Money Talk

Episode 21

Social Security, Payroll Tax, Wealth Tax

The art of giving it all away Magic number $11,579,999.99 Everybody is trying to take your money 12 million dollar toothpaste Chicken feed Give it all to charity? Dancing with Ted Lewis. Who wouldn’t want to? Win the lottery. Hide the cash in your basement closet. Free income for all? Artists living in barns.

Welcome to our listener-supported podcast, Money Talk, uncompromised absolute financial truths behind financial perceptions with host, Ed Sutkowski and Chuck LeFebvre. Let’s listen in.

Chuck: I’m Chuck.

Ed: I’m Ed.

Chuck: This is our first– We’ll call it an Ask Me Anything episode, although we’re really just asking each other anything. Ed, we want to talk about taxes, don’t we?

Ed: Yes, I like talking about the wealth transfer system. The gift and estate tax and some states have an inheritance tax, that is the right to give it away your tax, and the right to give property away, and then some states are taxing the right to receive it. A theoretical distinction, but real. That’s where the tax is imposed.

Chuck: Do you have a sense of today, what percentage of the population actually pays that tax? I know It’s very small. It’s been a while since I’ve actually seen the statistics on that.

Ed: I think it’s about 1%, but that varies now that these exclusion amounts– Let’s be more specific. Historically, there were two baskets. There was a gift tax imposed at a rate that was lower than the estate tax, which is at a higher rate. So, the new legislation, combine those two, there’s a uniform rate for both estate and gift taxes. We have some- for gift purposes, exclusions. You can give away tax-free of $15,000 per year for donnee and everyone’s tuition and medical and terrible gifts. Make political guests. Those are all tax-free, but everything in addition to that in 2020, you have $11,580,000. If you’re married, $23,160,000. The excess is taxed at 40%. You combine that for the gift and the estate tax rates.

Chuck: What you’re saying is that $11,580,000 is a pool that you can either use up during your lifetime with lifetime gifts or to the extent you don’t. You’re permitted to die with that much property without it being taxed, but then anything in excess of that is where the federal estate tax kicks in. Now, there’s also some states including Illinois, where we have estate taxes or inheritance taxes or as we found out, sometimes they have surcharges and fees that they don’t call an estate tax or an inheritance tax, but really effectively are the same thing.

Ed: And some probate charges.

Chuck: Right. I was a little amazed we had this estate that involved a resident of Ohio– Iowa. I’m sorry. It turns out they have a probate fee that works just like an inheritance tax or an estate tax. So they just get away with not calling it that, but it sure sounds like the same thing to me when you’re taxing essentially, not just the property that passes through the probate process there, but all property that is either owned or controlled by the decedent. Boy, that’s an estate tax in my book.

Ed: I want to make sure that we draw these things in between probate and economic transfers. In other words, probate are assets standing in your name alone, and you’re a ghost, and you have to inventory those assets and creditors file claims, and a judge determines if the claims are valid. Specifically, the probate process is kind of like a bankruptcy part.

Chuck: That’s what I always tell clients. It’s basically a bankruptcy. Maybe the best way to think about it is, It’s a bankruptcy. It’s a way to get the bills paid. Then whatever does not go to pay the bills, that’s what the beneficiaries of the estate receive.

Ed: If you don’t have a will and to do a what’s called intestate succession, depending upon the relationship of the decedent to these individuals who’s alive. typically have a will and payable to a trust, or you can have some assets payable on death, in a joint tenancy, have insurance. In other words, it’s the transfer of assets of economic interest in assets. That’s what we’re talking about.

Chuck: Right, but that’s to be distinguished. The property going through a probate process like that is to be distinguished from property that’s taxed as part of an estate tax, where really those taxes are designed to be much more broad and that they tax essentially anything. I think the easiest way to express it is to say that the tax applies to anything that a person owns or controls at the time that they die. That’s not legally outstated, but that’s how it works out, really.

