Tax on accumulated wealth

Practical and Practice issues for Professionals who practice in the area of taxation. Moral, social and economic issues relating to taxes, including international issues, the U.S. Internal Revenue Code, state tax issues, etc. Not for "tax protestor" issues, which should be posted in the "tax protestor" forum above. The advice or opinion given herein should not be relied on for any purpose whatsoever. Also examines cookie-cutter deals that have no economic substance but exist only to generate losses, as marketed by everybody from solo practitioner tax lawyers to the major accounting firms.
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Tax on accumulated wealth

Postby Colonel_Buck » Wed Jan 21, 2015 3:36 pm

From last nights' SOTU:

"And let's close the loopholes that lead to inequality by allowing the top one percent to avoid paying taxes on their accumulated wealth."

Notice he said wealth, not income. Would this be a direct tax or an indirect tax? Would it be something like "Send us X percentage of your net worth every year on so-and-so date"?

What would be the difference between a tax on wealth and the property tax that we pay out here in California? For that matter, what is to prevent California or any other state from taxing "accumulated wealth"?
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Re: Tax on accumulated wealth

Postby Judge Roy Bean » Wed Jan 21, 2015 4:03 pm

Colonel_Buck wrote: ... For that matter, what is to prevent California or any other state from taxing "accumulated wealth"?


Only the ballot box.
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Re: Tax on accumulated wealth

Postby Pottapaug1938 » Wed Jan 21, 2015 4:22 pm

There wouldn't be a due process issue, here?
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Re: Tax on accumulated wealth

Postby The Observer » Wed Jan 21, 2015 5:00 pm

The estate tax does not count as a tax on accumulated wealth?
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Re: Tax on accumulated wealth

Postby AndyK » Wed Jan 21, 2015 5:08 pm

And what about the "Personal Property" tax levied by several states.

For example, in South Caroina (If I keep the vehicles long enough) I might end up paying the state more than I paid the dealer.
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Re: Tax on accumulated wealth

Postby Cpt Banjo » Wed Jan 21, 2015 6:00 pm

The Observer wrote:The estate tax does not count as a tax on accumulated wealth?


The estate tax is a tax on the transfer of property at death, just as the gift tax is a tax on the transfer of property during lifetime. Both are recognized as excises, not taxes upon the mere ownership of property. See Knowlton v. Moore, 178 U.S. 41 (1901) and Bromley v. McCaughn, 280 U.S. 124 (1929).

What the Administration wants to get rid of is the basis step-up that occurs at death. For example, suppose you buy a stock for $10,000 and it increases in value to $1 million. If you were to sell it, you'd pay a capital gains tax on $990,000. But if you were to die, your estate or your beneficiaries could sell it and pay no capital gains tax because the tax basis in the stock gets increased to its date-of-death value. It is this built-in gain that the proposal would subject to the income tax.
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Re: Tax on accumulated wealth

Postby Famspear » Wed Jan 21, 2015 6:02 pm

For federal constitutional law purposes, a true property tax -- a tax on property by reason of its ownership - would be a direct tax, and would be required to be apportioned among the states.

A local ad valorem property tax would typically be a tax on property by reason of its ownership. In Texas, for example, if you own the property on January 1st of a given year, YOU owe the tax -- technically, even if you sell the property later during the year.

By contrast, the federal estate tax is not a true property tax. It is not a tax on property by reason of its ownership. It is a tax on an event -- the transfer of the ownership of the taxable estate.

Similarly, the federal income tax, generally, is not a direct tax. Example: The case of a receipt of money as compensation for services. The federal income tax is not a tax on the money by reason of its ownership. It is a tax on the event -- the receipt of the money.

This can be illustrated in part by the point that even the receipt of illegal income -- the receipt by a thief of money he stole -- is a taxable event to the thief for federal income tax purposes, even though the thief does not legally own the money (at least, as against the person from whom the money was stolen). Indeed, the thief is required to report the receipt as income even where the thief eventually is forced to return the money to the person from whom it was stolen. In fact, the thief may or may not be able to take a deduction for having to return the money to the person from whom it was stolen.
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Re: Tax on accumulated wealth

Postby Jeffrey » Wed Jan 21, 2015 6:07 pm

I don't think he was proposing a property tax despite the phrasing.

