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Monday, February 7, 2005

Lifestyles of the Rich and Dead

Big tax news in Washington State last week: The State Supreme Court threw out the state's estate tax. That's the tax that wealthy people have to pay when they die, on the property that they leave behind. (Actually, you can't pay a tax when you're dead, but your family has to do it for you.)

Oooh, the "death tax," evil evil evil, right? Actually, no. Picture a guy like Bill Gates, whose net worth has grown by tens of billions in his lifetime. You know how much tax he's paid on the growth of his Microsoft stock all those years? None. That's why there's a death tax.

Interestingly, Bill's dad has been a major proponent of keeping the estate taxes on the books. Now, there's a family that's willing to chip in its fair share... eventually.

Anyway, to all you rich types in the great State of Washington, don't spend it all in one place.

Comments (38)

"You know how much tax he's paid on the growth of his Microsoft stock all those years? None. That's why there's a death tax."

Oh my god, so what? Did he have a good idea? Yes. Did he capitalize on his good idea to become rich? Yes. So what? Here's the other important part: Should you punish him (via his estate) for singlehanded putting gajillions of money into Washington's economy via the thousands of jobs his vision created?

The "Death Tax" and "Capital Gains Tax" are all about punishing people for their having the balls, the audacity, to have invested their money wisely, to have put money into the economy (where, by the way, it helped OTHER people make money) and to have done so successfully.

He also profited from the laws of the State of WA, and the United States. And from the infrastructure that helped him develop and send his products out into the world. As his (and all our) wealth depends on the function of a stable society and its laws and mechanisms that allow for the creation of that wealth, he should pay (as should we all). It's foolish to suggest that wealth is created in a vacuum or solely as the result of one man's audacity.

Does this include big ol’ lars?

Jud says,
""""It's foolish to suggest that wealth is created in a vacuum or solely as the result of one man's audacity.""""""
Derek never "suggested" any such thing.
That is your twist and contortion to provide yourself a way to argue against what he didn't say.
In fact he said just the opposite. That Gates invested and created within the Washington economy resulting in a economic lift and thousands of jobs. All along the "infrastructure" and "stable society" benefited, over and over again. Of course there was certainly no vacuum.
The problem with your angle is you can't recognize the magnitude of the automatic contribution to the greater good a Gates wealth creation process provides at every level of growth. The you feel it is inadequate of the government can't take another whack after death to devour and redistribute.

It's all so cut and dry when you throw out Bill Gates as an example.

What about a family owned business that *on the books* is worth a few million, but cash poor? The people who inherit it owe a substantial amount of cash to the government. Chances are, they'd have to sell it in order to make good with the taxman. What happens to all those jobs, Jack?? Huh? In your fight for the little guy, you may actually be doing more harm (depends on which little guy for whom you think you're fighting).

And what if I decide to put 50% of what I make into the stock market for the next 60 years. I've already paid tax on that money once. Why should my heirs have to pay tax on it again, outside the capital gains? "Because we live in America" is the best excuse you guys can come up with? I'm sure the participants of the Boston Tea Party are rollin' in their grave over that one...."you should gladly give over thy wealth to the King, for it is He who allows you to prosper!"

Hello!?!? Governments spend money inefficiently. "Urban renewal zone" ring a bell, Jack?

Only the richest two percent of US families pay any estate tax at all. These are people with estates larger than $1.5 million for an individual or $3 million for a couple. Small business owners and family farmers don't have this kind of money stashed away.

Plus, half of all estate taxes are paid by the wealthiest 0.1% of the American population – about 3,000 familes a year.

So it's okay if it only affects a few people. That sounds fair. Tyranny of the majority...

My point is that the inheritors of that money will spend that money more efficiently than the government. I don't really care how many people it affects. In my book, that's a red herring to get us commoners in an "us against them" mood. Doesn't go very far with me.

Wow, lots of anger on the comment board today.

