Those of you who have read this blog know that, although I consider myself staunchly conservative in my political views, I also do not have a problem with there being an estate tax. Regardless of your political persuasion, the government must be paid for. Deficits, regardless of their cause, must be addressed, reduced and eliminated. There are always long-term and short-term solutions. One of those solutions is and seemingly will always be the estate tax.
As I have pointed out previously, the main objections to an estate tax are that, first, the government is taxing money that has already been subject to a plethora of taxes (e.g., income tax, sales tax, capital gains tax, production tax, gift tax, employment tax, etc.) and, second, that the tax is perceived as a tax “penalty” for being successful. Although I agree with both objections, I also realize that an estate is a place where the government can reap tax dollars with little or no objection. The person who earned the money will be dead and the beneficiaries can still revel in their often new-found wealth, even though it was received at the cost of a tax. Although it is quite numbing to see a family write a seven-figure check to the IRS for those taxes, they are still often left with a substantial windfall with which to console themselves. My objection to the tax as it was then existing was that the estate tax exemption — which had always increased over time, was on the precipice of going from $5 million to $1 million. Even though President Obama’s earlier proposal was to cut the exemption to $3.5 million instead of $1 million, it was still a decrease, thus subjecting estates which had previously not been subject to the tax to a tax at a 35% rate.
In an earlier post, I discussed what I referred to as the NIMBY approach — Not In My Back Yard. The sentiment was that most people don’t have a problem with the estate tax… as long as they don’t have to pay it. Many liberal commentators were perplexed with wondering why anyone would have a problem with a tax that they would never have to pay, because their estates would never exceed $1 million or more. However, the common reasoning was that, based on the “American Dream” many people still clung to the possibility that, some day, they could be successful and thus did not want to have to bear that tax.
Considering both sides of the issue, Congress came to a surprisingly smart solution. The American Taxpayer Relief Act of 2012 (“ATRA 2012”) didn’t decrease the exemption… it INCREASED it. The current federal estate tax exemption is $5.25 million. It is indexed for inflation so that, over time, it will automatically increase without the need for Congressional approval or intervention. ATRA 2012 contains a portability provision so that the unused estate tax exemption amount of a deceased spouse will now be automatically available for the use of the surviving spouse. In other words, if I die with a $3.25 million estate, my wife gets to use my unused $2 million of remaining exemption, thus giving her $7.25 million that can avoid estate taxes. The bottom line is that a married couple can potentially and realistically leave a $10.5 million estate to their heirs without taxation. The only “poison” in that pill is that the former maximum marginal estate tax rate, which was 35% since 2010, was increased to a flat estate tax of 40% on all estate above the exemption amount. That means that anyone with an $10.6 million estate or with a $3 billion estate will pay taxes on the amount above the exemption at 40%. Of course, any and all estates passing to qualified charities will continue to be exempt from the estate tax. Is this a good and fair solution? I believe it is. Would I have preferred a complete repeal of the tax? By all means, yes! However, the tax is placed on individuals and estates that clearly can afford it. There had been (and continues to be) a lot of argument over President Obama’s “promise” not to raise taxes on anyone making less than $200,000 (or $250,000, depending on which speech you listened to) per year and whether he breached that promise. There was also argument and objection that the $200,000 threshold was still offensive and objectionable because it touched what many perceive to be the “middle class.” That is not a logical argument when it comes to an estate tax above $5.25 million or $10.5 million. Of course, there will still be those situations where families might be required to sell off assets to pay an estate tax debt. However, it is clear that a tax at that level will not decimate a family or leave them “wanting” when they still have more than $5.25 million – $10.5 million to allocate among heirs.
Like it or not, the estate tax is now a permanent part of our tax system. Congress did not just “kick the can down the road.” They took a firm and surprisingly reasoned approach to arrive at a solution both sides can live with. I often have mentioned that when I started practicing law, the federal estate tax exemption was $175,000. Now in 2013, most people have a house and an IRA that exceed that amount. If the estate tax exemption was still $175,000, there would be horrendous pressure on Congress to do something. Depending upon inflation and depending on the success of our economy, the day could come when a $10.5 million exemption is not enough. However, I believe the rancor over the estate tax has been quelled for many years to come.
Let’s say that I was a poor person (NOTE: I was once told we are all just one paycheck away from bankruptcy.). Possibly, I was an Occupy Wall Street participant or someone on food stamps, welfare, unemployment compensation, or any number of other government programs available to “assist” me in getting by. What would be your opinion of me? Based just on that information, would you consider me to be a good person or a bad person? Would I presumably be characterized as good, lazy, worthless, radical, bad, subversive, or evil? Would I be championed by either of the major political parties? Would I be a target for any group protesting either party or their politicians?
Based on my observations of current political trends and what I just described about me, I would be embraced by the Democratic Party as one needing the further assistance of the government and protection from the greedy, evil, wealthy corporate society. Clearly, from their position, I am in my current state as a result of corporate greed, corporate waste, and the indifference of the rich. I need the government’s protection and care. From the current view of the Republican Party, I am, most likely, minimalized because I either am not trying to be successful or I am not taking appropriate action to become successful (E.g., Newt Gingrich’s admonition, “Go get a job, right after you take a bath!”) Regardless of your political leanings, I am not a success and can really only be a political football for both sides. I am not a productive part of any society.
Now, what if — for whatever reason — I suddenly become wealthy? Does my existence and physical presence all of a sudden change for either of these political parties? Clearly, that answer is yes! Although I was just previously embraced, comforted, and consoled by the Democratic Party, now I am, most likely chastised. HOW did I become wealthy? According to our President, I clearly didn’t do it on my own! If I am now wealthy, I would venture to guess that most people would suspect my wealth did NOT come on my own accord. Of course, if I inherited that wealth, well, I don’t deserve to better my life as a result of that. I should be forced to pay most – if not all – of my inherited wealth to the government. People on both sides of the aisle seem to feel that way to differing degrees. If I was a lousy, low life, who just fell into wealth as a result of a relative’s death, I shouldn’t be permitted to raise my standard of living because I did NOTHING to earn it. Isn’t that usually the sentiment, whether silent or spoken, that accompanies news that a derelict friend just received wealth? How many of you remember The Beverly Hillbillies? The reaction is usually one of jealously or feigned jealousy, masked by the anger that a poor person is now suddenly rich through no effort of their own.
However, if the current president’s goal is that his economic policies will make everyone more successful (i.e., “a rising tide floats all boats”), what happens when I am just more successful than you? If we are all subject to the same laws, receive the same benefits and opportunities from the government or otherwise, and pay the same taxes, but I just work harder and do better than you, when do I go from being a “good person” to being a “greedy rich person”? At what income or asset level does my very nature seemingly change? At what point do I go from being embraced and championed by the Occupiers, liberals and Democrats to then being a pariah to them? If, under the same laws and opportunities, I am willing, ready and able to go to work for “the Man” but you are not, does that make me bad? If I choose to further my education in a practical field that will allow me access to more jobs and you don’t, am I still evil? Finally, what if we both follow the same goals, market our skills, services, or products in the same way to the same markets and I just end up making more money than you? At what point do I become evil and you don’t?
