What is meant here?

[kenberg]

The suggested site has an item labeled

"Close the trust fund loophole".

I suggest that would have been a fine phrase to use in his speech, assuming that is what he was referring to. Close the trust fund loophole makes it clear he intends to (try to) address an issue involving trust funds. One could then read more details and, as suggested, have an opinion. "Close the loopholes that lead to inequality by allowing the top one percent to avoid paying taxes on their accumulated wealth" suggests, to me at least, that he is thinking of having people pau taxes on accumulated wealth. Nothing about a tax on passing in on to heirs, simply a tax on accumulated wealth.

 

Here is what I expect when someone asks me for my help, my support, or my understanding. I expect their words to mean pretty much what they sound like they mean.. If that minimum threshold is not met, I stop listening. I understand that the number of viewers for the State of the Union address was historically low. Maybe I am not the only one who feels this way.

[hrothgar]

Well, you may not have any reason to learn what stepped up basis means, or you may but just don't know that you do.

 

Under current US tax law, when a person dies, his or her property is inherited by the heirs with a tax cost equal to the fair market value of the property on the date of death. The tax cost is also known as the "basis" of the property. The basis of the property is the starting point for determing gain or loss on the sale of the property. If one sells 10 shares of IBM stock for $1,000, and the original price paid for the 10 shares of IBM stock (the "basis" of the IBM stock) was $500, one has a gain of $500 on the sale.of the IBM stock. However, if one inherited the stock from someone who died one month ago, and the value of the stock was $990 on the date of death, the gain on the sale of the stock would be only $10. It doesn't matter that the person who died bought the stock for $500 many years ago. The basis of the stock for the heir is "stepped-up" on the death of the previous owner. The potential capital gain in the hands of the original owner disappears upon his death, and his heir gets the stock with a basis equal to the value on the date of his death.

 

Basis can also be "stepped-down" if the value of the stock on the date of the decedent's death is lower than what the decedent paid for it. But it is unusual for that to happen, as prices tend to rise over time. So we usually refer to basis being stepped-up upon the death of the decedent.

 

So, if this is the loophole that Obama was referring to, then he intends to eliminate the step-up in basis and have the heirs inherit the property of the decedent with the same tax cost as the decedent had. This will result in more capital gains on the sale of the decedent's property by the heirs.

 

 

A lot of the discussion that I have seen regarding the State of the Union address have focused on this same point (they have been using the moniker "Angel of Death" clause as short hand.

 

Its worth noting that the publication of "Capital" last year has resulted in a lot more focus on wealth than "just" looking at income.

[kenberg]

I very much welcome this development in this thread. I had never before heard of "stepped up basis". What do I think? I dunno.

 

 

Let's go with Art's example. I buy $500 in stock, it rises to $990, I die, and a bit later my heirs sell it for $1000. Should my heirs pay tax on $10 or on $500?

 

Follow up questions:

 

Does it matter if we add zeroes. Say I buy for $500,000 and it sells for $1,000,000?

Does the overall size of my estate matter?

Does it matter how wealthy my heirs are?

 

I like simplicity. If it is given that we tax the gain on investments then the gain has been $500 and we tax the $500 gain. My death is irrelevant. It is also irrelevant whether I am me or I am Warren Buffett. I gather that Obama agrees with the first sentence, but maybe not with the second.

 

Someone, and I can't recall who, is supposed to have said something on the order of "Tax law turns a man's life into a business. A man's life should not be a business." I agree wholeheartedly, hence my ignorance of many of these matters. It's just in the nature of things that we have to give some thought to the finances of dying. But the more straightforward we make this the better. Once we agree that it is acceptable to tax income on investment (and the assertion that this is not ok is a whole different argument) then it seems to me that the tax should be set so that my death does not allow avoidance of the tax. My life should not be a business, and certainly my death should not be.

 

 

I welcome hearing what others think.

[PassedOut]

I certainly agree that death should not affect the basis of assets.

 

As to "life as a business," I think that life has (and should have) many aspects, and the business aspect is one of them. But the business aspect should not be so complicated that smart folks find it confusing.

[ArtK78]

One very good aspect of the current rule - that heirs get a date of death value as their basis for inherited assets - is that it wipes the slate clean for record keeping purposes. When assets are held for a long period of time, it may be difficult to determine with any accuracy what the basis of the assets are, since the records may have been lost long ago. This problem is magnified when you are dealing with records of asset transactions from many years ago for someone who has died

 

The problem is being lessened to a certain extent now, as brokerage firms are keeping records of investment transactions and account holder's basis in investments and reporting them in monthly statements. Still, when I am dealing with an estate administration, I often find that the decedent's records for his investments are severely lacking, and the date of death step-up in basis is very nice to deal with from a record keeping perspective for the heirs.

