What is a Fair Share?

OK, so I’m sitting here thinking about  a few things I’ve read lately: comments from the incoming Democratic leadership for the next Congress as well as what the majority of the news outlets are saying the new Congress will / should do regarding income taxes.  As usual, I have a few things I’d like to say to really put it into perspective for those of us not part of the coastal policy makers…please feel free to share your comments or thoughts down below!

There is a lot of rhetoric of eliminating a lot of the tax cuts made under the last legislative session as the “wealthy” were given a lot of advantages not available to everyone else.  I don’t know about you, but my definition of “the rich” is much different than our illustrious Congress’ definition.  In my opinion, no matter your income level, the top tax rates people are complaining about are still too high and discussions about eliminating this or that is really pontificating about increasing our taxes.

About 52% of the population pays no federal income tax, and a lot of the ones who don’t receive wealth transfers from those who do or are incentivized to not work.  Politicians of all parties used to talk about people paying their “fair share” but lately having any discussion of the 52% of the folks who don’t pay starting to pay something to support the infrastructure seems to be forbidden – just like any serious discussion of fixing social security.

Fair share, to me at least, says everyone should pay the same rate without all of the Mickey Mouse (with apologies to Mickey Mouse and Disney) deductions we have left and right.  Let’s assume the Federal rate is 20% across the board: no matter if you make $20,000 or $200,000 you will cut a check (or take a payroll deduction) for 20% of your gross.  If this were universally applicable – after all, that seems pretty fair to me – I would continue to work my tail off trying to get as much incentive and other legal compensation I could get.  After all, I don’t want to work for the rest of my life then drop dead immediately after retirement.

Federal, state, local, excise, Medicare, investment gains, occupational, employment, licensing, and probably a dozen more taxes add up as a major deduction from my family’s checkbook.  Then, as if that wasn’t enough, the Feds and many state / local jurisdictions tax the gross value of your estate when you die.

I wonder how many doctors quit working because the incremental take home pay isn’t worth it?  I personally know of two who said it wasn’t worth it and quit outright.  They were pretty good docs, too, which makes me wonder about the secondary effect: how many people died because they were tired of being overly taxed for each incremental patient they saw and were kept away from their families?  I don’t have a problem with anyone making a boatload of money and, in the case of doctors, I recognize they went to school a lot longer than I did and made a financial and personal investment in their future.  I guarantee they incurred a heck of a lot more debt than I did completing their educations and achieving their professional certifications.

Another thing I don’t understand is all of the posturing on the infamous estate tax over the years and how it started to raise its head again this summer.  There has been a lot of discussion about how it is fair to take out anywhere from 35% to 55% of estates valued anywhere from $1 million to $5 million or more; while those levels sound great to sell the concept to the general pubic, you know for a fact one day it will be lowered to any dollar amount.  Right now, the Federal death tax rate is 40%.  Sure, a lot of well-off, obscenely rich people would benefit if the estate tax were abolished, but hasn’t it been taxed enough already?  Bear with me as I give you an example (and Dad, if you are reading this, I really wish your estate was valued that high and qualify for me having to pay your estate tax and then some!).

Assume John Doe works his tail off building a successful car repair / oil change location over the years, and has expanded it to a three bay shop and his sons now work with him.  He’s open six days a week from 7 in the morning to 6 at night Monday – Saturday.  He picked a good location 30 years ago in a growing community, has a steady client base, and it does well enough to support him and his two sons’ families to pull out $300,000 a year as profit or $100,000 for each family.  Assume when he dies, the value of the real estate location and the business has a value of $2.5 million to his survivors comprised of the business, a modest house, a car, and a minor portfolio of investments but the majority of the value is in the business.

Assuming those facts, the government thinks it is fair to take anywhere from $875,000 (35%) to $1.4 million (55%) immediately from his estate, which will require John’s survivors to sell and give up the business and their jobs to pay the tax man.  After all, not many people have that much cash around but isn’t that fair?

Not really.  Why?  Because, for example, as John was working to build his business over the years – and achieve the $2.5 million net worth – he was paying taxes every step of the way.  For example, he paid state and local sales and franchise taxes, property taxes, employment and other labor taxes for himself and his employees, and an average Federal rate of about 40% over time on his profits.  If you sum up all of those taxes, he probably paid around 60% of taxes over time (a little more in some jurisdictions, a little less in others).  If you assume the remaining 40% is left over for John (100% income less the 60% of taxes), that means he really earned $6.25 million over his lifetime and paid out $3.75 million in taxes before he passed away.  He probably worked 60-70 hours per week and rarely took a vacation.

Now he has died and the government wants to collect their fair share.  One group of politicians wants at least 55% and another group thinks lowering it from 40% to 35% is more fair.  As the 55% is more, I will use it as an example: in addition to the $3.75 million in taxes John has paid out over his lifetime, now that he has died they want an additional $1.4 million (55% rate multiplied by the $2.5 million of assets he had upon death).  This does not include the various states that also tax dead people’s assets.

All in all, over John’s life as well as up to when he dies he has paid out approximately $5.2 million of taxes on his original $6.25 million of earnings (the $3.75 million over the years plus the $1.4 million as a parting gift).  That’s a tax rate of of 83.2%.

Doesn’t seem too “fair” to me – it’s actually depressing.  Where does it stop on taxed assets upon death?  1 million?  $500,000?  $50,000?  Five bucks?

If you’ve read this far, thanks.  I hope you will take the time to think about your own situation – maybe you have a lot of assets, maybe you don’t – do you really want to have your children be forced to write a check just because you died?

Michael

 

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1 thought on “What is a Fair Share?”

  1. We experienced this very thing when my father in law died in the UK. He came from a blue collar family and built a small little nest egg that unfortunately he didn’t get to use in retirement since he died soon after retiring. It’s obscene how much “death” tax my husband and his siblings had to pay – so much so they had to borrow money from the government to pay down the taxes while they tried to sell his dad’s home to pay off the taxes. The real injustice is that people that make this money on their own have been paying taxes all along so Michael great job of putting it in laymen’s terms. I’m up for paying my “fair” share.

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