The point I am trying to make is that our society has clearly defined classes. We are not separated into castes, like the Indians, through markings on our foreheads. We are separated into classes based on the numbers on our Form 1040s each year. I believe these classes are popularly defined as the Poor, the Middle Class, and the Rich. According to our President, the qualification for membership in the Rich Class is that you make more than $250,000. It doesn’t matter how you make it. (NOTE: The President is part of that class!) You are just lumped into that class if you earn $250,000 or more. I disagree with that categorization. In today’s society, I am not sure that $250,000 qualifies you as rich,. It depends on your obligations and needs. Regardless, there is that invisible threshold that does move you from the Middle Class to the Rich Class. How you get there does lend itself to criticism. If you earn it, I believe you deserve to keep it. It is the reward for your success and effort. Of course, the morals of society should compel you to share some of your newly found wealth with those less fortunate. With the current, progressive tax system we have, you definitely WILL share more of it with the government! However, beyond that, why shouldn’t you be congratulated, cheered, or rewarded for your success? On the other hand, if you received your wealth through gift or inheritance, should you be treated differently? Most people are NOT congratulated or cheered when their relatives die and they become wealthy! However, what that newly made rich person does with the wealth often dictates how they are perceived in society. Mitt Romney and George Bush are and were both chided and ridiculed because they were born into wealth. However, as has been pointed out in the current campaign, Mitt Romney has worked as his state’s Governor and as the head of the Olympic Committee without pay. President John F. Kennedy, also born into wealth, rejected his salary too. All three of these men were benevolent with their family fortunes. Probably the epitome of generosity has to be Bill Gates. Creating wealth at a young age through his own skills and talents (Obama, stay out of this one! The government did more to thwart the growth of Microsoft than help it!), he is now one of the wealthiest men in the world. Well, the Bill and Melinda Gates Foundation is also one of the most impactful and benevolent charitable organizations in the world, helping eliminate disease (that foundation has given more than $500 million to The Rotary Foundation to eliminate polio), furthering educational opportunities (The Gates Millennium Scholarship) and helping other just causes. People with wealth who use it the right way should not be derided and harangued by those who have less.
The poor are defined as anyone receiving government assistance or otherwise not being able to function economically in our society. They might be on food stamps, welfare, disability, or other federal, state, or local assistance. You are defined as poor, because you can’t make it on your own. In other words, you clearly didn’t build that. To an extent, I agree with the definition of poor. However, I draw the line in assisting them — either privately or through government funds – until it is determined how they got into that class. Much like the criticism of how the wealthy person got there (e.g., earning it versus inheriting it), I want to know how and why a person is classed as being poor. I have seen seemingly “poor people” standing on street corners asking for money, while reeking of alcohol. I have also heard stories of these “corner people” making $30,000 to $50,000 a year holding their signs! I have seen people on food stamps with large, colorful tattoos and body piercings pulling wads of cash from their pockets to pay for beer and cigarettes in the store. I have also seen welfare recipients who cuss out businesspeople and refuse to work for “corporate America” when it is corporate America that could get them out of their lowly existence, if they would just cooperate.
We will always have the poor. There is a segment of society that is just down on their luck or disabled or just from a bad situation. Regardless of their desires and their efforts, they just can’t and won’t succeed. Many times, sadly, they are children from unproductive homes struggling to get by, because they don’t know any better. They deserve our help. I WANT to help them. I want to educate them on how to succeed and awaken that work ethic that can make them successful. However, I have no desire to help those people who thumb their noses at our system of free enterprise and then try to milk society for everything they can take, while doing their best to skirt around the traditional work ethic of our ancestors. “Go get a job after you take a bath” is truly a problem in our society today. People who are socially dysfunctional or educationally unmarketable – even with advanced degrees from elite and expensive institutions – want to blame the wealthy for their inability to find six-figure incomes. To use the old adage, “If you are pointing a finger at someone, there are four fingers pointing back at you!” (NOTE: That adage really doesn’t hold true, because your thumb points generally in the same direction as your pointing finger!). The bottom line is that the fault for a portion of the societal poor rests with themselves. We can argue over what percentage of the poor caused their own problems. We’ll never agree. Furthermore, there will never be a “truth detector” out there that can discern what percentage of the poor truly need our help and what percentage is just too lazy to work. However, as long as the portion of society that is poor opts to vote for more government benefits instead of more opportunities for productive work, society will continue its downward spiral.
That leaves the Middle Class. Who are they? They are what are left between the two other classes. They are supposedly what most politicians claim to be fighting for. The Middle Class is that group of people who are either working hard and trying to get ahead, trying to feed their families, and trying to aim for a better station in life, dreaming of and aiming for the time that they can move up in class to the Rich. That was always the goal I aspired to when I was younger. It was the “American Dream”! Now, children are being told that “American Dream” is vile and something to be avoided. That is because the Middle Class is also comprised of those people who have given up and don’t want to do any more. Sometimes that is caused by their lack of strength and will to achieve. Sometimes it is caused by illness or injury – sometimes self-inflicted — which takes away their desire or ability to achieve. As a result, they sit and exhaust what financial nest egg they have until it is gone. They are often the ones who then chide the government for not paying more Social Security to them, chide employers for not paying greater benefits to them after retirement, and chide corporate America for making everything so expensive. In other words, their dwindling financial situation is almost NEVER their fault. It had to have been caused by someone or something else. They have lost sight of the American Dream and, out of their jealousy or frustration, counsel their children and others against seeking that dream. If today, a young child was asked, “What do you want to be when you grow up?” and they replied, “I want to be rich and earn a million dollars a year working for a corporation on Wall Street!”, how would the media portray this child? Would the child be considered a pawn of the right? Would they be considered misguided and brainwashed by their parents? Sadly, how many people would feel the need to counsel this child that such a goal is crazy and stupid and demean the child for even thinking they could do that?
I started this article by asking when does the public perception of me change when I start accumulating wealth? Clearly, the perception depends on from where I am being observed. Wealthy, successful people seem to appreciate and welcome those who used their skills and efforts to obtain success and wealth. Poor and middle class people look on such newly made wealth as ill-gotten and deride those obtaining it. Clearly, in their eyes, the person did something illegal or evil to obtain it, even when the person gained the wealth through their own talents and hard work, or just through good luck. Of course, even with the talents and hard work, it is the belief of our own President that the person really didn’t get there as a result of their own talents and hard work! The government was the real reason for the person’s success, even though it is usually the government that puts impediments to that success virtually everywhere.
The most common frustration and derision of wealthy people seems to be laid on those with inherited wealth or those who “lucked” on to it. It is often curious to see some poor person’s story when they win the lottery. All of a sudden, family and friends come out of nowhere! Surely, the lottery winner can just give me a few hundred thousand or a million dollars! They’ve got plenty left, right? Of course, if the winner refuses to share, he is chided as being greedy, right? Then, he becomes the subject of derision and ridicule because he won’t help his “fellow man.” Forget that his fellow man” is doing very little to help himself! No, the winner is just expected to communally share his or her wealth. You might know of the story of rapper M.C. Hammer. In his heyday, he was making a tremendous amount of money. With it, he hired friends and many others to work for him. He was paying large salaries to men just to walk with him, just to stand on his stages, just to hold things for him, and just to ride in cars with him. These people had no real skill. He was trying to help them and give them some worth. As a result, just like the lottery winner, everyone was clamoring to be part of his entourage. However, when the cash stopped flowing, and he was bankrupt and foreclosed upon, where was that entourage As you might expect, almost all of them were nowhere to be found! Margaret Thatcher has often been quoted for saying, “The problem with socialism is that, eventually, you run out of other people’s money!” Truly, that is the problem with wealth because, regardless of how much I share, it is usually never considered to be enough, because there are still poor people out there.
Our society has never been able to appreciate and accept the successes of the “other guy.” That is an emotional flaw that isn’t easily remedied. I understand people feeling the way they do. It is just human nature. However, it is not the duty of our government officials to seek to pacify our human nature of jealousy and/or rage through legislation that penalizes me for being successful. No, seeing the success of another should be incentive for us all to try to achieve more. I know “the American Dream” is still alive for me.