Ed: The economic interest in the asset and those who have- you control a canary that has very little value, it’s a little big deal but if you control interest in some property, it pays you $100,000 a year in rental income, it’s the value of that property that is the subject of the estate tax, not the $100,000, but the underlying value the property that produces it. I think of these exclusion amounts: like a tube of toothpaste. That was, the government gives you a toothpaste worth $12 million. You can use it to brush your teeth during your lifetime. You use it up, so you use up 4 million of it, then you still have the balance available to your heirs when you’re a ghost. By the way, if you’re fortunate enough to leave a surviving spouse, that surviving spouse gets to use what you didn’t use in terms of basic amount. Then we have this Generation-skipping transfer, Chuck, what’s that all about?

Chuck: Well, that’s the text that I find that even though you can state it, very simply, it seems to confuse people more than any of these other taxes. That works like the estate in the gift tax wherein the sense that you have a certain amount that you can give away, either during life or at death, without incurring any tax, and it’s the same amount. It’s $11,580,000 that you can give away to a so-called skip person, which basically means someone who’s two generations are further removed from you, and then the tax applies at that same 40% rate.

It behaves an awful lot like the estate tax, and I think what’s confusing about it is that it’s a completely different tax. It’s just layered on top of the estate and the gift tax, even though it behaves very similarly. Rather than with the estate tax and the gift tax, which there are two separate taxes that apply, one during lifetime and the other at death. This generation-skipping transfer tax is a single tax regiment that applies to either lifetime transfers or death transfers. The real bifurcation of the way that tax operates is whether you’re looking at a gift that’s made directly to a human being who happens to be a grandchild, versus a gift that goes into a trust that either does or could benefit such a person.

Ed: This is utter confiscation. We’re talking about the basic rate of 40% of the in excess of the exclusion amount and now we have another tax at 40%. If I had a million dollars that’s subject to the transfer, how would those taxes be computed?

Chuck: Right. You would simply apply. Let’s say you’ve used up the exemption amount in both cases, you’ve already given away $11,580,000 in property not just to anybody under the sun, but you’ve actually given that much away to grandchildren. The next dollar that you give away to a grandchild is going to be taxed. Let’s say this is a gift you make during your lifetime, you give away a dollar, that dollar is going to be taxed at the 40% gift tax rate. It’s also going to be taxed at the 40% generation-skipping transfer tax.

Ed: If it’s $1 million, net it’s a million less 40% or 400,000, so you got 600,000 left. How is that tax? What percentage applies to that?

Chuck: The generation-skipping tax?

Ed: Yes. The generation-skipping.

Chuck: That’ll be will be a 40% tax applied to that.

Ed: 600,000?

Chuck: Yes.

Ed: Wait a minute.

Chuck: You don’t exactly double up the taxes, but you do tax the amount that’s going to a grandchild, essentially twice.

Ed: I start with $1,000,000, so we got 600,000 left, and by the way, I pay that tax on the donor. I pay that tax.

Chuck: Yes, you pay that tax.

Ed: Now the $600,000 goes to my lovely grandchild, who’s going to be a Wonder Woman, so to speak. $600,000, now there’s a tax of 40% or $240,000, on that 600,000?

Chuck: Yes.

Ed: What’s left is chicken feed.

Chuck: Right. Now, what will often happen when you give away a gift during the lifetime, of course, is that you simply write a check for $1 million, let’s say, to the grandchild and then the taxes are not paid out of that $1 million, but that’s just money you scrounge up from somewhere else in order to pay those taxes. You’re paying the 40% gift tax and you’re paying the 40% duration skipping transfer tax because your granddaughter actually received $1 million. That’s subject to.

Ed: Is that tax payment or generation-skipping transfer?

Chuck: I do not get you there.

Ed: I don’t think so. Putting it another way, that’s tax-exclusive, but when we do the estate tax, my granddaughter had gotten that $1 million less both taxes, that would’ve come out of her gift.

Chuck: Right, exactly.

Ed: In the left-hand situation, the granddaughter gets $1 million but I’m the one that’s paying all the tax. In the death situation, she’s getting the $1 million less this 40%, less the 40% or $240,000.

Chuck: That’s exactly right.

Ed: Why would anyone do these things at death?

Chuck: Right. Well, it’s because they don’t like to give away things during life, Ed.