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Re: Tax on accumulated wealth

Postby Famspear » Wed Jan 21, 2015 6:13 pm

By the way, local property taxes in Texas are not actually handled according to what the statute says.

Under the statute, if you own a piece of real estate on January 1 of a given year, you are personally liable for the tax, even if you sell the property six months later, on July 1. But, the tax amount isn't even determined until late summer early fall.

And if the taxing authority has received adequate notice that the buyer bought the property on July 1, the taxing authority will bill the buyer (around November or December) for the entire amount of tax for which the seller is personally liable.

The buyer's tax liability is in rem. The seller's liability for the same tax is a personal liability.

In Texas, this is handled by having the buyer and seller pro-rate the estimated total liability for "the entire year" (even though the liability is technically imposed on the person who owned the property on January 1) at the closing on July 1, and crediting the buyer, so that the buyer will be expected to pay the full bill to the taxing authority-- which bill, again, is typically issued to the buyer, in November or December.
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Re: Tax on accumulated wealth

Postby Arthur Rubin » Wed Jan 21, 2015 9:44 pm

Replacing the estate tax with a capital gains tax would make sense, although it would be hard on those who expect the "step-up" to make up for their loss of cost records, and tough on those states which have an estate tax based on the Federal estate tax. Adding a capital gains tax to the estate tax is (at least intended as) double-taxation.
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Re: Tax on accumulated wealth

Postby Pottapaug1938 » Wed Jan 21, 2015 9:45 pm

When I did real estate closings in Massachusetts, there was always an adjustment of some sort for property taxes; and I remember calling city and town halls to get the per diem amount.
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Re: Tax on accumulated wealth

Postby JamesVincent » Wed Jan 21, 2015 10:01 pm

Any way it would work out it would still be a crappy tax. Even just the general statement of it sounds like it's meant to be double taxation. By accumulating wealth my guess would be that it's a tax on either your net worth or a tax on your holdings. Either way you would taxed a second time on income you have been previously taxed on. Coupled with the restrictions on how much you're allowed to put into IRAs it sounds like it's going to be used to force people to pay out twice.
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Re: Tax on accumulated wealth

Postby Cpt Banjo » Wed Jan 21, 2015 10:24 pm

Arthur Rubin wrote:Replacing the estate tax with a capital gains tax would make sense, although it would be hard on those who expect the "step-up" to make up for their loss of cost records, and tough on those states which have an estate tax based on the Federal estate tax. Adding a capital gains tax to the estate tax is (at least intended as) double-taxation.


Many of the states whose estate tax is based upon the federal tax are already in a bad way because their tax is based on the maximum credit for state death taxes that used to be allowed under the federal estate tax regime. But federal law has replaced the credit for state death taxes with a deduction, so those states (e.g., Texas) effectively have no estate tax.

As far as double taxation is concerned, it's my understanding that under the proposal there would be a federal estate tax deduction for the amount of income tax paid on the built-in gain.

Of course, what really galls me is the Administration's calling basis step-up the "trust fund loophole", which is obviously designed to conjure up the image of yuppies tapping their trust funds to live an indolent lifestyle while everyone else has to work. In fact, it has nothing at all to do with trust funds, and it may even be that eliminating basis step-up would increase the use of trusts. See the article at http://www.forbes.com/sites/janetnovack ... of-trusts/
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Re: Tax on accumulated wealth

Postby Arthur Rubin » Wed Jan 21, 2015 11:45 pm

Cpt Banjo wrote:As far as double taxation is concerned, it's my understanding that under the proposal there would be a federal estate tax deduction for the amount of income tax paid on the built-in gain.
If that's correct, it's clearly inadequate to avoid double-taxation, although it does prevent the total Federal tax rate from exceeding 100%. Removal of the "built-in gain" entirely from the estate would avoid double-taxation, and have the (probably) intended side-effect of only hurting those who are marginally rich, as the "capital gains tax" rate would probably be at a maximum of 23.8%, and the estate tax rate would be at a minimum of 30%.
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Re: Tax on accumulated wealth

Postby Cpt Banjo » Thu Jan 22, 2015 12:45 am

Arthur Rubin wrote:
Cpt Banjo wrote:As far as double taxation is concerned, it's my understanding that under the proposal there would be a federal estate tax deduction for the amount of income tax paid on the built-in gain.
If that's correct, it's clearly inadequate to avoid double-taxation, although it does prevent the total Federal tax rate from exceeding 100%.