For those of you who have read any of my earlier posts, you know that I am an unapologetic conservative. However, I do respect other viewpoints. I get quite angry when people on “both sides” (as well as any other viewpoint) seek to demean those with whom they do not agree. I KNOW that I am right! However, I respect your right to voice your own, opinion and I will listen to it…although I may not agree. What I do not agree with are those people who need to spew vitriolic hatred and demeaning and degrading insults when they disagree with statements made by that “other side.” If you don’t agree, just say so! No need to berate me because I have a differing view. For example, Rush Limbaugh was recently criticized at length for his incendiary statements about Georgetown law student Sandra Fluke. What Mr. Limbaugh said was wrong (He called her names and berated her for testifying about the need to receive birth control from the government). Granted, I am sure he believed his statements and was ready to defend them and has done so, even though he feigned an apology to Ms. Fluke. That is part of his shtick. However, as has often been said, “If you can’t say something nice about someone, don’t say anything at all.” I would point out that what is good for the goose is good for the gander. Where was the same furor from Democrats and liberals over the various comments made about Michelle Bachmann and Sarah Palin? I recently heard a recording of a radio program where comedian Louis CK was the guest. His horrendous and hateful “monologue” on Sarah Palin and her Downs Syndrome son was outright deplorable! The Louis CK talk happened in 2008, during the last presidential election. He made fun of Mrs. Palin and used the “c” word many times when referring to her and made fun of her having to care for and raise a disabled child. Why didn’t this audio get national attention then? Where was the media and liberal outrage then? In that audio, the talk show host was even laughing along and agreeing with Mr. CK’s demeaning and vulgar portrayal of Mrs. Palin. I recently saw that Louis CK was invited to present his comedy routine at the Radio and Television Correspondents’ Dinner (He later pulled out from that event, after the 2008 audio came to light). Was the invitation to speak and “entertain” an affirmation of his “style” of comedy? Jimmy Fallon’s band director, Ahmir “Questlove” Thompson, played the song “Lyin’ As* *itch” when Michelle Bachman was introduced as a guest on Fallon’s show. Although both Fallon and Questlove publicly apologized to Rep. Bachman, Questlove’s statement was, “I feel bad if her feelings were hurt. That was not my intention.” One has to wonder, what WAS his intention? No word and no apology from Louis CK for his statements. I digress…
My topic today is to try to state, as fairly as possible, the liberal argument for an estate tax. I have read articles, blogs, and books about the estate tax and feel I have a good grasp on the subject. You might be surprised to know that I am not totally opposed to such a tax. Some of the main bases for the liberal argument comes from the writings of Adam Smith, who saw the main purpose for government as being to create a degree of civil order that enforced and protected natural rights which, as the Declaration of Independence states, were “life, liberty, and the pursuit of happiness” (i.e., property). Smith stated:
Civil Government, so far as it is instituted for the security of property, is in reality instituted for the defense of the rich against the poor, or of those who have some property against those who have none at all.
One blogger’s summation of this statement was, “To this end, Smith saw that those who had the most property to secure, were also those who most benefitted from the core function of government, and therefore those who should pay the most to maintain the very order they so much benefited from.” In other words, if you achieved the wealthy status that you did, and wanted to keep it, you need to provide funds to the government to help you protect and maintain that status. Taxes, such as the estate tax, according to the argument, are not a PENALTY for acquiring the wealth; they are the costs of maintaining and protecting it. Think about it: How many poor people do you see with a security detail? Yet, most celebrities, major business owners and other people of wealth pay large sums of money to maintain a security force to protect their assets and their family. Often where there is a natural disaster or some other catastrophe you see somewhat of a breakdown in society. People vandalize stores, taking everything they can. People vandalize and harm each other since, during such a catastrophe, law enforcement is often not available. Such a disaster is often a cue for some people to take what they can. Is it a majority of the population? Certainly not! However, when civil society breaks down, it is the wealthy who suffer the consequences. If I don’t have anything, then I don’t have to worry about vandals taking things from me. However, if I own real property that is destroyed by these mobs, I lose. If I am personally attacked and lose jewelry, clothing, vehicles or other articles, I lose. Therefore, it is in my best interest to pay to maintain a well-ordered society. Think about the “Occupy” movement. They loitered in parks and in buildings, destroying things. Did it cost them anything? No (other than those who were arrested). However, what were the costs to the cities where extra police and fire protection were needed? What about the cost of cleaning up after them? That bill fell on either the taxpayers or the property owners. More than likely, the “Occupiers” weren’t working and thus weren’t paying any taxes for those civil services to begin with.
Thomas Jefferson often expressed a concern about the rise of a permanent ruling class. Jefferson once said,
I hope that we crush… in its birth the aristocracy of our moneyed corporations, which dare already to challenge our government to a trial of strength and bid defiance to the laws of our country.
Another means of silently lessening the inequality of property is to exempt all from taxation below a certain point, and to tax the higher portions of property in geometrical progression as they rise.
The first statement is the reason for many of our existing laws to protect working class people. Admittedly, many “big businesses” put profits in front of workers’ rights and such businesses must be monitored and contained. As the saying goes, “absolute power corrupts absolutely.” However, the same applies to government. The second statement from Jefferson is one of the bases for our current, progressive tax system. As you make more (or, in the case of estate taxes, have more), you pay a higher marginal rate. Presently, that maximum marginal estate tax rate is 35%. However, as of January 1, 2013, the highest marginal rate will return to 55% (where it was prior to 2010), unless Congress takes action. I was quite surprised that Congress acted in 2010 to increase the estate tax exemption and lower the maximum marginal tax rate. That change in the law – the Tax Relief, Unemployment Insurance Authorization and Job Creation Act of 2010 – was one of the last pieces of legislation of the 111th Congress controlled by the Democratic Party. Will the current Congress extend the current law, pass an entirely new one, or do nothing and let the current law expire? It should be noted that the estate tax exemption amount has NEVER gone down. When I started practicing law in the late 1970s, the federal estate tax exemption was $175,000. For many years, the exemption was $600,000. In 2002, the exemption was $1 million and in 2009, the last year of the Economic Growth and Tax Reconciliation Act of 2001 (the so-called “Bush tax cuts”), the exemption was $3.5 million. If you will recall from one of my earlier posts (“Not in my backyard!” July 3, 2011), I stated that most people don’t mind an estate tax… as long as they don’t have to pay it. Presently, people with estates between $1 million and $5 million don’t have to pay an estate tax. I would expect that, right now, they feel comfortable knowing their family will avoid that tax at their deaths. However, what if, as of January 1st, they have to deal with a tax of as much as 55% on their estate? Is it fair to say they should have planned for it, when an existing law which was allowing them to avoid such a tax simply disappeared because Congress wouldn’t act? And what if, as I describe below, the $5 million was needed to insure their financial security and keep from them relying on government assistance? Is there a problem with taxing that amount… again?
A few years ago, after I gave a talk on estate tax laws, I was approached by an attendee highly critical of my comment that Congress must regularly raise the estate tax exemption. His belief was that wealthy people should not be allowed to leave their estate to their children, because it then causes those children to be less productive. (NOTE: Isn’t that also the argument made by Conservatives and others for not extending unemployment benefits longer than 99 weeks? If we continually extend unemployment benefits, there is no incentive for the unemployed to find work. Again, I digress…) I then told him that if the wealthy cannot leave their estate to their children, then neither should be poor. I suggested to him that, using his argument, EVERYONE should be required to leave all of their assets at death to the government. He vehemently disagreed, because that would hurt poor people.