We know that. People tend to hold on to things at life. Of course, the other big reason people wait until death is because if what they own is property that has a very low-cost basis, they don’t want to give that away during their lifetime because they want to take advantage of the basis step-up that applies at death.

Ed: Well, let’s be very specific. Using the 2020 numbers, let’s assume that Charlie, a single individual has an asset value of $11,580,000 and his tax basis, what he paid for this stock is $580,000 so he’s got a gain of $11 million. He transfers that to the grandchild because it was within the exclusion amount, grandchild sells it, the tax is at what, 23.8%?

Chuck: Correct. The Federal tax would be at the 20% basic capital gains rate. For a sale that large, you’re going to incur the net investment income tax of 3.8% as well so you have 23.8%.

Ed: If you have a state income tax, guess what?

Chuck: That’ll be on top of that.

Ed: However, Charlie dies with that same transaction. That $11 million gets stepped up so the new tax basis is $11,580,000 and there’s a tax saved of that difference.

Chuck: Exactly.

Ed: The secret is never to have more than– In today’s numbers, $11,580,000 and have highly appreciated securities and die owning it. Guess what? Big taxes saved by your heirs. The only problem is you’re dead.

Chuck: Right. Exactly. We always say that these taxes are voluntary taxes. Now, in the case of the estate and gift tax, that’s true, but you generally have to make quite a few sacrifices. If you have a very, very large estate and you really want to avoid those taxes completely, quite often, the cost of doing that is– For instance, the easiest example, of course, is, “Hey, look. You don’t have to pay tax if you just give it all to charity.” In a sense, it’s a voluntary tax, but in another sense, the way you avoid paying it might involve doing things that you’d rather not do. The point is that everybody in a sense has a choice. They can structure their estate plans in such a way that if their number one priority is avoiding paying any of these taxes, they can certainly do that. Now, that involves in many cases making some difficult decisions if what you’re trying to do is avoid the estate tax and you have a really large estate, but the generation-skipping transfer tax, that’s one that– Boy, anytime someone pays it, I think that means someone made a mistake.

Ed: That is truly a voluntary tax.

Chuck: Right. You can give away billions of dollars and avoid paying the generation-skipping transfer tax simply by not having the person designated as the receiver of that gift being a so-called skipped person. That one’s just incredibly easy to avoid. I don’t think I’ve ever seen that tax paid. I don’t think I’ve ever seen it. Have you ever seen it, Ed?

Ed: No, I have not in 50 plus years. Of course, we haven’t had that tax during the 50-year period, but I have yet to see one. In matter of fact, it gets a bigger issue I think, and for the individual that has accumulated, let’s assume we have or subject to the 40 percent rate, let’s use round numbers $12 million, married $24 million. With someone with, for example, $75 million worth of assets, what do you do with the excess over the amount that can pass tax-free?

My experience has been goes to charity, and so all this human cry about taking them an annual asset tax. This tax is avoidable. I don’t know the statistics but in my world, significant numbers of clients That have accumulated that sort of wealth typically being an entrepreneur, these are not situations where they talk about inherited wealth, the entrepreneur will give back to the community that was saying what everyone else seems to think I don’t know what your experience has been but that’s mine.

Chuck: That’s my experience too. I can think of some exceptions and I guess my sense, although I could easily be wrong about this, but my sense is that the existence of the tax is a motivator for making those charitable gifts. Just mathematically, it doesn’t make sense for someone who’s not otherwise charitably inclined to give the money to charity just in order to avoid the tax. That really does not end up maximizing the amount of money going to the non-charitable beneficiaries. My sense here, Ed, is that the existence of the tax is what motivates people in many cases to be thinking about other types of dispositions of their wealth and looking at these charities and charitable dispositions as an opportunity to maybe leave a different kind of legacy.

Ed: Well, it is interesting that the, again, my travels very limited experience, so five-plus decades, but let’s focus on the entrepreneur, the individual male or female, that has devoted that individuals working lifetimes to the accumulation process only because that’s something that’s genetic, that’s what that person does, and has worked an extraordinary number of days, and hours, and risks and may be taken bankruptcy a couple times, got up and accumulated this wealth. I will tell you typically, aside from these basic amounts going to children perhaps outright, and not to grandchildren or great-grandchildren, it goes to a charity. I think that’s the way the world works. If you work hard to accumulate it, you’re not going to give it to someone that you don’t know.

