Wednesday, July 15, 2009

Put your money where your mouth is

I firmly believe that actions speak far louder than words and here is yet another example:
[Susan Buffet's] death at 72 forced Warren Buffett to confront how to start giving away his fortune. He settled on directing the bulk of his Berkshire Hathaway shares to the Bill and Melinda Gates Foundation. He trusted Mr. Gates, a Berkshire Hathaway board member and friend who played bridge with him. What’s more, the Gates Foundation had the infrastructure to handle a gift of such size.
Later in the article:
Warren Buffett went to Congress in November 2007 to argue in favor of the estate tax, saying it counters an unhealthy concentration of wealth.
What Mr. Buffet is saying is this: For compassionate people like him who voluntarily give their money away, private charity is superior to government aid. For those that are less compassionate (i.e. don't do what he thinks is the right thing to do) then the federal government has a duty to make them compassionate by taking their money involuntarily.

Why should we wait until people are dead to make them compassionate. Let's take Warren's money away from him while he is alive one way or the other.


Phillip said...

Buffet made his money on his own and ethically. He is a brilliant businessman and has already paid heavy taxes. I can see where the argument comes from for the estate tax -- unearned money for those in the will. I agree with the idea of not letting someone like Paris Hilton never have to work when there are severly limited opportunities for others. Don't take away all the money, but if someone didn't earn it -- why should they get to keep all of it? There is already a ridiculous concentration of wealth in this country that has less to do with merit than people would like to believe. Buffet is an exception to the rule.

Adam Freund said...

Does the money that the rich earn belong to them or to society? If it belongs to them then why is the occasion of their death a reason to confiscate their wealth. They should have a choice on what to do with their hard earned (and already taxed money). Otherwise we should be honest and take it from them when they are still alive. At least we shouldn't let their undeserving kids benefit benefit while they are alive.

Geoff said...

I completely agree with Phillip.

I propose we institute a national "Allowance Monitoring Board" whose mission it is to regulate and monitor the rewards (monetary or otherwise) parents distribute to their children.

I want to help prepare children to live a lifestyle wholly different from and reasonably below that which their parents live so that when their parents die, they will be prepared to go it alone honestly.

I will sleep better at night knowing that any fortune I am able to accumulate through my tireless hours at work will never fall into the hands of any of my children or any other undeserving person or group for whom I might have affection.

Adam, think of the children!

Phillip said...

I think we can agree that there is a significant difference in letting 100k, 500k, 1M, 50M fall into people's hands who have done nothing to earn it. It is, for all practical purposes, a windfall profit to those individuals (assuming it is not a spouse). I would prefer for it to be handled as a windfall profit. In my, admittedly limited, knowledge it is not.

The money does belong to the man who made it, but that doesn't mean he should be able to do whatever he wants with it. Nor does it mean that it should be transferable without being subject to tax just because one party is dead.

Geoff, caring about tax revenues and proper methods of accumulating and transferring wealth is caring about the kids -- just more than one set of kids.

Adam Freund said...

If something belongs to you then by definition you should be able to do what you want with it. Otherwise it is not yours. It's kind of like saying you can do anything you want as long as it is these 3 things.

Ownership implies the right to destroy the wealth if the person wants to. It also implies the right to give it to whomever they want.

Phillip said...

If you own land there are restrictions on what you can legally do with it. If you own a computer, there are things you can not legally do with it. One can make controlled substances and devices with products found at Wal-Mart -- but that is also illegal. Including things that do not directly stifle the fredom of others to act. This is an established part of American life and the generally accepted defition of ownership.

I am not saying that you should not be able to give the money to your survivors, just that it should be treated like a windfall profit or any other transfer of wealth. This doesn't impede your ability to give it away, although it is illegal to destroy some forms of wealth as well.

Adam Freund said...

If you look at the transfer of wealth just like any other transfer, then you are right. The original ownership of the money however should have some sort of caveat printed on it like, "although you may think this dollar belongs to you, it really doesn't!"

A tangentially related questions: What type of wealth cannot be destroyed and why?

Also do you believe that all wealth inherently belongs to society and society allows the individual to keep it, or do you believe that wealth inherently belongs to the individual and pays for societies services. I think if you believe in the latter then you would have a different perspective on estate taxes.

Phillip said...

A family friend of mine owns two historic homes that are protected by the state. She cannot legally demolish them if she wanted to (not that she would ever want to). You can argue why, but I do not know.

Taxes also apply to personal gifts to other people (over a 12k per person per year). What is an inheritance if not essentially a gift? The only difference in this transfer is the life of one of the parties.

How does taxing a transfer of money equate to not really owning the money? If government restriction or involvement at any point equates to not owning then I guess no one in the US really owns anything because it could be taxed at some point in a transfer.