The various arguments and stories I have written above bring us all back to the same, basic question: What is an acceptable amount of wealth to retain? Clearly, that is a very subjective question! According to the U.S. Health and Human Services website, the 2012 federal poverty threshold for a family of four is $23,250 a year in income. President Obama has often used the figure of $250,000 as the start of his class of “wealthy” citizens. Of course, income does not always translate into wealth. I am sure we all know of individuals (professional athletes and other celebrities often come to mind) who earn a substantial amount of income and then, in less than a few years, are flat broke. I am also sure you know of individuals who were very successful in business for a while and then, due to either a downturn in the economy or other catastrophic event, they too went broke. Therefore, we cannot necessarily use income as the basis for determining wealth. A determination of wealth should be based on net asset worth. Using the 2007 Survey of Consumer Finances as a basis, the median net worth of a “baby boomer”, ages 55-64 was $253,000 and the mean net worth was $930,000. Of course, since 2007, the stock market has crashed and many private investments are substantially lower than they were in 2007. Yet, wouldn’t you consider someone worth $930,000 (almost a millionaire!) to be wealthy? Let’s consider what could be done with a $930,000 cash investment today. If you were to invest it in a certificate of deposit, what rate could it earn? Assuming you could make three percent, which would generate $27,900 a year, before taxes. $27,900 of income is only $4,650 more than the federal poverty threshold. A quick search online shows that the rates for a one year CD around the country range from .15% to 1.15%. Not even close to three percent! Of course, the federal 30-year Treasury note yield is 3.22%. Still, that only generates $29,946 a year in income. (Are you still interested in seeing the estate tax exemption amount fall back to $1 million?)
Let’s say that a person could make six percent (6%) on their investments. They would need to have $4,167,000 of assets earning 6% — risk free – to be able to be assured of a $250,000 annual income before taxes. However, based on current rates and assuming one would consider the 30 year Treasury yield to be viable and secure, $4,167,000 would only generate $134,177.40 a year at the current yield of 3.22%. Of course, by only using the income, the individual is preserving the $4,167,000 to pass on to his or her family. That is apparently something the individual I mentioned above, as well as many liberals, consider “taboo.” Well, what if we amortized the net worth? In that way, an individual is receiving both income and principal from his or her net worth so that the net worth decreases over time and, if they live to their normal life expectancy, they will die without a penny to their name, not leave anything to their children (who must then generate their own wealth). Of course, for the person’s own sake, let’s hope they don’t outlive their money or have a catastrophic financial emergency somewhere along the line! If that happens, I wonder who will take care of them? Gosh! It sure would be nice if they could maintain some sort of “safety net”, right? Nevertheless, if we use a 6% interest rate, a person would need just over $2,660,000 to maintain an income of $250,000 a year, if the person was seventy years old. This assumes, based on a normal life expectancy, that the person would live 17 more years (the life expectancy for a 70-year old male is 13.73 years, and for a 70-year old female it is 17 years). The same person would need to have accumulated more than $3,250,000, based on achieving a 3.22% investment rate, to be able to maintain $250,000 a year. In each scenario, all of their saved money would be completely used up in 17 years, based on the person receiving $250,000 a year.
My father worked in civil service his entire life. He was a hard worker and was very prudent with his money. I never remembered him having a credit card. He maintained a savings account and CDs. In his later years, I got him to be interested in investing in insured corporate bonds, just to obtain a better interest rate than CDs were paying. However, he was not a risk taker. The only debt he ever had was a home mortgage. He paid it off early. When my mother was in a nursing home, he paid for her care from his income and savings. He never looked to me or anyone else for financial help. He was generous! He gave to his church and other community activities. He made gifts to me and to his grandchildren. In other words, he was financially independent. All in all, I never remember him having more than a few hundred thousand dollars in savings. When he retired in 1975, his government salary was around $18,000 a year. Yet, when he died in 2006, his government pension was nearly $43,000 a year. In other words, because of his career choice of working for the government, he really didn’t have to save for his own retirement. He was provided for through the government. As a result, his concept of “financial security” was MUCH different than mine. I have been self-employed for most all of my career. If I retire, I have no guaranteed income. If I retire, all I have is what I have saved and possibly Social Security. However, we are all being told that the Social Security system is insolvent and will not last. Yet, Congress just extended the reduction in payroll taxes.(How, again, are we all going to “fix” the Social Security system so that it can continue when we are “shorting” the contributions to it?)
I’d prefer to not have to rely on my government to take care of me in my later years. I have been, and will continue, saving for my retirement. Of course, it would be great if the economy would improve so that my investments would do better. However, I will continue to hopefully work until I attain the level of savings that will guarantee my financial security. I’d prefer those savings to be at a level that would allow me to only use the income for the remainder of my life and that of my wife. However, I am realistic enough to know that may not be possible, depending on my health and my income needs. When I was young and my father was earning $18,000 a year, we lived comfortably. Now, $18,000 is well below what is considered the MINIMUM amount needed just to survive. My father told me about his father crying because he could not come up with $300, in the early 1920s, to purchase a house and three acres of land in Pennsylvania. The same land is probably worth nearly $1 million today. Therefore, if I plan my retirement based on wanting to make $250,000 a year, because that will keep me and my wife comfortable (NOTE: That is not the figure upon which I am planning. I am simply using that income figure since it is what our President considers the threshold of wealth), then what happens if the cost of living increases to a point where $250,000 a year doesn’t allow me to continue my style of living? Do I turn to my children for help? Oh, wait! They will be busy trying to generate their own “nest egg” so they can retire. Of course, if they have to factor in additional funds to take care of their parents, that means I really should refigure my entire plan above to include those sorts of financial emergencies as well. For example, what if one of my children has a catastrophic medical need? What if one of them has a substantial financial problem? I’d like to be able to help them. However, if I am relegated to only providing enough so that I can pay my own income for my normal life expectancy, then I guess I just can’t help my children.
Financial security. What is it? Is it also subjective? Of course it is! Someone who now makes $50,000 a year doesn’t need to plan on earning $250,000 a year in retirement. In fact, the rule-of-thumb is that you usually need 75% to 80% of your regular income in retirement. Therefore, someone who earns $250,000 a year while working, possibly only needs $187,500 in retirement. Someone earning $50,000 a year might only need $37,500 in retirement. However, the amount needed in retirement will also possibly increase if there are health needs, inflation, or other changes. The needs will vary depending on the health, lifestyle, needs and wants of the individual. I know of people who spend every weekend at their lake house. I know of people who spend every summer in Europe. I don’t have (or want) a lake house. Although I like Europe, I don’t necessarily want to spend every summer there. For some, a “lavish” vacation is a trip to Branson, Missouri, or Las Vegas, Nevada. For others, it is a cruise. For others, it is a week in Cancun. The “lavishness” is also subjective and depends on the availability of funds, as well as upon the desires of the person.
Financial security generally pertains to me having enough to care for myself. It typically does not include me leaving an inheritance to my children. I have seen senior citizens struggle and deny their own comfort just so they will have something to leave to their children. That is both a badge of pride for them, as well as love for their family. I, too, would like to leave something to my children when I die. It is not a matter of pride. It is a matter of being ready for emergencies – both in my life and in theirs – and being able to maintain financial security, should the cost of living rise. Does that mean I need an unlimited amount of wealth? No. Based on my examples above, $5 million would be a sufficient amount of money for me to live comfortably for the rest of my life and possibly be able to pass along some of it to my children. Would I like to have more? Sure! Will I necessarily need more? Probably not, unless things change drastically. If I die with $5 million to my name, do I want to pass it on to my children? Yes. Would I like to help charitable organizations? Sure! If I gave 20% to charity ($1 million), that would leave $4 million to be divided between my children. Will $2 million leave them financially secure? I refer you to my discussion above about my father earning $18,000 a year and living comfortably. What will housing cost in forty or fifty years when my children want to retire? What will groceries, fuel, clothing, and educations cost then for them and their children and grandchildren? In essence, although I would love to leave $2 million each to my children, which inheritance will not necessarily guarantee them financial security? Nevertheless, I’d like the opportunity to leave it to them. What if I died with $10 million to my name? Well, I can assure you I would be quite comfortable in my old age (NOTE: I intend to live to be 150!), benefit my community and charities, and I could leave a larger inheritance to my children.