Chuck: Yes, that’s true. That’s very true.

Ed: I’d like to digress for a little bit and talk about a case that I tried, this is a long time ago and involves the application of the then-current state and gift tax rules. Remember, I alluded the fact that the gift tax rates were a little less than the estate tax rates, and so it was better to give during your lifetime than at death without regard to the basis of step-up rules and that was not in this equation. This was a jury trial here in Peoria County, and a lady it’s public information so I could mention names at 83 years old and she gave away during her lifetime in addition to the then-current $3,000 per year per donating exclusion amount now 15, she gave away $500,000 worth of beneficial finance company stock to her daughter. Now, today you did the math on this before we were busy. What do you figure that would be worth today 60 years later?

Chuck: Yes, so if you assume about an 8 percent rate of growth in the value of that stock, that would be about $3.3 million worth of value that she gave away in today’s I would say that’s probably the equivalent, so that’s not an inflation adjustment. That’s just what that stock maybe is worth.

Ed: You figured 2 percent and pretty anyway, it’s a lot of money, maybe almost four-plus million dollars. Having said that the background this was a section which is just crazy. Nonetheless, it applied. That if you made a gift of property during the three-year period ending at the date of your death, it presumptively was taxed back at your estate at a higher rate. Made no sense. When you were making this gift were, you’re doing it in contemplation of death?

Chuck: It was a mind-reading rule. It mattered what you were actually thinking.

Ed: Anyone with a decent amount of opportunity to plan could avoid that. Well, in this case, Edith Albrecht, she did this when she was 83 years old. I didn’t know her but from what I understand, she was a pistol. Well, the story was you can all kinds of things. We’re going to do this to reallocate the dividends. We’re going to give this to a son or a daughter-in-law if they took care of me. You can contrive all kinds of rules or during the course of the trial, I was a rookie then. I’m still a rookie. I guess you never grow old in this day job stuff. Talking with her daughter, I said, “Well, what did she do? Did she like to dance or whatever?” She said, “Well, mom, there was this guy, Ted Lewis, who was a clarinetist playing over at the Springfield club in Springfield, Illinois. She thought she’d go and dance with Ted Lewis. She was 82 years old. I said, “Okay, then what happened there?” “Well, mom and I took the train and we went up to Bonwit Teller in Chicago and the Gold Coast and we went to Bonwit Teller and she bought the whole outfit. Gloves, a hat, a suit, a stocking, purse.” The whole nine yards so she could get dressed up to go dance with Ted Lewis. This is after she had made the gift. I’m thinking, “Wait a minute, was this lady die? Thinking of dying when she’s making the gift?” Guess what? Jury trial came in with about two hours, we won. The difference in tax, the tax rate for gift purposes in a state, in this case, was $185,000. Now that’s if they brought it back into the estate.

Chuck: It would have been-

Ed: 185,000 bucks.

Chuck: That’s just a fascinating result because you could argue that in spite of that evidence that the jury got it wrong. You could say, “Hey, look, I’m 82 years old. I’m not going to die tomorrow but I know that I’m going to die sometime in the next 10 years. Maybe it’s time to start giving my property away.” Wouldn’t that be in contemplation of death?

Ed: Absolutely. The number of cases reported on this section– finally, the government was losing more than they’re winning because first of all, the jury doesn’t like to pay tax.

Chuck: The point is that for whatever reason, now I think this might be changing Ed but certainly historically it seems like the estate tax has been a fairly unpopular tax. People look at this tax and they say, “You’re rubbing salt in the wounds of people.” Someone passes away and the only two things that are inevitable are death and taxes. Why do you combine them in this gruesome way? Now the reason that might be changing is because now the exclusion amounts are high enough that people who are familiar with the way this tax system works, look at this and maybe they’re a little less sympathetic or they’re thinking, “Look, this is a tax that isn’t ever going to apply to me. It just applies to that other guy, that rich guy over there.”

