Tax question

I was having a conversation with a friend today that involved real estate and eventually we ended up on the topic of inheritance tax and taxation in general. My knowledge of taxes is a bit inadequate (other than the fact that i pay what always seems too many) so feel free to help me become more informed. Here's something i'm trying to understand. When you work and recieve a paycheck you're taxed around 40% for Soc. Security, etc. When you buy something with that already taxed income you're taxed again at a retailer. Same goes when you pay bills. You're hit with Fed./State "charges." Then when you finally, if ever, recieve Soc. Security income, thats taxed as well. And then when you die you pay (or rather, those closest to you) pay a large inheritance tax. Maybe i'm wrong, but aren't we being taxed 4 times in a row?
1. Paycheck
2. Goods,Services, and Property
3. Soc. Security (which we were taxed for in the paycheck)
4. Inheritance tax

This either just doesn't seem fair or its a very inefficient way to do things. I admit, my knowledge is unfortunately limited in this area so anyone with more knowledge please feel free to chime in. How many times is it okay to pay taxes on money you've worked hard to earn?

Tax basically serves two purposes. One is to raise revenue. The other is as a manipulative tool to encourage or discourage behavior.

For revenue, there is no need to tax anything other than commerce. The taxing of individuals provides unnecessary complexity. Individuals would be paying taxes through commerce's need to recoup such "operating expenses". Costs would include that "business expense", and the consumer would be the one ultimately paying all taxes. The way it is, the consumer is the one paying all taxes anyway, but having to endure complexity.

The undesirable aspect of having commerce be the "tax collector" though, is the loss of power afforded by the behavior modification aspect of taxes.

The federal government is no longer satisfied with governing the states, and letting the states govern the people. The real power is in governing the individual. The states are becoming more and more simple jurisdictions of U.S. territory. The concept of congress as a collection of representatives of states is giving way to congress as federal representatives to the states.

States? Japan is a state, as is France, Italy, etc. Just ask Colin Powell, the secretary of state. New York, Pennsylvania, Virginia etc used to be states. Now they are merely provinces of Washington DC.

A great deal of tax money is simply used to buy votes. Billions of so-called farm subsidies for bad, lazy or pretend farmers, billions and billions in welfare, food stamps etc, for those who don't pretend to be anything but parasites, billions for pills for those who assume it's their God given right to force others to pay for their medicine, etc. As long as we elect low-lifes to the government, it will only get worse.

I'm thinking of running for office as a member of the pander party. I'll pander to everyone. I don't see how I could lose.

I don't have a problem with inheritance tax, at least, not, er, inherently. The heir, not the decedent, is the one taxed. No one is entitled to inherit anything, so I don't see why this sort of windfall should be excluded from taxation while other forms of earned income, capital gains, gambling/lotto winnings, etc are taxed. That said, I don't think the 55% rate is very fair, even given the substantial amount that is exempt from taxation (~$500,000 last I heard, but probably more now after Bush's adjustments).

I like the way you think- my kind of logic all the way. I hesitate to say anything on this subject since I am a nemesis here in Washington D.C.- but just so you are aware- we have it worse than you might want to know. Things are going to heat up in a big way in America unless some serious tax reform occurs.and quick! /ubbthreads/images/graemlins/whoopin.gif
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Empath said:
Tax basically serves two purposes. One is to raise revenue. The other is as a manipulative tool to encourage or discourage behavior.

For revenue, there is no need to tax anything other than commerce. The taxing of individuals provides unnecessary complexity. Individuals would be paying taxes through commerce's need to recoup such "operating expenses". Costs would include that "business expense", and the consumer would be the one ultimately paying all taxes. The way it is, the consumer is the one paying all taxes anyway, but having to endure complexity.

The undesirable aspect of having commerce be the "tax collector" though, is the loss of power afforded by the behavior modification aspect of taxes.

The federal government is no longer satisfied with governing the states, and letting the states govern the people. The real power is in governing the individual. The states are becoming more and more simple jurisdictions of U.S. territory. The concept of congress as a collection of representatives of states is giving way to congress as federal representatives to the states.

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Speaking of inheritance tax, isn't it gradually being reduced to its lowest point in i think 6 years or so? But after that it jumps back up to what, 60%? So maybe you're exempt unless you're willing away more than $500,000? But that still doesn't seem logical to tax money that someone has spent a lifetime earning and has already paid countless taxes on. Was it originally meant to curb wealthy families from maintaining too much control and wealth? Wouldn't someone with that much money have attorneys who could minimize the inheritance tax impact by transferring assests, etc. before they die?
I do see the logic in Empath's post about only taxing commerce. It would seem to take away much of the taxation confusion. Which leads me to another thought. Shouldn't filing your income tax paperwork for example be an easier process? Isn't the complexity of the whole thing part of the problem?

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Aten_Imago said:
I hesitate to say anything on this subject since I am a nemesis here in Washington D.C.- but just so you are aware- we have it worse than you might want to know. Things are going to heat up in a big way in America unless some serious tax reform occurs.and quick!