I am not exactly sure how I would describe how I think of wealth and I need some time to craft my response to ensure I articulate my beliefs accurately.

One thing though, why should the type of transfer matter (except legal guardian to minor) if it should be taxed?

Adam Freund said...

Actually, I was referring to the destruction of money. You cannot destroy money and I think it is very interesting. I will leave that to another post.

You are exactly right. We have two competing philosophies. One would be that the government can essentially (or should because this is a philosophical question) tax you on anything regardless of the reason. And the other philosophy is that it can/should tax you for specific reasons. The former is the socialist philosophy and the latter the conservative/libertarian philosophy.

Right now the government as you are constituting it is on the verge (if not there) of socialism. According to what you are saying, no one owns anything. I want to change that which is why I started this blog.

Phillip said...

Ah different topic then.

Before I head home, I would ask -- should gifts of any monetary value be taxable? If I were rich, should I be able to give a friend 100k without that money being taxed?

What types of transfers of wealth should be tax exempt?

Also, socialism is determined by how the money is used by government and other government constructs -- not taxable activities. If all of that money only went to national defense and law enforcement that would be a very libertarian viewpoint.

I never said no one owns anything. I said that if you take the view that if something can be taxed that you no longer own it, then we own nothing. I personally believe that I own the money in my bank account despite the fact that I will pay taxes on it when I use it. I am confused to what you mean by owning. What must exist or not exist for you to own something?

Geoff said...

Phillip, I am really, really struggling to understand your point-of-view. I admit it. It just seems so...nonsensical to me.

First off, I will try to answer some of the questions you posed in your last post:

"should gifts of any monetary value be taxable?" No.

"If I were rich, should I be able to give a friend 100k without that money being taxed?" Yes.

"What types of transfers of wealth should be tax exempt?" I hate to answer a question with another question, but this one begs it: what types of transfers of wealth should be taxed? Why? I think the burden of proof should be on your side - not mine.


Why is the government automatically entitled to a chunk of someone's estate when they die? Let's assume that the heirs or designated recipients don't deserve the estate tax free, why does the government deserve _any_ of it? Again, I would suggest that the burden of proof for such an action is on your side of the issue.

What if the deceased designated _all_ of their estate to a charity (use your favorite charity as an example). Should it still be taxed as a "windfall profit" to that charity in your opinion or does the type of recipient somehow change your opinion on the matter?

I'm not trying to put words in your mouth so please correct me if I'm wrong, but you seem to have such contempt for the concept of a profit - "windfall" or otherwise. Do you think that profits are inherently obtained through ill-gotten means and, therefore, MUST be taxed as a sort of justice for those who didn't make the profit?

You also seem to agree with the notion that because the government _can_ levy a tax, it ought to. I don't get that either.

I don't believe we live, work, and die to satisfy the whims of a government; the government lives to satisfy the needs of its citizens.

Geoff said...

Oh yeah, one more thing...

If you believe transfers of wealth should be taxed, then why allow $12000 in cash to be untaxed? Why should estates worth up-to $2.5 million be transferrable untaxed? Those numbers seem arbitrary and capricious.

Adam Freund said...


Why shouldn't gifts be taxable? Why should the rich be able to give away their money without paying taxes? Just because you say it should be one way is not convincing.

I don't think Phillip is displaying an obvious contempt for "profits", I think you are misinterpreting his reasoning. I believe Phillip's position is that the government levies taxes on all sorts of things, why is this any different than those taxes? Not to say that government must tax those things, just that they can and the fact that they do does not constitute any wrong on their part (Phillip correct me if I misunderstood).

Adam Freund said...

The two competing philosophies are not about what is done with the money after it is collected. They are about the relationship between you and the government. Taxing is essentially the same as restricting. You said it yourself:
If you own land there are restrictions on what you
can legally do with it. If you own a computer,
there are things you can not legally do with it.
Take the argument to the extreme and place restrictions on what you "own" to mean you can only do one thing with the land or the computer. Is that what you think of ownership? I could even go farther and not let you do anything with what you own and confiscate it all.

What must exist or not exist for you to own something? Here's the question, how does/should society come up with the restrictions applicable to land, the computer, or the inheritance to be passed down. If those restrictions are arbitrary then I would say you don't own anything because they could be changed at any time.

The problem many people, my friend Geoff included, have with the estate tax is exactly that it seems very arbitrary. There is no reason to tax other than to take from the rich because their heirs don't deserve it. Yes, society can do that, but why? Should we tax everything and everyone we don't like?

This is a political philosophical question because there are many who believe that yes, society should tax things it doesn't like. They see no limits to what society can and more importantly should do. If that is your view then keep reading this blog.

Phillip said...

The 12k on personal gifts is the current law, which is where the figure comes from.

