Case Against Estate Tax

For years people have talked about trying to repeal the estate (death tax). By the time someone dies the money that is subject to estate taxed has been taxed multiple times. The money is first taxed when it is earned (federal, state, and sometimes even city tax). If that money is invested and if someone sells their investment they are taxed again (at a rate of either capital gains or ordinary income). Once they sell the investment if that same money is used to purchase something you have to pay sales tax. Then when the person dies they are taxed after already being taxed multiple times.  The estate tax started in 1916 and the exemption was $50,000 which would be around $1 million adjusted for inflation today. The exemption these days is over $5 million per person. Let's not forget if you give over $14,000 a year to someone you are not only required to let the government know (Form 709) but you also may have to pay tax on that. However, the estate tax by itself raised very little revenue. In fact the estate tax raises less than ½ of 1% of all revenue. The United States also has the third highest marginal estate tax rate in the world. People with lots of money can easily find ways to get around the estate tax by either giving it away, setting up certain types of trusts, or spending it. What is really interesting is people like Warren Buffett and Bill Gates who are both in favor of higher taxes are giving all their money away to charity (I guess they really trust how the government would spend their money).

You hear statistics like the estate tax only affects 2 in 1,000 estates. The problem can mislead someone into thinking only 2 in 1,000 estates have over $5 million. The major problem with this is that many people with over $5 million are figuring out ways to not have to pay estate taxes. People can set up various types of trusts, give the money to charity during their lifetime, or spend it which would not subject them to the estate tax. The rich didn't rich by being stupid as Dr. Walter E. Williams would say.

Basically if have any right or control over property it will end up in your estate. The estate tax makes zero economic sense because it inducing not to invest and accumulate wealth since it will be taxed. This is why so many wealthy people give assets and money to either family members, charity, or their children. Let's not forget the wealthy people who do set hire accountants, financial planners, and lawyers have an implicit tax of hiring t However,  if you give over a certain amount to family members then you have to pay gift taxes and if you give money away to someone too young you might have generation skipping taxes (see how the taxes start adding up quickly).

Other popular arguments you hear are that the estate tax is used to break up the concentration of power. This too is nonsense considering usually the kids of the people who worked hard to earn the money generally don’t have the same work ethic or values as the people who actually earned the money. Most often times the wealth lasts for three generations. In actuality not having an estate tax or gift tax would actually break up the concentration of wealth because if people could free give their money to whoever they wanted, money would move to many more and different people. 

Obamacare and Taxes

Apple Sidestepping Taxes and Pursuing Excellence in Tax Avoidance

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 In this story from the New York Times it is reported (or really whined about) how little Apple pays in taxes. The story starts off by talking about how Apple put an office in Reno to side step paying higher California taxes. Technology companies in general can move their headquarters to different states or around the world more easily than manufacturing companies due to the fact that making software, applications, or intellectual property doesn't require billions of dollars of capital investment in property, plant, and equipment.

Apple paid $3.3 billion and had a profit of a little more than $34 billion which makes their effective tax rate less than 10%. One technique that Apple uses to reduce their taxes is what is known as the double Irish arrangement. This is part of a tax avoidance by placing intellectual property outside the United States and without paying U.S. taxes. The money from the intellectual property is licensed from an outside company from Apple that is located in Ireland, and licenses the rights to a second company also owned by Apple that is also located in Ireland. The second company gets income and taxed at a low rate and avoids being taxed at high U.S. rates. It important to know that tax avoidance is perfectly legal and different from tax evasion which is where someone purposely goes out of their way not to report income, defraud the IRS, or essentially never intending to pay their taxes. Apple should be commended on such accounting excellence. Also Apple is not the only company that takes advantage of this. Eli Lilly, Google, Microsoft, and even Pfizer use the same strategy to lower their taxes. I would also point out that hiring the people to find these strategies is not cheap. Tax ninjas are not only expensive, but are not easy to come by. The true cost is adding in what it cost in time and money for the services of the tax ninjas.

I love how the New York Times tries to vilify Apple for not only pay their taxes but to suggest that companies like Apple are the reason why states of California are now facing a financial crisis. California is in crisis because of generous benefits to state employees, overspending, and high tax rates which lead not only companies but people out of the state. If California simply lived within their means and lowered state rates you would see people starting to move back.

The tax system is not only complicated at the personal level but also at the corporate level. GE filed a 57,000 page tax return. This seems ridiculous. How many hours and money was spent simply on the return? The tax code needs to be revamped at both the personal and corporate level. My suggestion would be to have a progressive tax rate at the personal level without any deductions. At the corporate level I would propose a flat 15% level. You might say “This will deprive the government of revenue!” The problem is government spends whatever it can get its hands on. I would argue that lower corporate rates would bring business back into the United States which would increase revenue which actually would be a problem since Congress would spend it. At the same time I would propose a balanced budget act. My balance budget act would be a little different. If Congress was not able to balance the budget everyone in Congress would be fired. This would make for interesting politics and ensure some accountability.  Until any of this happens companies will use all possible deductions, credits, schemes, and sandwiches to keep more of their money. 