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Couldn't you just give us a little hint about how and why things are going to heat up in a big way? And how do we have it worse than we know?

What form would "serious tax reform" have to take?

Inquiring minds want to know...... /ubbthreads/images/graemlins/confused.gif

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Empath said:
For revenue, there is no need to tax anything other than commerce. The taxing of individuals provides unnecessary complexity. Individuals would be paying taxes through commerce's need to recoup such "operating expenses". Costs would include that "business expense", and the consumer would be the one ultimately paying all taxes. The way it is, the consumer is the one paying all taxes anyway, but having to endure complexity.


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Are you talking about the so-called "value-added tax"? This has been debated for a long time. It seems that the complication of assessing taxes all through the manufacturing and distribution process might be just as complicated or more complicated than the individual tax. Wouldn't businesses have to file returns for every business-to-business as well as consumer transaction?

How would this tax be assessed on, say, goods from China? China is the world's factory and our retail shelves are filled with their products. Or on goods from NAFTA countries?

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tygger said:
Speaking of inheritance tax, isn't it gradually being reduced to its lowest point in i think 6 years or so? But after that it jumps back up to what, 60%? So maybe you're exempt unless you're willing away more than $500,000?

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That's essentially correct. The numbers may be a bit off, but that's the idea.

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tygger said:But that still doesn't seem logical to tax money that someone has spent a lifetime earning and has already paid countless taxes on.

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Why not? The heir hasn't spent *any* time or effort earning that money. The heir is the one taxed, not the person who earned it. Be thankful the first $600k or so is exempt.

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tygger said:
Was it originally meant to curb wealthy families from maintaining too much control and wealth? Wouldn't someone with that much money have attorneys who could minimize the inheritance tax impact by transferring assests, etc. before they die?

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Yes. There are a number of techniques for shielding assets.

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tygger said:
I do see the logic in Empath's post about only taxing commerce. It would seem to take away much of the taxation confusion. Which leads me to another thought. Shouldn't filing your income tax paperwork for example be an easier process? Isn't the complexity of the whole thing part of the problem?

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Yes. I think if polititians were forced to do their own taxes, we'd see a MUCH simpler system in a year. Hell, I'd even be willing to let them use turbotax.

Doesn't the US have some of the LOWEST tax rates in the world? We are also the wealthiest nation. We have good roads, public education, good infrastructure, and the list goes on.

That said, I personally have a lot of tax stuff to keep up with. I have a filing cabinet just for this. Each year I take the summary of all this (medical bills, drug bills, car mileage, house expenses, mortgage interest, etc) to my accountant. About 2 weeks later I pick up a packet, sign it, and mail it. No big deal... costs me about $250 for him to do my personal and corporate taxes.

I know that I can't withdraw from our tax system so I have embraced it and try to work within its framework and rules. As a result I only paid approx 2% of my income as tax this past year (that's federal and state combined).

If everyone paid 10% on money recieved ther would not be a surplus. Go figure.

I always thought that taxing Social Security was about the stupidest thing I could imagine. After all, the money is coming FROM the government in the first place, and then they take some of it back? And on every trip through the system you loose value as it gets eaten up by pushing paper around. They should just give you a bit less to start with and not make you pay taxes on it.

It is my experience with inheritance and capital gains taxes that they are much more a burden on the not so wealthy. It is quite possible for an average working guy to save up and invest money over the course of his or her life in excess of hundreds of thousands of dollars. Then when they want to give it to their children you pay an exorbitant amount of money. Those that are truly "rich" don't give money to their children but setup trust accounts or holding companies to pay their kids a salary and so none of the money is taxed upon their death. But that only works when you have millions.

Same thing for capital gains. When a truly wealthy fellow sells stock it's a company or something that does it and has a lot more tax options. When my retired mother sells stock to do some work on the house, even though she paid taxes on the money she made to invest in the first place years ago, she still has to sell 40% more than the cost of the work to pay the taxes.

It is my conclusion that anything that reduces those taxes are good for us middle class folks and have no impact on the truly rich at all. Anybody that tells you anything different is running for office /ubbthreads/images/graemlins/grin.gif

When someone gets older, if inheritance tax is going to be an issue, they could start gifting to their children/etc. Right now the IRS allows a yearly gift of $11,000. That means that your parents could collectively give you and your wife $44,000 a year - tax free. Father to you 11k, father to your wife 11k, mother to you 11k, mother to your wife 11k = total $44k.

Probably the biggest problem the middle class has with taxes is that they don't take advantage of even the most modest tax breaks.