Ed: The only problem that rich guy today may be a poor guy tomorrow If you’re the entrepreneur or if you’re the person who has this wealth accumulated, look what happens with the stock part day to day basis. The black swan right now with the virus. These are unpredictable events. if you’re in a position where you have to sell an asset while this black swan occurs, it’s not such a good deal. The other side of this. I want to talk about this asset-based annual tax for just a second but the idea of taxing wealth, I understand it but the issue is the predicate. Where did the wealth come from? In other words, is it inherited wealth from multiple generations above you or did you earn it? Did you borrow money to make payroll? Did you come up with a novel idea? Did you exercise some insight, some passion, and some imagination and create this wealth and other jobs? Well, my sense is that we’re entering if not fully in an age where there’s sufficient class divisions that there are entire swathes of the population that are not interested in making those distinctions. They look at somebody who’s– Now I’m not sure exactly each person might have a different definition of what they consider to be a wealthy person. I’m not exactly sure where that boundary line is going to be drawn for any individual, but I think that we’re entering an age where there are plenty of people out there who would say, “Okay, if you’re wealthy, then by definition you must have gotten that through some means that I don’t approve of.”

Chuck: Lottery. You had to win a lottery.

Ed: Or you hear this rhetoric and it certainly isn’t universal. I don’t even think it’s universal even among the Democratic candidates, for instance, running for president these days. I think that there is a segment of the population, that views– I’ve heard the expression where–I’ve heard this phrase where someone says, “Every billionaire is a policy failure.” The idea is that there’s no way to become a billionaire that would somehow be good for society. The accumulation of that much wealth in any one individual is per se a public harm. That attitude is definitely out there, and what that suggests to me is that there are at least some people who really don’t view those distinctions you just pronounced as being worth examining. I’m not one of those people. I think it matters. I think it’s worth drawing those kinds of lines in understanding where wealth is coming from. Certainly, in a different era, we would definitely be having conversations I think about the benefits of wealth accumulation. This podcast is all about wealth accumulation. There’s obviously some good that comes with that, something that everybody is motivated to do and yet I do believe that there are some people who are just simply not interested in examining anything beyond what’s your balance sheet look like and if it’s above a certain number, then you must be a bad person.

Chuck: Yes. There are three books I want to mention. There’s capital in the 21st century by this Parisian economist Thomas Piketty and to follow on books when Daniel Markovitz, the Meritocracy Trap, and also A Triumph of Injustice by two USC professors, econ professors. The common theme there seems to be that this accumulation of wealth distorts the political system because if you have the money, and we’re seeing this in Democratic side now, you’re going to buy a political office. Well, I think we’re finding out that yes, you can do a lot of advertising, but if you don’t have it politically, you’re not going to get in. Yes. I think that there’s been a lot of distortion about exactly what the harm here is in terms of when wealth inequality becomes an issue that is of concern for society. There’s been so much discussion about this question and not a lot of discussion about what the harms are. My sense is that, number one, on the extreme low end of the scale, if you have extreme wealth and inequality, then I’m not sure how concerned you want to be. Let’s say you had extreme wealth inequality, Ed, but every single person in the population had all their basic needs met. Every single person had food, shelter, health care, clothing, and they had security that they would always have those things. I query whether we would still be having discussions about wealth and inequality, or the discussions would be the same as they are today. If that were the society mean, there you could say that these issues about wealth and equality might just purely be an issue. Some people are jealous of other people envy but on the other extreme, of course, you do have the sense that okay, even if everybody has all of their basic needs met, if there are some people who are so wealthy that they essentially do not have to live by the same rules as everybody else, then now you could say that, again, you’re just talking about envy, that if you’re jealous that somebody who lives by a different set of rules than you then that’s wrong, but also that that feels just intuitively that feels a little more objectively like as a society, we shouldn’t want that.

Ed: Well, I couldn’t respond to that, thinking of a Milton Friedman advisor, Margaret Thatcher, Ronald Reagan, really economists’ math major, you see really an outstanding whether you subscribe to all those theories. The one that I think seems to stand out, it says forget about all these super tedious transfer systems and provide for earned income credit. Right, everyone will get so many dollars per year, irrespective of assuming they have less than the appropriate amount of income.