I often ask clients how much is too much to leave to their children. The amount varies. However, in the above scenario, if I died with $10 million, left 20% ($2 million) to charity and then left each of my children $4 million, I would have basically provided for both my financial security and theirs. Could they then just “slack off” and just try to get by until dad dies and makes them rich? Sure. Could I provide more for them during my lifetime so that they would not have to work? Sure I could. Personally, I wouldn’t do that because I want to help them be productive. I don’t want them to be lazy, spoiled, and unappreciative of the value of a dollar. Others may not feel that way. Regardless, the current federal law allows me to leave up to $5 million to my family and other beneficiaries without an estate tax. I am comfortable with that. The current law is also indexed for inflation so that, over time, that $5 million exemption will increase. However, the current law also expires December 31st of this year. As of January 1, 2013, the federal estate tax exemption will be $1 million and the maximum marginal tax rate increases from 35% to 55%. That means that if I die next year with that same $5 million estate, my family will pay $2,045,000 in estate taxes. That will still leave $2,955,000 to be distributed to my children (or, in the above scenario, I can still leave $1 million to charity and then have a $4 million taxable estate, paying $1,495,000 in estate taxes and leaving $2,505,000 to be divided between my children). The “rub”, as I see it, is that I accumulated the $5 million through my hard work and determination. I paid taxes on it as I acquired it. I paid taxes on what it earned. I needed it to generate my own income so as not to be a burden or charge on the government. Now, with my death, I have to (or my family has to) pay taxes on it again. If our President recognizes a “wealthy” person as one making $250,000 a year and he pledges not to raise taxes on those earning that amount or less, then that tax pledge must extend to the estate tax. In other words, if he defines one earning $250,000 a year or more as “wealthy”, then he must also define one with less than $4,167,000 as not being “wealthy” since that person is using his assets to earn $250,000 a year.
What’s the solution? There is no easy answer. I again would point out that the federal estate tax exemption has never gone down. Therefore, we should urge Congress to maintain the $5 million current exemption and continue to index it for inflation. The federal estate tax generates only around one to two percent of all federal revenue. Thus, its impact on government is minimal. However, its impact on a family is often devastating. When assets have to be sold to pay that tax, families lose. They lose assets that were acquired through hard work and compliance with laws, including laws mandating the payment of taxes. Enough is enough! If I am successful, allow me to realize that success. Success is not evil. Jealousy is! However – more importantly – allow me to retain enough of my success to protect myself and my family. Is that too much to ask?
It has been called an inheritance tax, a transfer tax and a wealth tax. However, the estate tax, as it is presently called, has been part of world history dating back to Egypt in 700 B.C. and to the Roman Empire, nearly 2,000 years ago, where the Emperor Caesar Augustus imposed the Vicesina Hereditatatium. The estate tax has been a part of our country’s culture and laws since almost the beginning. The first federal “estate” tax was passed by the 5th Congress in 1797 to pay for a naval build-up in anticipation of a possible war with France. It was then called “An Act Laying Duties on Stamped Vellum, Parchment, and Paper” and required payment of 25 cents on distributions by will or estates of between $50 and $100, 50 cents on the next $500, and $1 on each additional $500. When a treaty with France was signed to avoid the war, the tax was repealed in 1802.
To raise revenue for the Civil War, a federal inheritance tax was enacted in 1862. The share of an estate passing to ancestors, to issue, or to siblings was 0.75%, to nephews and nieces was 1%, to aunts, uncles, and cousins was 3%, second cousins 4%, and to more distant relatives or to unrelated persons 5%. Surprisingly, there was also a 100% marital deduction. Such a deduction did not become part of the present estate tax law until 1982! Nevertheless, the federal inheritance tax was repealed in 1870, after the end of the war.
In 1898, another inheritance tax was passed to help finance the Spanish-American War. This tax had a top rate of 15% on estates over $1 million. However, that tax was also repealed in 1902, after the war ended.
In 1916, as the U.S. prepared to enter World War I, Congress passed yet another form of the estate tax. After an exemption of $50,000, the rates started at 1% and had a top rate of 10% on estates over $5 million. Although modified many times, our current estate tax comes from this 1916 Act. Initially, there was no marital deduction, even if the entire estate passed to a surviving spouse.
Did you notice a pattern here? The estate tax laws were enacted in each instance to fund our involvement or possible involvement in a war. After World War I, the top estate tax rate was 20% in 1926. During the Depression, the top rate soared to 70% in 1935. Of course, that was not as a result of a war but, quite frankly, was the result of a major “battle” that can best be described as class warfare. The economy was in shambles. Therefore, why not tax the rich? Sound familiar?
During World War II, the top estate tax rate was actually 77% on taxable estates greater than $10 million. The rate was still as high as 70% with only a $175,000 exemption in 1980. That was when President Reagan sought the passage of The Economic Recovery Tax Act of 1981. That act dropped the top estate tax rate from 70% to 50% and increased the deduction from the estate tax (in the form of a tax credit) to $600,000 by 1987. In 1997, Congress passed The Taxpayer Relief Act which would have increased the exemption over time to $1 million in 2006. However, The Economic Growth and Tax Reconciliation Act of 2001 (EGTRRA — also commonly referred to as the “Bush Tax Cuts”) increased the estate tax exemption to $3.5 million in 2009, and then repealed the estate tax in 2010. On December 17, 2010, President Obama signed The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, which reinstated the estate tax, but with a $5 million exemption and a 35% maximum marginal rate. However, the increased exemption and lowered marginal rate were only effective for 2010, 2011 and 2012. If no action is taken by Congress before December 31, 2012, the estate tax reverts to a $1 million exemption and a 55% maximum marginal rate, as it would have been if the 2001 and 2010 Acts were not enacted.
As most everyone knows, 2012 is a federal election year. The November election will include the election of a President as well as the entire Congress and a portion of the Senate. Both major parties are posturing, as is President Obama and the various Republican challengers. You can bet that wealth will be an issue in all of the elections! Although we are not in a Depression, as we were in the 1930s, there is a tremendous amount of class envy. I do NOT expect Congress to pass any bills related to the estate tax until after the November election. Then, it is anybody’s guess as to what might happen.
Historically, the laws pertaining to estate taxes have NEVER reduced the exemption amount. Most recently, in 2009, the exemption amount was $3.5 million and many tax and estate planners grew nervous, realizing that if Congress did not act, the exemption would fall to $1 million in 2011. Fourteen days before the end of 2010, Congress passed and President Obama signed the bill that increased the exemption to $5 million. Is it possible that Congress will decrease the exemption from $5 million? Sure. However, I feel it is unlikely. First of all, the estate tax is a very minor portion of all taxes collected by the federal government. Since World War II, federal estate tax revenue has ranged between one and two percent reaching a post-war high of 2.6% in 1972. As a result, changes to the rates really don’t affect much of the populus. Since that is the case, why not repeal it? On the other hand, since it has been used to pay for the costs of wars, why not increase it to pay for the costs of the existing wars, as well as the war on terrorism? Since it is a tax on what you have acquired during your lifetime, why penalize people for being successful? However, there is such class warfare going on right now, why not increase the tax on these wealthy individuals? I will explore both sides of these arguments….. next time.
In part one of this topic, I attempted to analyze some of the psychology behind the payment of individual income taxes. In summary, the “rub” boils down to resentment and class envy. In other words, the Liberal argument is, “You make more, you should pay more.” The Conservative argument is, “I shouldn’t have to pay more until you either pay some or cut back your spending.”