Estate and Gift Tax 1917-2009 (Percent of Total Revenue)

50% of Americans No Federal Income Tax Liability

From the Heritage Foundation this graph shows the number of people who have no federal income tax liability. The number has only increased since the 1960's and I am afraid this percentage will keep increasing. Politicians talk about how the 1% don't pay their fair share, however how is it fair that 50% pay nothing. If anything we need more taxpayers. Also doesn't Congress already do more than their fair share of spending?

Buffett Tax

This week President Obama announced the Buffet Tax. The Buffet Tax would tax people making people who earn more than $1 million. In Buffett’s article in the New York Times entitled “Stop Coddling the Super Rich” Buffett makes the case that he pays lower taxes than his secretary. This of course is true since Warren Buffett’s income is taxed at a much lower since Buffett earns all his income on capital gains which is much lower than ordinary income (income from working). However, what I find interesting is that Buffett leaves out the taxes that his company pays in order for him to receive that income. Buffett runs Berkshire Hathaway which is a large conglomerate of companies. When Berkshire Hathaway earns income that income is taxed at a corporate rate. In 2010, Berkshire Hathaway paid 29.4% in corporate income taxes. Generally companies pay 35% in taxes but companies can lower this rate through their tax department. Berkshire Hathaway then passes their income to shareholders which Warren Buffett is. The income is first taxed at the corporate rate then Warren Buffett pays individual taxes. So in essence this income is taxed twice. Warren Buffett claims his income tax rate is 17.4%. However, the true tax rate Warren Buffett pays is 46.8%. People don’t really look at the tax rate corporations pay because people assume corporations are paying the taxes not people. People pay taxes not corporations. If corporations pay taxes its less money they have to operate which lowers their return which lowers the return of millions of shareholders. If Warren Buffett really is claiming his tax rate is 17.4% then he is essentially saying that Berkshire Hathaway pays no income taxes. Clearly, this is nonsense. Buffett would have more money if his company didn’t pay taxes. It is frequently brought up that although corporations are in a 35% bracket they don’t really pay it. This point is valid although I would point out lowering the tax a company pays comes at a cost. Hiring accountants and creating tax departments are not cheap. This cost is never talked about though. A company can’t magically lower their taxes without a cost. It would be interesting to see someone study the cost of taxes if you included how much time, energy, and money it took for corporations to lower their tax rate.

I myself am a fan of a progressive flat tax. This would free up corporate accountants and individuals from calculating their tax rate. Tax revenue would no doubt increase because it would be very hard if not impossible to shelter income if people paid one flat rate. Right now there are many legal ways to reduce taxes although billions of revenue is never collected because the tax system is so complex that very few people even understand it. The only problem I worry about is that if we raised more revenue it would lead politicians to want to spend more. It would be as if politicians went to a buffet and realized there was even more food than they thought.

I myself am a fan of Warren Buffett when it comes to his investing advice. However, his political views leave much to be desired. If Buffett really felt he was paying to little in taxes he could always voluntarily pay more. No one is stopping him from giving more money to the government. His actions show he is okay with paying the existing tax or else he would voluntary give more. You can’t say you are for raising taxes if you comply to pay lower rates than you otherwise would.

We Don't Have A Spending Problem, We Don't Have Enough Taxpayers

This sums everything up so beautifully...(H/T Mark Perry)

Warren Buffett: Higher Taxes Please

Warren Buffet in a New York Times op-ed yesterday said that rich people should pay more in taxes. Buffett points out that he paid 17.4% (or $6.9 million) in taxes last year. The reason Buffett is in a low tax bracket is because nearly all of his income comes from capital gains (buying and selling stock) which is taxed at a much lower rate than ordinary income (wages from a job). Warren Buffet claims he doesn’t mind paying higher taxes. Interesting that Buffett doesn’t voluntarily paying his highest marginal tax rate of 35%. In fact if Buffett felt really patriotic he could make a gift to the U.S. Treasury Department to pay down the United States national debt. I have a feeling Buffett isn’t going to be making a gift any time soon.

Our tax system is extremely progressive. The top 1% (people making $380,000 and up) pay an average tax rate of 23.3% this is higher than any other bracket. Meanwhile the average tax rate for the bottom 50% is a mere 2.6%. In addition to this, the top 1% of taxpayers are paying 40% of all income taxes. This percentage has only been increasing since 1980 not decreasing. The top marginal rates since 1980 have also decreased. If politicians wanted the top 1% to pay “more of their share” of income taxes all they would have to do is lower the marginal rates.

No doubt Buffett is probably one of the best investors of all time. However, I find it surprising that someone with an economics degree from Columbia doesn’t understand demand for anything slopes downward the higher it is priced including taxes. If Buffett was really serious about paying his fair share he would voluntarily pay more in taxes. Buffett can say how he wants to pay more in higher taxes, but until he voluntarily does so it’s all talk. Talk, rhetoric, and blame are all great tools for politicians. Blame in fact is an unlimited resource.

Number of Pages of Federal Tax Regulation From 1913-2011

Seems as if spending has not only dramatically increased over time, but also the amount of federal regulations businesses have to comply which has increased exponentially. In 1913, there were only 400 pages of federal regulations to comply with. This year there are over 72,000 pages of federal regulations to comply with. Increasing the amount of regulations is a tax increase for businesses which pass along the costs to consumers. I wonder how many pages of regulations would equate just one percentage point in a tax hike.