I can't conceive that anyone in the Administration was worried about completely eliminating the effects of double taxation. The situation is somewhat similar to the double tax on what the Code calls "income in respect of a decedent", which is income that a decedent earned but that wasn't taxed during his lifetime. Non-Roth IRA's, pension plans, and deferred compensation are the prime examples. The law includes the gross amount of such items in the decedent's gross estate for estate tax purposes and imposes an income tax on the gross amount payable to the beneficiaries. An income tax deduction is allowed for the estate tax attributable to the IRD, but this clearly doesn't eliminate the double tax effect.

The screwy thing about the proposal (well, one of them, at least) is that there's only a $100,000 per-person exemption for the built-in gains tax at death, which is unrelated to the size of the decedent's estate (this is in addition to a exemption for the built-in gain on a personal residence, which already exists under current law, and a special exemption for closely-held businesses). So, for example, if John Doe dies with a net worth of $300,000 consisting of a house worth $100,000 and $200,000 of stock he acquired ages ago that has a basis of only $25,000, his estate ends up paying a capital gains tax on $75,000.

Clearly, John shouldn't be considered wealthy, yet he (or more precisely, his estate) is being hit with a tax. This certainly isn't middle-class tax relief.
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Re: Tax on accumulated wealth

Postby Number Six » Thu Jan 22, 2015 4:49 am

Aside from estate (death) taxes in how many other circumstances does the government require a complete inventory of assets held?
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Re: Tax on accumulated wealth

Postby Cpt Banjo » Thu Jan 22, 2015 2:38 pm

Number Six wrote:Aside from estate (death) taxes in how many other circumstances does the government require a complete inventory of assets held?


When a will is probated in Texas the Executor normally has to file an inventory with the Probate Court listing all of the assets that passed under the will. This requirement is intended to protect the interests of the creditors of the estate as well as the beneficiaries. The inventory would not include assets that passed in some other fashion, such as life insurance proceeds, IRA or pension plan accounts, and survivorship bank accounts. It would also exclude real property located outside of Texas.

In order to protect the privacy of the beneficiaries, a recent change in the law allows the executor to not file the inventory with the court but instead to give a copy to the beneficiaries and file an affidavit with the court stating that he has done so. This procedure is available only if there are no debts owing by the estate.

Before the law was changed, many people used revocable trusts to address privacy concerns because the assets in the trust would not have to be listed in the inventory.
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Re: Tax on accumulated wealth

Postby Number Six » Fri Jan 23, 2015 3:01 am

Plus anyone applying for public assistance or other government sponsored programs is usually required to show financial need and declare all assets.
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Re: Tax on accumulated wealth

Postby LaVidaRoja » Fri Jan 23, 2015 3:34 am

Oh yes, Number 6, but that's the POOR. Of COURSE, they are expected to divulge everything. But the RICH, you understand, are very, very different.
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Re: Tax on accumulated wealth

Postby Arthur Rubin » Fri Jan 23, 2015 10:33 am

Cpt Banjo wrote:
Number Six wrote:Aside from estate (death) taxes in how many other circumstances does the government require a complete inventory of assets held?


When a will is probated in Texas the Executor normally has to file an inventory with the Probate Court listing all of the assets that passed under the will. This requirement is intended to protect the interests of the creditors of the estate as well as the beneficiaries. The inventory would not include assets that passed in some other fashion, such as life insurance proceeds, IRA or pension plan accounts, and survivorship bank accounts. It would also exclude real property located outside of Texas.
Not exactly because of death taxes, but because of death. I don't see that as a significant counterexample to "Number 6"'s premise.
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