The arguments and “battle lines” are somewhat different when it comes to payroll taxes. In fact, the nature of the payroll tax is, in my humble opinion, what is stalling the economy right now and figuring out a solution here will either crash the economy or send it skyrocketing.
As an employer, I pay several employment-related taxes. As an employee, you typically have deducted from your paycheck federal, state, and sometimes local income taxes, Social Security taxes and Medicare taxes. Although you can often recover the federal, state and local income taxes that are deducted from your pay, you can’t recover the Social Security and Medicare taxes. Of course, some employees also have other deductions taken from their pay for union dues, health benefits, and other benefits offered by their employers. The employer also pays Social Security taxes, Medicare taxes, unemployment taxes, and their share of any agreed benefits, such as insurance, retirement or other “perks.” The employer is not paying any portion of the employee’s income taxes. Therefore, if personal income tax rates go up or down, the employer might have to deduct more or less. However, it typically does not impact the employer’s bottom line. If Social Security, Medicare or unemployment taxes go up or down, they do affect the employer’s profits. Similarly, if the minimum wage rate goes up, employers are affected. When the employer is affected, he or she has two options: reduce their PROFITS or reduce their WORKFORCE. Usually when payroll taxes are increased, there is usually not an offsetting increase in income (meaning the employees don’t become more productive, just because the employer has to pay more taxes). Therefore, the employer’s decision is often to reduce the size of their workforce. On the other hand, if an employer is making a sizeable profit from the existing workforce and wishes to increase that profit, they will often decide to increase their workforce so that they can make more profit. An employer is not going to hire more employees if the employer knows he or she will lose money by doing so. Logically, an INCREASE in the workforce makes the generally population happy, because there are more jobs, more income, more spending in the community and more general harmony in the country, while a DECREASE in the workforce makes the general population sad or even angry because that causes loss of income, less available funds to spend in the community, more resentment of the “greedy” employer who sacrificed their employees in order to earn obscene profits.
The argument on both sides is understandable. If I am laid off from a job, I will resent the employer, regardless of my understanding of the fact that he or she had to do it. Of course, my logical position will be that, if there must be a layoff, it shouldn’t involve MY job. If I am the employer who wants to earn a profit (and who doesn’t?), I have to decide how I can maintain a profit when I am now forced to pay more in taxes for my employees. In surveying the status of the business, it makes sense to cut out those areas that are not as profitable. Therefore, employees are usually let go. Usually, that is a difficult decision for any employer to make. It is not as it is often portrayed in books and movies that the sinister boss sits in his office, gleefully watching his devastated former employees cleaning out their desk and plodding hopelessly off into the street. It is always a difficult decision to terminate an employee. However, one must understand that if an employer has to choose between reducing their own income and reducing yours, they will typically choose to reduce yours. That is their prerogative. After all, it is their business.
Currently, employers are staring at federal laws that may require them to pay the cost of health care for their employees. If that is the case, such additional costs will take tremendously from their bottom line. Although some may be willing to do that for their existing employees, many do not want to risk having to pay that cost for new employees hired after the health care mandate. Therefore, most employers are sitting and waiting to see what will happen with the law before they start hiring. Those banking on the health care laws being repealed, thrown out by a court or modified, are waiting to hire. Those individual needing jobs and seeing that many businesses are earning large profits but not hiring are frustrated by that fact.
Most people want to work. They want to be productive. More importantly, they want to feed their families. Most usually can care less about what sort of profit their employer is making, as long as they are paid a fair wage. However, the determination of that fair wage is often the subject of dispute between employers and employees.
In the Christian Bible Gospel of Matthew there is a parable about an owner of a vineyard who went out to hire employees. He found some early in the day and agreed to pay them a fair wage for the day. Later, he went out and found others to work. Still later, he found others and invited them to work as well. Finally, just before the end of the work day, he found others to work. When it came time to pay them all, he started with the most recently hired ones and paid them for a full day’s wage. When the ones who had worked the entire day stepped forward, they expected to receive more and were mad that they were paid the same as the others who had worked much less. Although the moral of the parable is much more inciteful, it is also clear evidence of the nature of people to expect to be paid more for doing more. Similarly, it is the nature of people to want more if they are helping the employer make more. Consider professional athletes who sign long-term mega-contracts for millions of dollars. Even though the agreement might be that the athlete is to receive $3 million a year for ten years, when the athlete has an extremely successful year halfway through the contract term, they want to renegotiate their contract, because they consider themselves more valuable to the employer (owner of the team) and are therefore allowing the employer to make more money. I somehow doubt many such athletes go to the employer when the athlete has been injured or has had a bad year and DEMAND that their contract be reduced!
The fact of the matter is that an employment agreement — whether an individual agreement or a collective bargaining agreement — is a contentious relationship. The employer, whether consciously or subconsciously, generally wants to pay as little as possible for as much work and effort as possible from the employee. The employee, whether consciously or subconsciously, wants to receive as much as possible for as little effort as possible. As a result, problems arise when the employer perceives there is not enough effort being given or the employee perceives he or she is not receiving enough compensation. In a pure setting, that is really all that drives this relationship. However, the government throws another wrinkle into the relationship! It is the government that mandates whether or not the employer is paying enough or, in some cases, paying too much. It is the government that mandates safety standards that can, and usually do, increase costs of employment to the employer. It is the government that mandates contributions to unemployment plans which increases costs of employment to the employer. Finally, and most recently, it is the government that mandates benefits (i.e., health benefits) that must be provided to an employee which increases costs of employment to the employer.
When economic times are good, many of these added costs are easy to absorb. It might mean the employer is making a 19% profit, instead of a 22% profit. However, when economic times are not good, those costs are sometimes the difference between breaking even and losing 3% or the difference between making a 1% profit, or losing 2%. In those times, an employer must reduce costs, which often leads to reducing employment costs. The government cannot require that an employer must hire additional employees. However, the government can and has required that an employee be paid a certain wage and receive certain benefits. It is in the face of those requirements that employers have balked and either refused to hire or have reduced the size of their staff.
When economic times are hard, I have had attorneys looking for jobs volunteer to work at little or no pay, just to have a job in our office. I have received resumes for clerical positions where individuals are willing to work for minimum wage. I am sure in many unskilled labor positions, there are individuals willing to work at almost nothing, just to be able to earn something. However, government regulation requires they be paid a minimum amount. Additionally, due to government “assistance” in the form of welfare and/or unemployment benefits, there are workers unwilling to work for some lower paying jobs, because it will cause them to lose their government benefits or will require them to exert effort to earn as much or less than what they receive in government benefits for not working.
Although many people laugh when they hear the phrase, “I’m from the government and I’m here to help,” it is clear that the government is trying to do what it does to “promote the general welfare” of its citizens. Always, there will be government representatives arguing for more government assistance, and always, there will be people who try to take advantage of such assistance. The government rightfully should monitor working conditions. That wouldn’t have been necessary, had employers been more considerate of their employees. However, they were not and the government stepped in. The government rightfully should mandate a minimum wage. If employers had paid employees fairly, that would not have been necessary. However, it is quite clear that there is a vast disparity between what an employer and an employee might consider a fair wage. Should the government provide unemployment compensation to someone out of work? Clearly that answer is yes. However, not so clear is the question of how long it should be paid. In times past, my observations have been that, coincidentally, the laid off employee seems to find new employment about the time his or her benefits run out. Therefore, if the benefits have a defined period, it gives the employee a timeframe in which to find work.
