax code.

Most personal, financial and business decisions all have to take into account the Income Tax system and generally require expensive assistance from tax accountants and lawyers who themselves do not even understand the Income Tax code.

This is no way to fund a government and unless something is done, this Income Tax system is going to continue to wreak havoc on the US economy