Chuck: Well, now, now they refer to that as universal basic income. It’s a wild left-wing idea but Milton Friedman was an advocate.

Ed: Yes. To me, it makes a little bit of sense that there are holes in the redistribution of economic wealth. I mean, why should an artist that is very good, have to live in a barn so to speak, because the genetic makeup of that artist is not the same as that of an individual who, Jeff Bezos, so Bezos or whomever. I mean, are penalizing someone that doesn’t have a stem background. To level the playing field, that earned income credit does make sense a little bit.

Chuck: Well, and I think that maybe if I can channel Milton Friedman, maybe if he were here, he would say that his view is that as long as you create a floor for society where even the poorest person is going to be on some floor where you define what some basic needs are, and so I would say food, shelter, clothing, health care, that if you’re providing that, then Milton Friedman would say then you don’t have to worry about any of the other inequities that are endemic in a capitalist system.

Ed: Exactly.

Chuck: I think he would say you’ve solved all of those problems by simply creating a floor that’s high enough that people are not going to fall off the edge and maybe he’s right but I do think that there’s also something else that’s part of the current discussion, which is what happens on the high end is that you get into this political class or the political donor class that people who have such power and such influence which is typically correlated with wealth, where what they do with that power and influence is they start dismantling that floor. It erodes the principle of the system. When you have a certain amount of accumulation, although, in my mind, it seems like the concentration that occurs here is concentration of power more than wealth.

Ed: We’re looking at well, number 1% is probably one 100th of 1% of the population.

Chuck: Yes, 1/1000. I mean, we’re talking about a very small portion of the population. For instance, and I would think about this globally, and you think about some individuals like MBS, this crown prince of Saudi Arabia, who even mentioning his name on this podcast, and even given the limited viewership, I think, Wow, am I in trouble now? Because you’re talking about a person who has such enormous amounts of power and is definitely willing to even engage in extrajudicial murderers in order prevent people from saying bad things about him and do it with impunity. That’s an unjust system when you live in a world, so this has nothing to do with the United States. This has to do with the global.

Ed: Yes, but Chuck, this is going to be evil, always. You’re going to have outliers. There’s going to be evil that you can’t legislate away.

Chuck: I definitely agree with that, especially on the global scale we regulate that everywhere. I do think that part of what we’re seeing today, or the discussion we’re seeing today, is people fearing that too much of that is occurring inside the United States.

Ed: I understand that. Yes, you must understand the value that’s been created by those people, those, quote, perceived evil people.

Chuck: I think that that’s very much overlooked by a large number of the folks who are engaged in this rhetoric that we’re talking about.

Ed: Well, what’s the second question someone asked if you meet a new person?

Chuck: Well, they ask, what do you do? If you have a job that’s the most important feature of your personality. If you have a job, all of a sudden, you have value. We have a quantitative value of dollars and cents. You make x thousands of dollars, and we have a qualitative value. That is to be able to say that I have a job, I’m productive and those that serve to accumulate wealth. I’m not talking about inherited wealth. I’m talking about the guys and girls that created an industry, created an idea. They create jobs and they create a value that you cannot quantify, and we can’t overlook that, but people tend to overlook that.

Ed: Well, and I think that we have some among the population that I don’t want to sound too dismissive here. I think that there’s some people among the population that maybe haven’t been around long enough to observe how that actually plays out. That drives some of this rhetoric that you see that where there’s a lack of appreciation of what public good is derived from essentially the capitalist system and in the pursuit of wealth by people. You look around at the world, and you look at all these things that people enjoy today and people attribute to being a modern and technologically advanced society. Most of what you would point to are things that someone invented because they were hoping to get wealthy from inventing it. Right?

Chuck: Yes. Creating value in the quantitative sense, you have more money in your bank account. I understand that, and I’m saying that perhaps unintended consequences flow from that wealth accumulation.

Ed: Well, I would take it one step further and say, some of those consequences are in fact intended. I mean, Steve Jobs, he invented the iPod and then the iPhone because he intended to get rich off of it, and he did get rich off of it. An awful lot of people now use those devices to communicate with folks they’ve never even met, to talk about the very wealth inequality that Steve Jobs himself was pursuing.