Anyway, apart from being a source of revenue, the federal estate tax was enacted to mitigate against the concentration of vast wealth within a family down through the generations. I believe that this is a legitimate goal, but of course it is reasonable to argue just who should be paying the tax, i.e., how rich do you have to be before you are taxed. In my opinion, the exemption levels are currently a bit low, though they are rising through 2009.

Now as for taxing the unrealized appreciation in value of assets, under current law this is not done at death - that income goes forever untaxed. Not a bad deal. Mark, you appear to agree that such appreciation should be taxed (or at least you are under the belief that it is), but that the transfer of the property should not be. That's fine, but it must be understood that there are two completely separate taxes at play - an income tax and a wealth transfer tax.

As for the capital gains tax being a punishment, that comment is so absurd as to not even warrant comment.


I think it's great that you don't want families getting too much money. Good for you.

You don't have to think like I do. This is isn't Russia. Is this Russia? This isn't Russia, Danny.

But what I'm *trying* (albeit poorly) to get across to you is that taxing people just because they're rich, or because traditionally we've done so, is no excuse. (Slavery was a tradition)

The more money the government gets, the less efficiently it will be spent. That's the bottom line.

Jeesh... and I thought the religious right ruined the Republican party. I'm starting to think it's the Pork Barrel Republicans now.

Even if the estate tax were eliminated, the gains on Gates' Microsoft stock would still be taxable to his heirs if they ever wanted to sell the stock and do something with the money.
The fact is that the estate tax today is in somewhat the same state that the income tax was 25 years ago. At that time the top income tax rate was 70%, but almost no one paid at that rate through judicious use of what were then perfectly legal tax shelters. Remember cattle futures?
The top estate tax rate today is near 50%, but again, the super wealthy are able to reduce the effective rate dramatically through the use of charitable foundations, life insurance trusts, and family limited partnerships. By the way, Jack's an expert in this area.

I'm clear on what he said. "Singlehandedly." I'm afraid we can't measure his actual contribution monetarily. But, given that he has been rewarded disproportionately to his input, he ought also to give back more, even if it's after death. I'm thrilled to note that "he" has given substantially to the WA economy in lift and jobs. Perhaps you could balance that against the economic incentives Microsoft has received and the taxes they haven't paid.

The thing is, Mark, it's a new tradition that the founding fathers made up to counteract the old tradition of rich aristocratic families running the countries. I suppose you would prefer to go back to that?

Kai, you're wasting your breath. Mark doesn't know how to debate in a civil manner, at least not when he's sitting behind a computer screen.


A little sarcasm and I'm lacking in civility..

>The thing is, Mark, it's a new tradition that the >founding fathers made up to counteract the old >tradition of rich aristocratic families running the countries

And it's worked oh so well... let's see... GWBush, Andover and Yale... John Kerry... St. Paul's School and Yale...Al Gore....St. Albans, Harvard.

The old money *already* controls the government.

Now I'm being argumentative just for arguing's sake. I'm sorry to have soiled this blog. Seriously. I'll stop now.

What if Bill Gates had been born in the Congo...


Don't forget about the society and its tax payers who helped create the environment for Gates' success.


Our founding fathers made up the "new tradition" of the estate tax?

I didn't realize Alexander Hamilton was still kicking around in 1916.

I'm sure you'll tell me that Thomas Paine once pamphletted in support of an inheritance tax for England. (Under a theory of having royal families make reparations to commoners for generations of profitting from a monarchical government).

Not exactly appropos considering it was a different country, and, even if you applied it to America, these arguments were forwarded before the existence of the Federal Income Tax and enormous growth of the welfare state.

The Founding Fathers warned against concentration of wealth.

The reason that the estate tax was instituted in the early 20th century was that we had never seen such concentrations of wealth as emerged in the late 19th century (due to industrialization). Political and economic theorists argued that such concentrations undermined the liberal foundations of our Republic. Democrats and Republicans have supported the estate tax since then.