[PassedOut]

One very good aspect of the current rule - that heirs get a date of death value as their basis for inherited assets - is that it wipes the slate clean for record keeping purposes. When assets are held for a long period of time, it may be difficult to determine with any accuracy what the basis of the assets are, since the records may have been lost long ago. This problem is magnified when you are dealing with records of asset transactions from many years ago for someone who has died

 

The problem is being lessened to a certain extent now, as brokerage firms are keeping records of investment transactions and account holder's basis in investments and reporting them in monthly statements. Still, when I am dealing with an estate administration, I often find that the decedent's records for his investments are severely lacking, and the date of death step-up in basis is very nice to deal with from a record keeping perspective for the heirs.

My take is that we shouldn't cater to those so hopelessly disorganized. Let the estate pay to sort it out.

[helene_t]

When my dad died we had his art collection and such valuated for the purpose of splitting the assets betwern us and for enheritance tax. It is then easy to use that value as a baseline. Some of the assets had been aquired many decades ago under obscure circumstances and may or may not already have had there revenue taxed. I think that trying to assess a purchase date baseline would be too much of a hassle. I live in the uk now so the UK taxman needs the value when the money crossed the border as a baseline which typically coincides with the date of death.

 

But in principe of course it would be better if the whole capital gain was taxed.

 

Anyway this is Europe so probably not so relevant to this discussion.

[Zelandakh]

Let's go with Art's example. I buy $500 in stock, it rises to $990, I die, and a bit later my heirs sell it for $1000. Should my heirs pay tax on $10 or on $500?

There is a third option too - they could pay tax on $490 at the time of inheritence and then again at $10 on the sale itself. The advantage of this arrangement is that the two tax rates need to be equal and the capital gains part can easily be added to the estate tax to create a more complete inheritence tax. Thus you can create a form of compromise between zero capital gains and 100% of the standard rate without greatly increasing administration costs. Or have I misunderstood how things work over there?

[ArtK78]

My take is that we shouldn't cater to those so hopelessly disorganized. Let the estate pay to sort it out.

You might be surprised to find that "those so hopelessly disorganized" comprise a very large segment of the populace. I would guess that a very large majority of the populace does not have records of stock purchases made before 1980.

 

And as for purchases of other assets other than real estate, don't even go there.

[barmar]

You might be surprised to find that "those so hopelessly disorganized" comprise a very large segment of the populace. I would guess that a very large majority of the populace does not have records of stock purchases made before 1980.

They would have the same problem if they sold the stock. Why should they get a pass because they die? I suppose you could say that it's not the heir's fault that they didn't have good records. But if you inherit the wealth, you also inherit the problems that come with it.

 

If the stock is held by a broker, they'll know the date that it was acquired. There are historical records of stock prices that can be used to estimate the cost basis.

 

But if you can't determine the cost basis, you're required to treat it as 0. So, is that a real burden? Yes, if the heir sells the stock, they'll have to pay more tax than if they knew the actual basis. But they still come out way ahead, because this is all money that they didn't have before the inheritance. It's all "found money".

[blackshoe]

Now, I know that you are not into socialist ideas of the rich helping the poor, but I find the idea of taxing the poor to help the rich get richer alien, if not -to use your word- "reprehensible". And I think that some rich, financially successfull people, such as Warren Buffet, agree with me on this.

I'm not into forcing the rich to help the poor, but if the rich want to give to charity, I have no problem at all with that, in fact, I find it a good thing. As for taxing the poor, I do find that reprehensible — especially if it's done "to help the rich get richer". But I doubt you can show that in the US we tax anybody for that purpose.

 

That Warren Buffet agrees with you doesn't make either of you right. B-)

[kenberg]

You might be surprised to find that "those so hopelessly disorganized" comprise a very large segment of the populace. I would guess that a very large majority of the populace does not have records of stock purchases made before 1980.

 

And as for purchases of other assets other than real estate, don't even go there.

 

I expect that many, maybe even some on this thread,an support this. We moved about ten years ago, and when I filed my taxes, some stuff had gotten lost in the move. The IRS sent me something saying I owed them some bucks. I realzed my error and after some work I found some documents and replaced others, and then they owed me something. But in addition there was stock I had a few shares in that was based in another country and had done some strange maneuvers that I simply could not grasp. Actually I don't think that the IRS could understand it either. It was truly a small amount and the issue just soret of vanished as I recall. I sent them some sort of proposal to resolve it and I think they never responded, I don't remember.

 

I asked myself why I was doing this, decided I couldn't explain why, and we now have a professional do it. If the toilet leaks I call Mike the plumber, if I have to file taxes I call Jenny the tax lady. Very relaxing. I filed my first taxes about the same time as I overhauled my first engine on my first car, all long ago, I am happy to stop now. . Car to the Honda dealer, plumbing to Mike, taxes to Jenny.