Possibly the reason most people don't take advantage of their tax breaks is the seemingly overwhelming amount of cryptic paperwork they must go through (or pay someone else to go through it) in order to understand their exemptions. I agree with James about Soc. Security being taxed. Its ridiculous to tax what little money they send you after you've worked your @ss off. But another issue with Soc. Security is the process of deducting money from your Soc. Security check every month if you make a monthly salary over a certain dollar amount. If you're 65 or over and still want to work, making a decent wage, why should you in a sense be penalized by a reduction in amount of money you get from Soc. Security? I'm not sure what the limit is on the amount you can earn before your Soc. Security is reduced, but I'm sure its a rather low figure. Again, I'm mostly referring examples of middle-class income earners, and not mega-wealthy individuals. After 65 years (God willing you make it that long) shouldn't one truly be able to retire? And if they can work and be productive in the workforce why shouldn't they also be able to reap the full benefits of Soc. Security?

Maybe it's off topic but I'd be inclined to say we need spending reform more. But first you have to get everyone to quit asking the government to provide so much, that means everything except, defense, and trade between states. After all, everything the government "gives" you, has to come out of somebody's pocket, probably yours at some point. I'd say more but I think I'll step off my soap box now. However then I'd say we could lower taxes and people would be happier about the lower taxes.

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nullandvoid said:
Maybe it's off topic but I'd be inclined to say we need spending reform more. But first you have to get everyone to quit asking the government to provide so much, that means everything except, defense, and trade between states. After all, everything the government "gives" you, has to come out of somebody's pocket, probably yours at some point.

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OK income distribution is an arguable point. But what about libraries, highways, museums, parks, drug treatment programs, prisons, public health efforts like NIH, food inspection, Superfund cleanups, etc.

Not all taxes are wasted. Some go to projects that make all our lives better.

Hey, even on the wasted government programs, the programs employ people who would otherwise have to get real jobs!!!

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StuU said:
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nullandvoid said:
Maybe it's off topic but I'd be inclined to say we need spending reform more. But first you have to get everyone to quit asking the government to provide so much, that means everything except, defense, and trade between states. After all, everything the government "gives" you, has to come out of somebody's pocket, probably yours at some point.

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OK income distribution is an arguable point. But what about libraries, highways, museums, parks, drug treatment programs, prisons, public health efforts like NIH, food inspection, Superfund cleanups, etc.

Not all taxes are wasted. Some go to projects that make all our lives better.

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Yes, not all are "wasted" although I'd say the superfund site's might fall under interstate trade since very few outfits with that kind of waste are soley in one jurisdiction. However taxing for many of those other things is a matter of imposing your morals on others. That's not to say that they are all bad morals, and not to say that we don't do that every day anyway, but it is imposing "your" (very generic you here, not one specific person) morals on someone else. I'd say that if you didn't tax people to do these things then more money would be available for people to fund these things privately. Libraries existed long before taxes supported them, via endowments from those wealthy people that so many people seem to feel aren't being taxed enough. Healthcare, same idea to some extent, if you taxed less people might give more to charities providing those services, etc... etc...
Besides I was talking largely about at a federal level. I'm not saying that taxes need to go away, but I do usually feel that they should be more usage based, and less policy based.
Slightly more on topic, I think the tax on inheritance is too harsh, The government doesn't tax you when you give things to your child, for example, your child turns 16, you happen to have done well for yourself and can afford to buy him a $30,000 car and give it to him. You don't pay a tax on that, but if you die and leave that same $30,000 car to him when he's 21 the government wants to tax 55% of it? Where's the logic in that? (I know someone is going to say they should tax it, somebody might even say that technically it already is taxed in which case I'm partially wrong although I've never heard of that being enforced) If you buy your child more than the alloted $ amount in clothes gifts etc.. during the year, do you get taxed for that today? I don't think so, though if I'm wrong please let me know. Just my thoughts.

Government's official view on the inheritance tax (other than a way they can get some more money obviously) is that this is usually money that was not fully taxed to begin with.

Example: you inherit 100k in cash from parent's savings (a large portion of this is interest your parents never paid tax on)

Example 2: you inherit a house and land. these were likely bought years ago and have appreciated in value. the tax was never paid on this increased value.

If we're seriously discussing this then we must realize that the IRS can only go so far in determining what to tax people, what is fair. If the IRS sat down and looked at when everything was bought, the price paid, the new increased value we would be paying extra taxes for all this work.

If you're that concerned about tax, get a decent CPA and take an active role in planning your own future.

I don't know the tax rate for inheritances. If it is 55% that can be low or high depending on many factors. Conservative estimates for my mutual fund at the time of my death (assuming I continue to pay in/etc) would be something like 2-3 million dollars (it's amazing what $100/month for 50+ years adds up to). I would have only put in about 10% of that though, the balance would be interest.

Remember... the taxes don't begin until the estate exceeds a certain amount (think it's about 500k right now). IIRC this amount increases yearly for about the next 10 years then it drops back to the original amount.

Actually I'd say that for the most part I think both of your examples aren't terribly good ones, I believe interest earned on normal savings accounts is considered income and thus taxed. I also believe that in most states that property values are re-evaluated every so often ( I know in arizona they do) and you pay increased property taxes on on those increased property values each year.
Please understand I'm not necessarily that concerned, though I am all for lower taxes and less spending. I used a CPA for my taxes this year and probably will continue to do so, I'm just expressing some thoughts and opinions on the toopic.