The new tradition is the attack on the estate tax that has emerged due to a well-financed campaign bankrolled by very wealthy Americans.

The numbers are an issue because they put a lie to claims that the estate tax destroys family businesses or farms. This is simply a lie. Very few, very wealthy families pay the estate tax. The vast, vast majority of family wealth is passed on and is not taxed.

Mark: and Jimmy Carter, and Ronald Reagan, and Richard Nixon, and LBJ, and Ike, and .... all presidents who rose from modest or even impoverished roots.

Who was it that once said something like: 'Wealth is like manure. You need to spread it around to create fertile ground for growth.'

Good idea sid. However, when it's your manure that you worked hard to earn. I bet you wouldn't be too intrested in giving it to some fat, lazy, scamming negro.

the prof: The new tradition is the attack on the estate tax that has emerged due to a well-financed campaign bankrolled by very wealthy Americans.

A vague and unsubstantiated statement that essentially says "two rich guys" are trying to pull the wool over our eyes.

me: taxing income twice is not fair. taxing people solely because they "have a lot" is not fair.

A straight shooting theory on what I believe is fair taxation.

I spent 6 months in East Berlin as a student. I've seen firsthand what can happen by removing the impetus for wealth creation. The native East German guy I rented a room from lamented about the old days of his "construction work" when they'd get drunk on Russian vodka if they ran out of nails, or paint, or concrete for the day(although from the looks of things over there, they had plenty of concrete). They had no reason to work harder, because it got them nothing more. As a result, their country was filthy (the Trabant!), architecture consisted of monolithic concrete forms, and generally their lives looked miserable.

To the end of my days, I will always believe that it is wrong to remove the desire to create more wealth by mandating that the government "deserves" it instead.

Look, I'm no crazy loon looking to get rid of all taxes. I appreciate the interstate highway system (hey, that's how I got here), our armed forces, parks, ... I can even tolerate public transportation - I've seen how crazy privatized busses are from my travels to Quito. And I can see how insanely wealthy people don't necessarily do good things with it (Paul Allen/Trailblazers?) and where it would seem more fair to the rest of us to take it away, but I just don't agree with it.

ok, now I'm done.


Let me put it simply for you.

Money is the root of all evil.

Now it is one thing to become evil due to your own efforts (we try to stop it from happening but some people are very stubborn). However, it is really tragic when an innocent person just inherits all that evil through no fault of his own.

We don't want these innocent people to become tainted by their parents' evil money, do we?

So we try to help purify them by laundering as much of the evil money through the government's washing machine as we can get away with.

When the goverment is finished cleaning the money, we all get to wear nice clean clothes.

How wonderful for everyone. Win-win-win.

And please don't ask questions about things like "earning", "individual responsibility" or "ownership". Those are illegitimate concepts intentionally designed to cull you from the collective consciousness.

You're thinking way too much Mark.

funny how most of the comments delve into policy of the estate tax repeal. i am going to restrict my comments to the court's opinion... did any of you actually read the opinion?

the court's decision basically took statutory language and said that the legislature could not have meant what it said. funny, i've seen lots of folks in jesusland calling judges "activists" for doing exactly that. i guess i won't hold my breath waiting for the outrage on talk radio about the judges who wrote this opinion.

I read the case and I reach a different conclusion from Jack. I don't think the Washington Supreme Court threw out the Washington estate tax. It simply ruled that the state of Washington can't collect more than the amount allowed as a credit for state taxes on the federal estate tax return.

At least until the federal estate tax is repealed in 2010 (for one year), that means some estate tax can still be collected in the State of Washington. The decision, by the way, is based on the court's interpretation of a voter-passed initiative which the legislature supposedly codified, only they chose not to update it.

I don't think this is a particularly radical opinion.

I'm simply amazed by the fact that so few Americans don't want to understand what our taxes pay for and what we get in return for paying those taxes. If you don't want taxes move to Saudi Arabia (no taxation, no representation.) Or move to a country where you can get away without paying a dime, like the Congo.