Chuck: Yes, he’s got all kinds of money now he’s going to die. What happens?

Ed: Well, I’m not sure what happened with his estate, but I think he might have been one of those outliers who did not give a lot to charity from what I understand.

Chuck: Guess what’s going to happen to his estate?

Ed: It gets taxed.

Chuck: And those shares are being sold, flooding the marketplace, potentially decreasing the value of Apple. The point is with the estate tax that does tend to equalize the excess accumulation of wealth and you avoid it through a charitable distribution and then you can do a lot for society. Unless you got goofy charitable objectives the preserved wooden sticks or something, but the point is, the accumulation process is a fun activity. It results in significant wealth. Then if you don’t do something with it for charitable reasons, a good part of it is gone. I do think, tell me if this is your experience, I certainly have had any number of conversations with clients myself, who’ve accumulated plenty. This has nothing to do with avoiding tax, but we get into this conversation about what they want to leave as their legacy or how they want to take care of their children and other descendants and other beneficiaries. For them, that is more difficult than the accumulation process.

Ed: Yes, we’ll talk about that in another podcast, which is really the big deal here. Whether you’re talking about $10 or 10,000 or $10 million that process that is where does this money go? I can any number of folks, clients will talk to me about, “Eddie, this is a great idea, getting all this money together.” X dollars but it’s a bitch deciding how to give it away. We’ll talk about that before we get to that, I’d like to just adjust a bit this asset-based annual task.

Chuck: Oh yes, I know you’re a fan.

Ed: Well, there is a supposition that redistribution is not working with the income tax and the wealth transfer tax so we’re going to impose an annual tax of X% on the amounts in excess of a couple of brackets. Now, in some of the European communities, how does the tax system work versus ours, which is a voluntary tax, self-reporting?

Chuck: Right, so there in many of those countries, the government just sends you a tax bill and says, “Here is your tax.” Ours, when I think about those annual wealth tax, my first reaction was, “I’m not sure how this can be administered efficiently.” It just seems like a nightmare from an administrative standpoint. I think that it also kind of it feels even to people who understand that they’re never going to pay their tax themselves because it only applies to a slice of the population that’s very much in the stratosphere in terms of their wealth. It just sort of, a little bit on American I think for a lot of folks. It just seems like something that politically doesn’t taste right in many people.

Ed: You’re going to impose that tax, for example, how do you pay it?

Chuck: Yes, there’s a lot of these hurdles with administration that exactly are like you said. You can get into the details here, first of all so many of these folks who are extremely wealthy in the billionaire plus club. Many of the assets that they own are assets that are difficult to value. They might be things like trademarks or tradenames.

Ed: Murdoch has a painting or Rembrandt, and so you’re going to have a 3% tax on its value, where are you going to get the money to pay it?

Chuck: Right, then you’ve got a lot of illiquid assets like you’ve got things like collectibles and other types. You might have a building that you can’t just sell 3% of or it’s pretty hard to sell 3%.

Ed: Let’s give it to the government, they are going to take the 3%.

Chuck: Yes, and then you have things like IRAs where you can have some wealth that’s sitting in this account but you can’t extract the wealth out of that account in order to pay the tax without incurring an exercise tax on that. There is a lot of things that will be taxed when you are dealing with an estate tax because of the fact that you’re not talking about a living, breathing human being who’s going to over the course of next year continue to live in or use or operate a business with or whatever the property that you’re taxing. Even though people complain a lot about, for instance, having to sell the family businesses or having to sell the family farm in order to pay the estate tax. First of all, I’m not sure if that happens as often as it’s often claimed but even when it does, you’re at least talking about a transition event there. Doing it annually seems like you’re really getting into not just one but maybe 100 more bags of worms.

Ed: Chuck, to urge your position even more so, let’s assume we have an individual with $100 billion paid out $3 million in tax in year one and year two it goes down to $50 million because of the virus. Does he get a refund on the month that it was paid in?

Chuck: Of course not.

Ed: Well, the point is this system is interesting but not necessarily workable and I’m not sure that it would be but who knows whether it will be enacted?