[mycroft]

no, no, we don't tax the poor so that the rich can get richer. We tax everybody to pay for things the whole populace needs. It's just that recently, more of the taxes, user fees, tolls, ... seem to be flat, and applied equally to the poor (who spend 40-50% of their income on these goods now with extra tax) and the rich (who may spend twice as much, and get taxed twice as much, on those goods - but who spend 10-15% of their income on those required goods like food and roads and...) A lot of this boils down to the diminishing value of the next dollar.

 

It also seems that the way the rich get money seems to be taxed less strongly than the way the poor do (even if, again, it's more in actual dollar amounts). And that money spent on things the rich use seems to be more ready than when it's spent on things the poor need. Odd, that.

[hrothgar]

That Warren Buffet agrees with you doesn't make either of you right. B-)

 

Maybe, but the fact that Heinlein would agree with you means that you are almost certainly wrong...

[barmar]

It also seems that the way the rich get money seems to be taxed less strongly than the way the poor do (even if, again, it's more in actual dollar amounts). And that money spent on things the rich use seems to be more ready than when it's spent on things the poor need. Odd, that.

By some theories, this is supposed to be good public policy. It's the whole "trickle down economics" idea: we use tax policy to encourage the rich people to invest, and this improves the economy as a whole. It creates lots of new job openings, which the poor can fill. It's the economic version of "a rising tide lifts all boats".

 

One problem is that it's like a pyramid scheme. By the time you get to the base of the pyramid, the profits are spread so thin that no one makes anything significant. But the guys near the top reap huge rewards.

[mike777]

I think this thread is discussing 2 separate issues.

1) redistribution

2) reducing inequality of global total wealth or income.

 

These issues need not be the same.

 

For example some combination of a wealth tax and closing "gift tax" loophole rules and increasing the rates may or may not increase total tax revenues but they may reduce inequality or reduce the rate of increase or be a first step towards that goal.

---

 

 

For redistribution it seems a large negative income tax that is means tested would be a good first step and be more efficient and easier to manage than many other approachs.

 

Again some of this stuff can be done by your local city, county and states. We don't have to wait on Congress.

[Trinidad]

I'm not into forcing the rich to help the poor, but if the rich want to give to charity, I have no problem at all with that, in fact, I find it a good thing. As for taxing the poor, I do find that reprehensible — especially if it's done "to help the rich get richer". But I doubt you can show that in the US we tax anybody for that purpose.

 

That Warren Buffet agrees with you doesn't make either of you right. B-)

Please do the math, it is not very complicated:

 

If you buy one loaf of bread, you pay $x. If you buy 100 loafs of bread, you pay $100x.

If you buy one hamburger, you pay $y. If you buy 100 hamburgers, you pay $100y.

 

If you earn $1000, you pay $z in taxes for the economic infrastructure (roads, money, an army that defends your interests, etc.) that makes it possible for you to earn those $1000. If you earn $100 000, you use 100x more infrastructure and, therefore, pay $100z.

 

... Except that -according to Warren Buffet, not the dumbest guy around when it comes to money- you pay considerably less, because of the nice loopholes that are available to the wealthy. That simply means that the poor are paying more for their economic infrastructure than the wealthy and the poor are effectively paying part of the infrastructure that makes it possible for the rich to get richer.

 

Mind you, I don't have any fundamental problem with the rich getting richer. Congratulations to them. But I do have a problem with the poor being forced to pick up part of the tap for the costs associated with making the rich richer. Those costs are supposed to be paid in full by the rich themselves.

 

Rik

[mike777]

To be fair the math is much more complicated than this. Thus the problem.

 

If I buy 100 loafs of bread I don't pay 100x

If I buy 100 hamburgers I don't pay 100y

 

there are loopholes, I get a volume discount.

 

If I earn 1$ I pay zero in income tax, I am poor. I am poor I don't own a car or a cellphone so I don't pay all sorts of taxes.

 

If I earn 1B$ then I get all sorts of loopholes and discounts that the poor do not get, they are poor. But I also pay all sorts of taxes tht the poor don't pay.

 

As I mentioned defining taxable income is hard and very complicated.

 

Buffett is correct he is using all sorts of "gift tax" loopholes to avoid taxes.

You are correct in that many taxes are "regressive" but the poor the truly poor don't pay many of them, they are poor. Thus something such as a negative income tax may be a first step as a safety net.

[Trinidad]

You are correct in that many taxes are "regressive" but the poor the truly poor don't pay many of them, they are poor. Thus something such as a negative income tax may be a first step as a safety net.

Feel free to replace "the poor" by "the middle class". The middle class in the USA (including the lower middle class) is paying a higher share of the taxes than the rich and thereby forced to facilitate the rich getting richer.