As a business owner this is what I need for my business to continue: good roads to transfer my products from Portland to other places in the country, good communication systems, the FAA, continued research in computer technology at public universities that will then be integrated into companies' products and services (the internet has helped my business), continued oversite of commercial kitchens to keep our processed food safe (I'm in the food business and contract with a commercial kitchen that makes my product), a good postal system, educated people whom I can hire, a Department of Agriculture that will ensure safe ag products (my food products are farm based)...

And I'm just a tiny business here in Portland. Imagine what Bill Gates needs from the government to keep Microsoft up and running, and what he needed to even get it started. Thanks to the government's research and development of the internet, Bill Gates has done even better than he would have without an internet. All the technology that Bill Gates used to start Microsoft has all been initially research at public universities through government grants.

The whole concept of progressive taxation is based on what I have discussed above.

The estate, gift, and generation skipping transfer taxes are taxes on the act of transfering wealth - they are not income taxes. That's no argument for or against any of them, but the estate, gift, and generation skipping transfer taxes do not result in double taxation of income. In fact, as noted above, the current system allows unrealized appreciation (i.e., unrealized income) to go untaxed forever, therefore eliminating income tax altogether. Again, not a bad deal.

The corporate tax, now there's double taxation of income.

And it should be noted that the current gift and estate tax rates are less than 50%, and after some fancy estate planning, effectively WELL below that, so we shouldn't conjure the image of government officials showing up to confiscate your estate when you die, leaving your loved ones to fend for themselves; if you die with a billion dollars (and no estate planning), your family still gets over half a billion.

I work for incredibly wealthy clients, and trust me when I say that the gift and estate taxes are absolutely no disincentive to earn more.


Jack R: The court said that the State of Washington can't collect more than the federal credit for state death taxes paid. "Any amount of a state estate tax not fully absorbed by a current federal credit is an invalid independent tax."

The current federal credit has been reduced to zero effective in 2005. See IRC (federal) sec. 2011(f). So if you die today in Washington, the state estate tax is zip.

So, as near as I can gather from Erik this is the situation:

There is an estate tax. However, due to the mind-numbingly complicated tax code, most *really* rich people get around it by hiring people like him to find the loopholes. So in essence, there isn't an estate tax. Well, not much of one. Unless you're not quite rich enough to afford someone like Erik.

The estate tax is just keeping a dizzying array of attorneys and accountants busy, distorting the actual GDP of the country.

Is that about right?

"He also profited from the laws of the State of WA, and the United States. And from the infrastructure that helped him develop and send his products out into the world. As his (and all our) wealth depends on the function of a stable society and its laws and mechanisms that allow for the creation of that wealth, he should pay (as should we all). It's foolish to suggest that wealth is created in a vacuum or solely as the result of one man's audacity."

Very much what Bill Gates says, Jud. Bill Gates, Sr. -- most recently to the Washington State legislature the week before last. He is a powerful and scolding critic of the regressive taxation in Washington, and says society is selling way short the contributions of those in specific and all in general who lay the foundation (in infrastructure, in research, in education) for such phenomenal achievements as have been made by his son. He scolded the legislature for the fact that the poor pay a greater percentage of their income in taxes than the rich. He asks who will argue that this is as it should be? He says it is those who have profited so significantly by their business activities that should contribute to the government that makes such achievement possible.

Most of the arguments to the contrary here sound like Ayn Rand overboard. Never there breathed a communist so rigid and so humanly shortsighted, in her reaction to the same, as she. She merely outdid Lenin at a 180 reverse.

But what would Bill Gates, Sr. know?

This is stupifyingly dumb.

Let's put the estate tax aside for a moment.

What taxes do you REALLY pay? It blows you away, in the USA.

You probably think of taxes as just Federal and State income tax. Idiot.