Part of the existing dynamics of the potential workforce seem to be cultural issues. Republican presidential candidate and former House Speaker Newt Gingrich was recently criticised for his condemnation of the Occupy Wall Street participants, when he said “Go and get a job after you take a bath.” However, the point is well taken in that many individuals (not all!) presenting themselves for employment do not meet the standards of their chosen potential employer. They come for employment dirty, smelly, or covered in body piercings and tattoos. They are unkempt and have lack basic social skills. A friend recently told me of an interviewee who, during his employment interview, took out his cellphone — while still listening to the interviewer — and returned a text message! Anyone want to guess whether that individual was hired? I have been in stores where the person in front of me, covered in tattoos and body piercings, uses food stamps to purchase their groceries, and then pulls out a wad of cash to buy their cigarettes and beer. I am sure most of you have seen the “homeless and out of work” signs on the street corners with individuals receiving dollars from well-meaning passers-by who, in reality, are not homeless, but just don’t want to work. I want to say that I firmly believe that it is a minority of recipients who do try and “cheat” the system. However, the public perception of the welfare system is viewed by many as being filled by such individuals.
How do these observations of mine relate to the issue of payroll taxes? It is quite simple. It is a fact that an employer usually needs employees to conduct his or her business. How many employees the employer needs is a factor of the productivity of the employees minus the cost of their employment. The productivity of the employees is influenced by the demand for the product or service of the employer. The demand for the product or service of the employer is dictated by the strength of the economy. The strength of the economy is driven by numerous factors, one of which is government intervention. As an example, in 1991, Congress passed a luxury tax on large items, such as yachts. As a result, demand for yachts dropped so much that a company in Rhode Island that built yachts had to lay off their employees and shut down. Therefore, how did this luxury tax benefit the economy? A friend of mine would regular complain, when Sen. Edward Kennedy would promote another increase in the minimum wage, that he (my friend) was going to send Sen. Kennedy a picture of his workforce, and ask the Senator to circle those employees my friend should lay off, because he could not continue to pay all of them, if the minimum wage increased again. Indeed, tax increases affect the strength of the economy. If income taxes increase, consumers have less to spend and, as a result, will elect not to purchase as many products or services as they would otherwise. If payroll taxes increase, employers who choose to retain their same number of employees usually increase the price for their products or services to compensate for the increased cost. That usually results in consumers buying less of a product or service (lowered demand), which usually requires the employer to make less of the product or offer less of the service (lowered supply), which usually then requires the employer to reduce his or her workforce (i.e., lay off workers).
Let’s take a scenario where governmental payroll costs to an employer are reduced by ten percent. Obviously, an employer could pocket that money and increase his or her bottom line by ten percent. If that is done, the employer is usually still using the increased profits to benefit himself or herself (i.e., spending the money in the economy) or using it to replace or improve existing business assets (i.e., spending the money in the economy). Such uses of that money benefits the government (more sales taxes) and benefits other sectors of the economy. On the other hand, if the employer is driven by making more money and also possibly expanding their business, they will use the savings to hire more employees as well as to invest in better plant and equipment. Of course, there are always the distrustful souls out there who don’t want to offer employers the chance to reinvest that ten percent, fearing they won’t do that. As a result, they do not want to ease any controls (taxes) over the employers. This is similar to the current Liberal position that decreasing taxes doesn’t grow the economy. Yet, those same people now argue that the government should mandate MORE taxes on employers as a way to grow the economy. I fail to see how that is beneficial. A few years back, as a result of government and public pressure, many Wall Street firms did not pay their employees the sizeable bonuses they paid in years past. As a result, many New York businesses suffered, since those highly-bonused employees usually used their bonuses to buy luxury items in New York City. Therefore, the failure to pay the bonuses rippled across the economy and, most likely, closed several businesses or required some layoffs.
It is my opinion that the economy works best with fewer governmental controls. Will there be problems in the future? Of course there will. In fact, as has been pointed out before, if the business community took care of all social needs, we wouldn’t need the government involved in that aspect of society. However, the present festering boil in the economy is how to make more jobs available. The general consensus is that employers do want to hire and to increase their businesses. However, they are not doing so because they are afraid to do so. If you are an employer (and, even if you are not, put yourself in this position) and you need more employees for your company, do you hire them now, when there is a risk that, in less than two years, you will be required by law to pay for their health care, or do you wait to see if there is some clarification in the health care laws? If you hire them now, do you then lay them off if the health care mandates become effective (and risk the public scrutiny for doing so), or do you reduce your profits so that you can pay these benefits? Realize that benefits are in addition to wages paid for their services. Former Speaker Nancy Pelosi stated that there was a constitutional right to health care. Although I don’t recall seeing that in the Constitution, I realize that sentiment is the force that is driving the Obama administration’s goal of providing universal health care. However, it presently appears to be an example of the adage of “Winning the battle, but losing the war.” The administration may have, through whatever means you wish to allege, obtained the passage of their health care act. But, since the business community is using it — rightfully or wrongfully — to freeze or decrease employment levels, will it be that the passage of health care will cause a complete economic collapse? Reducing instead of increasing payroll costs is the logical way to grow the economy. The sooner our leaders figure that out, the sooner our economic system will start moving forward. It has always worked in the past. It will work again.
Before one can really gripe about a tax, he or she must understand what a tax is. According to Wikipedia (Yes, I know that’s not really an authoritative source, but bear with me!), a tax is defined as:
“To tax (from the Latin taxo; “I estimate”) is to impose a financial charge or other levy upon a taxpayer (an individual or legal entity) by a state or the functional equivalent of a state such that failure to pay is punishable by law.
Taxes are also imposed by many subnational entities. Taxes consist of direct tax or indirect tax, and may be paid in money or as its labour equivalent (often but not always unpaid labour). A tax may be defined as a “pecuniary burden laid upon individuals or property owners to support the government […] a payment exacted by legislative authority.” A tax “is not a voluntary payment or donation, but an enforced contribution, exacted pursuant to legislative authority” and is “any contribution imposed by government […] whether under the name of toll, tribute, tallage, gabel, impost, duty, custom, excise, subsidy, aid, supply, or other name.”
(NOTE: I would point out, for the benefit of Warren Buffet and those other uber-wealthy individuals who want more taxes that they can make a “voluntary payment or donation” to the government at any time, without being required to do so in the form of a tax. Mr. Buffett and Bill Gates each have huge foundations that provide them with sizeable income tax deductions so that they can pay LESS in the way of taxes. If both of them were truly sincere about wanting to help the government, why don’t they give their charitable contributions to the federal government instead? More on that in a later post!)
Although people will always grumble about taxes, they are necessary. We can’t have government services unless there is a means to pay for them. Now, before some of you state, “We don’t need government services,” realize that I am talking about, among other things, what are provided for in the Preamble to the U.S. Constitution where it states that the government of the people will, “establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare.” Those things cannot be done without money. Therefore, tax become necessary. I’m not sure that anyone disagrees with that statement. If you do disagree, please tell me how those services are paid for. Therefore, the disagreement is over the tax rate and who pays it and for what.
There is quite a psychology behind taxes and the payment of taxes. What if you walk into a movie theatre and see that your favorite movie is playing. The ticket price is $8.00 and you willingly pay it because, of course, you want to see the movie and know that you must pay an admission price to do so. Then, as you walk away from the ticket counter, fully satisfied with your purchase, the next person comes up and buys a ticket. However, because they tell the ticket agent they don’t earn very much, they are only charged $4.00 for the same ticket you bought for $8.00. The next person steps forward and, after some discussion with the ticket agent about that they barely earn enough to feed their family, is allowed to get into the movie for free. Finally, the next person steps forward and, after some discussion with the ticket agent that they aren’t employed at all, but REALLY want to see the movie, is GIVEN $8.00 and a ticket to attend the movie. Clearly, you — having paid full price — would be upset, frustrated, and possibly resentful. After all, each of you is seeing the same movie! I believe those are all feeling felt by taxpayers. The problem even gets worse when the movie theatre announces that they will have to cut back on the number of movies shown unless they receive more money and the customers who aren’t paying or are being paid to attend start demanding that you (not them) pay more to attend. In addition, those who are being paid to attend start loudly threatening protests and civil action if their paid stipend to attend the movie is cut back or eliminated. Then, to make matters worse, they also complain that the movie theater is not satisfactory enough for their needs and it needs to be improved and modernized and that, by golly, the paying patrons need to pay for that too.