Chuck: I’m willing to make a prediction that it will not be enacted. I just think that the stars are not in alignment for there to be any kind of political consensus that’s sufficient to be able to. No matter who wins this coming election or the election after that, it just seems like we’re a long way away from having a sufficient political groundswell to get behind a tax like that. I do think that we’re entering a phase in our politics though where sometime in the next 10 years, we’re likely to see increases in taxes on the wealthiest segment of the population in some form. It just seems like that particular form is one that, boy, it’s really hard for me to imagine that getting off the ground. Next time let’s talk about the transfer process and we’ve kind of alluded to it, hard to be fun accumulating it, how do you give it away a series of trust, outright combinations. You avoid the tax or what about charities? Where are the forms of charitable gifts, but really the common theme, irrespective of the size of the estate is how do you give it away and to whom should you give it with or without strings? All this discussion today about taxes is interesting philosophically, but remember, it only attracts 1% of the revenue and maybe it hits 1% of the population, but for the balance of the 99% of your 401(k) Plan or your home, what are you going to do with it? My experience suggests that the smaller the estate, the greater the grief.

Ed: Well, and the other thing is that–

Chuck: That grief in the tax sense in favorite Charlie versus Pete.

Ed: The other thing is in this tax discussion, I mean, keep in mind that for the vast majority of the people, the biggest tax you ever pay is your payroll tax.

Chuck: We’ll talk about that because that’s a text that we’ve talked about before, but next time let’s talk about the distribution of how do you get it? Who gets it? How much Chuck hates the payroll tax? That’ll be the topic of our next discussion.

Ed: It is the most unfair tax ever created?

Chuck: Well, I think the more I read about it and think about it and study it, the more I dislike it. Let’s assume that we repeal though and that instead of going to the government, would go to the wage earner. You think that would stimulate the economy more than anything else?

Ed: Oh, my gosh. That would be fantastic.

Chuck: We eliminate, I mean, unfortunately, all the jobs in the industry that would be gone.

Ed: Yes, although, I bet we’d probably create more jobs from the stimulus that was created by putting that money in people’s– I’m dead serious. The multiplier effect on that would absolutely be huge.

Chuck: I know because most folks live, I’m overstating. Some folk’s live payroll to payroll and if all of a sudden you see an increase in your W2 about 10% or 15% when you combine both, that’s a big deal.

Ed: That’s an absolutely– That would be an enormous raise that would hit on a weekly basis.

Chuck: To the right people?

Ed: To the very people who could put it to use and spend immediately. There’s a reason why there’s this proposal to have a temporary reduction in that tax as a way of stimulating the economy.

Chuck: You think that’s going to work? It’s logical but guess what?

Ed: Well, I’m not sure. I mean, that was done in the past. I guess it depends on whether– I bet if we actually enter a recession, that idea might get some traction. I think there’s some hesitancy to engage in that fiscal stimulus when we’re not officially in a recession, but I bet if we hit a recession, we might see that happen again.

Chuck: The wish is for a reception.

Ed: If your goal is to get this tax repealed then yes.

Chuck: The bad news is you get a tax base to step up at your dad. The bad news is you take less money and take more money home but guess what? You don’t want to have a job.

Ed: We’re not going to tax your wages, but on the other hand, you won’t have any. Seriously, I mean, this is a tax that I know it creates a lot of revenue and people think that this is their way of– they think that this is a contribution that they’re making toward their future retirement even though they really aren’t. It’s simply as a transfer to the current retirees.

Chuck: You’re giving away our secrets for next time.

Ed: Oh, we want to wait. Okay, we’ll talk about this next time.

Chuck: We’ll talk about social security tax, which is a redistribution system and we’ll talk about the estate and these transfer taxes, inheritance taxes basis step up.

Ed: We should compare the two. Let’s do an episode where we do the pros and cons of each.

Chuck: In our next episode, we’ll compare and contrast those wealth transfer systems and the philosophical issue of how you give them money or who should get the money? What kind of incentives there should be if any equality or do you favor the one child that is not done as well that’s an artist? Are against the guy that’s created the new trip to the moon.

Ed: That’ll be fun.

Chuck: Next time.

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Episode 58

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