 

Your argument of a volume discount doesn't count. Unions could pay taxes in volume for their members. I don't think that Uncle Sam would give them a discount.

 

Rik

[mike777]

I'm not into forcing the rich to help the poor, but if the rich want to give to charity, I have no problem at all with that, in fact, I find it a good thing. As for taxing the poor, I do find that reprehensible — especially if it's done "to help the rich get richer". But I doubt you can show that in the US we tax anybody for that purpose.

 

That Warren Buffet agrees with you doesn't make either of you right. B-)

 

I think the whole issue of "forcing" the rich to help the poor can get a bit out of context. I am going to assume you don't mind forcing the rich to pay taxes and those taxes will be spent to a large degree to "help" the less rich and poor. You may even believe that the rich have a moral duty to help the poor as many Catholics believe.

----------

 

Some of these "tax the rich" ideas can be done on a local level where the money raised can be spent on the local level with local input. For example LA county or the state of calif can pass these tax laws to help decrease inequality. If some places in TX or FL keep increasing inequality then they suffer the consquences.

 

Also as they become more common at a local level it may be easier to pass them on a Federal level.

[barmar]

If you earn $1000, you pay $z in taxes for the economic infrastructure (roads, money, an army that defends your interests, etc.) that makes it possible for you to earn those $1000. If you earn $100 000, you use 100x more infrastructure and, therefore, pay $100z.

Things are not nearly so simple. Where do you get the idea that use of infrastructure and other public services is propotional to income?

 

Do million-dollar homes catch fire 10 times as often as $100K homes? While the value of the fire-fighting service is greater, because it's saving a more valuable home, they cost to the city/town of providing that service is basically the same as for a less expensive home.

 

A rich person is likely to buy a more expensive car than a poor or middle-class person, but that doesn't mean he drives more, so he doesn't put more wear and tear on the roads.

 

And of course, rich people don't make any use of public assistance services (e.g. food stamps, homeless shelters, Medicaid).

 

Meanwhile, the rich own businesses that put other people to work, allowing them to pay taxes. We want to encourage long-term investment in businesses rather than going for the quick buck, which is the public policy reason for the lower rate of capital gains tax versus income tax.

[ArtK78]

Meanwhile, the rich own businesses that put other people to work, allowing them to pay taxes. We want to encourage long-term investment in businesses rather than going for the quick buck, which is the public policy reason for the lower rate of capital gains tax versus income tax.

Actually, no. At least, not entirely.

 

One of the public policy reasons for taxing capital gains at a lower rate than other income is that capital gains represent many years worth of gain on the value of capital, thus bunching the income in one year - the year of sale. To compensate for the bunching of the income, it is taxed at a lower rate.

[mike777]

Yes and a wealth tax and gift tax might bring in some revenue that an income tax might not since there need not be a sale, indeed there need not even be a gain. I don't know if overall revenue would increase or decrease but the rate of increase in inequality should slow down.

[kenberg]

I am working my way through what I think of various State of the Union proposals. I truly did not understand what was that "And let's close the loopholes that lead to inequality by allowing the top one percent to avoid paying taxes on their accumulated wealth" referred to inheritance taxes, but if I now understand it correctly, that taxes would be paid no capitol gains whether the gain goes to the original holder or to his/her heirs, it seems right. Simplicity is generally good, whether ina tax plan or in a bidding syste. For example, say a person realizes that his remaining life span is not long, a year or two at most. And say he dolds a stock that logically he would sell, where by logically I mean his assessment of the stocks future potential. But as I get the current system, he would have to think "If I sell it now, I have to pay taxes on the previous gains. If I just sit on it, I and my heirs can avoid that tax." So s/he holds the stock for tax reasons, not because of his judgment of the potential of the stock. Not good, imo. So change it. Change it for Warren Buffet and change it for me.

 

Now there is another proposal that has generated some controversy. I gather (I always have to be hesitant about whether I understand it correctly) parents can now start a colloge fund for their kids that acts something like an IRA. There is a lot of tax sheltering. Accounts already in existence would not be altered, I would hope that they cannot be altered, but new accounts would have less or no tax sheltering. This change is apt to be a tough sell for me. The Washington Post, suggests means testing Maybe, but I think I prefer simply having a cap on the amount to be sheltered. Helping parents send their kids to college seems like a good idea but we can keep this help to a (generous) limit. Setting a limit on the amount, but otherwise making no restrictions, again appeals to my preference for simplicity.

[mike777]

It depends on what your number one goal is. Is it to reduce inequality of total global wealth to some number say the top 10% only have 10% of total wealth rather than 50-80% or some other top goal? For example sending more people to college may not reduce inequality, hence the problem. It seems we send many more people to college today yet as many posters point out inequality is increasing not decreasing.

 

Confusing goals and priorities lead to confusing tax policies.