Depending upon where you are in that scenario, your argument may be different. If you are the one paying the $8.00, you certainly don’t want to pay more if there are others either getting in free or receiving money to go to the movie. It is, logically, your position that those getting paid to attend should be denied such payment (or that such payment be cut back) and either not permitted to attend or are permitted to attend at no charge. It clearly makes sense to argue, “Why should I be asked to pay more for a movie that others are being paid to watch?” Additionally, you, as a paying patron, will be livid over the fact that these “freeloaders” are now demanding that you pay to improve the theater! Excuse me?
Those people who are not paying to see the movie clearly have no problem with or objection to those who are paying having to pay more. In fact, the ones getting in free might even feel threatened with the thought that, if those who are paying don’t pay more, they (the ones getting in free) might have to start paying. Therefore, since it is not costing them any more, they would approve of a higher price for the paying attendees. They also would welcome improvements to the theater because they aren’t having to pay for them and they will realize the full benefit of the improvements. Therefore, their movie experience will be enhanced at no cost to them. Such a deal!
Those who are getting in for a reduced price will probably object to having to pay more because the reason they were getting in for a reduced price was based on the fact that they are not earning enough to afford to pay full price. Therefore, since you can afford to pay $8.00 to attend the movie, it makes sense to them that you should be able to afford $12.00 to attend, just so that the others might not be affected.
The current tax system in the United States and in many other countries is not fair. Unfortunately, little is being done to make it fair. In fact, the current trend is really exacerbating the problem. The call is for the rich to pay more. Similar to my movie theatre analogy, it is the majority of those not current paying taxes that are lobbying and demanding that those already paying taxes pay more. Is is that same group that is also lobbying for improvements to the social services offered by the government (e.g., universal health care).
According to the National Taxpayers Union, as of 2008, the federal government collected $2.5 trillion. 45% of that amount came from individual income taxes and 36% came from payroll taxes. In other words, 81% of all federal income comes from working citizens and the companies that employ them. However, of that federal income, 25% of all income tax filers paid 86.34% of those taxes. The top one percent of all filers (those earning more than $380,354) paid 38.02% of all income taxes. The top five percent (those earning more than $159,619) paid 58.72 percent. On the other side, the bottom 50% of all filers (those earning less than $33,048) paid only 2.7% of the taxes collected. Why is that? Of course, it makes sense that those earning more be required to pay more. However, with the economy struggling, why are we still letting people in to watch this “movie” for free?
You and I hopefully know that if your pay is cut or if you have unusually high expenses, you have to either cut back on other spending or do without. If your disposable income goes down, you can’t continue to eat at fancy restaurants, buy top quality clothes, and go out for entertainment purposes as often. As an estate planning attorney, I deal regularly with elderly couples who are having to substantially cut back their expenses because one of them requires nursing care or health care assistance. Similarly, when a government “earns” less, it must make cutbacks. Although it is logical and expected that each particularly government recipient will argue to maintain their current kind of compensation at its current level (or higher), something has to give. This is the “gridlock” that now exists in Washington. The Conservatives argue there should be cutbacks in spending to make up for the revenue shortfalls. I am one who agrees with that position. When our family has earned less or had greater expenses, we don’t spend more. We spend less. The Liberals argue there should be higher taxes to make up the revenue shortfalls so that necessary or allegedly necessary services don’t have to be cut back. The typical “poster child” for the Conservatives is defense spending. Similarly, the “poster children” for the Liberals are Social Security and Medicare. The Conservatives argue that entitlement programs have grown too large or are unnecessary or must be cut back until government revenues increase. Otherwise, if we cut back on defense spending, we endanger the safety and well-being of our citizens. The Liberals argue that we can’t cut social spending or “throw grandma off the cliff” while the “rich” corporations make obscene profits. The two sides are now so polarized, neither is willing to give in and, with an election year only days away, neither side will give in, for fear of making their own political party appear weak just before the election.
Is there a way to mediate a solution between these factions? I can only offer a suggestion. However, it might shock you! I say we increase taxes by two percent… on EVERYBODY. Clearly, someone earning $1 million a year will pay more. However, even that percentage of the population receiving welfare will be required to pay the two percent tax, until the budget is in balance (By the way, I DO favor an amendment requiring a balanced budget. In fact, I like the proposal of political satirist Mark Russell, who suggested that we take away Congress’s salaries and put them on commission! According to him, “Just wait and SEE how fast they will start turning a profit!”). According to my research, 3.4% of Americans receive a welfare check of $366 a month. That is clearly a paltry amount that no one can really live on. However, the welfare system was never designed to be a sole source of income. $366 a month equates to $4,392 a year. Two percent of that amount is $87.84. The federal Supplemental Security Income (SSI) payment to be made for 2012 is $698 for a single person and $1,048 a month for a married couple. Two percent of the single person’s payment would be $167.73 a year and two percent of a married couple’s payment would be $251.57 a year. Now, before you scream that it is obscene to require these poor people to have to pay a tax on what they receive, please realize that the 2012 payments will include a cost-of-living adjustment of $291.43 for a single person and $437.10 for a married couple. In other words, those receiving SSI in 2011 are receiving less than what they would receive in 2012, even WITH the deduction of a two percent tax. Is a two percent tax an inconvenience? Clearly the answer is “yes!” However, it is an inconvenience that is borne by and shared among all citizens. It is not stoking the fires of “class warfare.” Yes, the rich are paying more. However, proportionately, so is everyone else.
Here’s a radical, but simple, idea: Let’s charge an admission fee to live in this country! If you want to live here and enjoy our “movie”, you have got to pay a minimum fee of $10 a year. With 250 million people, that will immediately add $2.5 billion a year in revenue. Even if someone is not earning money, due either to disability or lack of employment, they pay $10 a year from their government benefits or unemployment payments. (QUERY: How long should the government pay someone to stay unemployed? Talk amongst yourselves….) In that way, everyone — young or old, rich or poor, has a stake in government. A few years ago, Vice President Joe Biden was ridiculed for making the statement that it is “patriotic” to pay taxes. Well, if that is so, why doesn’t everyone become patriotic? Or are just wealthy individuals required to be patriotic? I would even go so far as requiring payment of this $10 “admission fee” before one can vote. Otherwise, you allow those with no stake in the government to control the government. Would you give your credit card to a homeless person? No! Would you give a blank check to a stranger? No! Allowing those not paying taxes to control the government often creates the same results. It’s easy for someone not paying taxes to find no objection to raising income tax rates and/or to spending more. However, what if agreeing to raise income taxes even as little as one percent meant that, instead of paying $10 a year, that same person is now required to pay $11?
Shortly after the 2008 election, I watched a YouTube video of a man leaving a polling place stating, “All I know is that if I vote for Obama, my mortgage payment will be paid and my car payment will be paid” Now, I don’t know if that video was real or staged. I don’t know if that person really thought that because he voted for Obama that he would really receive that sort of benefit, But it highlights the danger of empowering people with no vested interest in creating the government’s income to control how that income is spent. Although income taxes have been the largest single source of federal revenue since 1950, other taxes — including estate taxes — figure into the revenue stream, although in a much smaller amount. We’ll discuss them later…..