There's that and much more

You pay a tax on the electricity that powers the alarm clock so you can wake up early in the morning, go to work, and provide more taxable income. Peed, did ya? There's another tax, that would be for flushing. Keep going, it just gets worse.

Don't forget the FCC tax for your cable tv. The line tax on your phone, the sin tax on your beer, wine, or smokes.

Sin-free? Good for you! You'll pay taxes that much longer. Government loves that. Oh, of course then there are fees, which really aren't taxes - but of course, you knew that.


The quote is not "Money is the root of all evil", but "LOVE of money is the root of all evil". Now, start over.

Sid Anderson:
"Imagine what Bill Gates needs from the government to keep Microsoft up and running."

You mean like protectionism? Subsidies? Restraint-of-trade laws disguised as "consumer protection"? Onerous copyright and patent monopolies? The zoning laws that let companies set up these isolated campuses, cut off from interaction with the surrounding civic environment? The whole idea that corporations are people, thus shielding the true malefactors (repeat after me: corporations don't break laws and pollute, the people in charge of corporations break laws and pollute) from jail time?

Gee, thanks, but no thanks. I'd rather try my hand with less governement involvement.

Jack--That's why you're teaching tax law and I'm not. I knew the federal estate tax was being phased out (at least temporarily) but I was unaware they had eliminated the state tax credit.

I stand corrected.

I agree 100% with you. But for now, we've got what we've got and the execs at the big M should be on their knees thanking the government through large tax payments that should be used for public education, conservation, protecting our water and air, health care, and anything else that helps promote the general welfare of the American people. Instead they just made hundreds of millions more through their $3 a share tax free divedend payment.

Believe me, I'm no fan of Microsoft. One of our computers runs on Linux and we use Firefox.

As to you Jay,
Try living in a country where you pee and the sewer systems don't work. Take my word for it, it stinks to high heaven.

No, there is an estate tax. And a gift tax. And a generation skipping transfer tax. Yes, you can hire an attorney to help you reduce that tax burden, and attorneys are expensive, but not as expensive as the tax, and that's why people faced with the tax will often hire one.

If your problem is no longer that the government is robbing the rich and giving to the poor (I seemed to have convinced you on that point, Mark), but that the law is keeping attorneys busy, let's do away with criminal laws, immigration laws, the Constitution, etc... No laws, no lawyers.

Also, I'm not an estates attorney, and even without the transfer tax system, such attorneys would still have work to do.


So how many reasons do Portland's small business owners have to look northward?

No state income tax, no county I-tax, no BIT tax, better schools, fewer obstructive gov't layers and you get to leave your estate to your kids w/o the spending class appropriating it for "progressive redistribution".

Earlier, somebody dismissed estate tax criticisms as sounding like "Ayn Rand overboard".

Interesting comment as we continue to watch Atlas shrug its way across the Columbia.

The only reason to be up at 5:20 PST is if one is still drunk, or if one is hitting the river early, before work.

"So how many reasons do Portland's small business owners have to look northward?"

Oh, then they'd bitch about the gross receipts tax. What Bill Gates, Sr. seemed to be sick and scolding about was the regressivity of Washington State's tax system. Taxing the poor more than the rich. As I said, he asked who would argue that this is how it should be? He might see who -- here.

Washington State ostensibly has the most regressive tax system in the country. Yes, look northward! I suppose this new ruling could make it even more so. And give the father of the world's richest man even more to rail (in his mild-mannered but very studied way) against.

Oregon also use to have excellent schools back in the 70s and 80s before M5. It takes a few years for those tax cuts to start working through the education system. I'll place my bets: The Washington state public school system will begin to go downhill.

Sid says,
"""Oregon also use to have excellent schools back in the 70s and 80s before M5"""

Until recently Oregon outspent Washginton by 1300 per student. Money is not the problem.

Horrific state education administrators and worthless programs they perpetuate are the problem. If M5 had not come around about the same time, the CIM/CAM reform would have devoured even more than it has with NOTHING to show for it.

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