Considering nearly every transfer of wealth is currently taxable, the burden of proof is on demonstrating why estates and gifts should not be taxed.

Charitable donations are not taxed in the transfer. To compensate that they are net, not gross, amounts of income there are federal income tax deductions. I believe that is an excellent way of handling the situation. Yes, the recipient does and always has mattered to me and the law. As a society we have agreed that promotes the common good and does not interfere with anyone's freedom and the benefit to society balances or outweighs the loss in tax revenue.

Speaking of nonsensical, where would you ever get the idea that I dislike profit? Nothing I have ever said has related to the idea that profits are evil or obtained though unethical behavior. Nor do I believe that we live to satisfy the whims of a government. Your overt and implied statements are both red herrings and non sequiturs.

It seems more arbitrary to me to make a transaction exempt for no apparent reason. This is a matter of personal perspective though and whether or not we view it as arbitrary is irrelevant in the end. Also, the estate tax also begins in effect at estates valued at 1M which is certainly not only the rich.

Your discussion of ownership seems very theoretical. What is your practical definition of ownership? How would we set limits without the ability to change them?

Adam Freund said...

Ownership aside. Why the tax other than we can do it and you think it is right? Isn't this a very dangerous philosophy and the definition of arbitrary?

Something that is not arbitrary is a tax on gasoline to pay for the roads. Or income tax to pay for the military. These taxes are collected to serve a function of government. What purpose does the estate tax serve other than to generate revenue for the government? And if this is the purpose then I ask you why this particular type of tax? Why not another tax such as raising the income tax on the rich or higher corporate taxes? There are lots and lots of ways to generate more revenue. Why this method of doing it?

Phillip said...

The taxes that we pay are not as itemized as you depict there. Some items have specific taxes for them. Other items draw from the general tax pool, mostly filled by corporate and personal income tax. Whenever these entities want to do business they pay a tax on that, usually a state sales tax.

If the purpose of this tax is to generate revenue for the government, which has huge debts and deficits, then why not this tax? We have the graduated tax system for what we believe to be fair in place already and thus believe that the wealthy are already paying their fair share. Higher corporate taxes may (or may not) cause economic stagnation or recession from the status quo. There are arguments against why we should do the other kinds. Obviously an estate tax would not cause large economic problems. Is it fair? In my eyes, yes it is because I view it as just another transfer of wealth. The limits are set at a certain amount because taxing below those would probably not be cost effective.

You seem to dislike the fact that this tax is not collected for a specific function. Our government, in its "wisdom" has already found some function for it I am sure.

Adam Freund said...

Our "wise" government will spend every red cent you give them and apparently more than that!

As far an the economic effects of this particular tax, there are some. I can assure you that all taxes have an economic effect. As an example, if you are one of "those" people who think you should be able to give your after tax money to your heirs, what is your motivation for accumulating that money if the government is going to appropriate it? I bet it was less than before the tax. This will mean that that person will work less which means less wealth is created for society.

Why not tax below a certain amount? It has nothing to do with being cost effective? Most rich people already evade these taxes with living trusts and other mechanisms. The reason there is an arbitrary minimum is for political reasons.

My original question has gone unanswered. Why this particular tax to raise money? Why not other more direct taxes? A more fundamental question, why raise the money in the first place (this is more rhetorical and I want to limit that, so don't answer please). The answer is not economic in nature but political.

Phillip said...

The original question has been answered. The government spends more money than it brings in. Thus it wants to bring in more money. I guess they do not believe that it is politically tenable or economically wise to pursue another tax. I am not saying I agree with those reasons, but they are the likely candidates. It is simple though. They want money. This is a way they can get it without ticking many voters off and hopefully won't muck up the economy.

From wikipedia:"Living trusts generally do not shelter assets from the U.S. Federal estate tax. "

The reason for the 1M cutoff may be political, but don't deny the utility. Going after a 10k estate would be a waste of time and money.

As far as changing the desire to be able to give money to your heirs? First, this applies to people with estates of 1M or more. Thus, it is established that they likely have some earning capacity. If I wanted my heirs to be set up fiscally and I knew that money would be taxed in giving it to them -- why wouldn't that be a motivation to work harder? Some people may change their minds but I do not buy the "taxes squelch greed" argument. The kind of person who would let some (not an enormous tax burden until you get over multiple millions for estate) taxes stop the desire to make large amounts of money probably did not have the drive to make that money. People do not make large amounts of money by accident.

I agree with you that I would like taxes to be more sensible. I also wish that we had some notion of fiscal responsibility -- which we have not had since Eisenhower.

Adam Freund said...

You got it:
"They want money. This is a way they can get it without ticking many voters off and hopefully won't muck up the economy."

The only thing missing is "we" in your argument because you don't oppose this. It isn't "them" that is doing it, you support it fully. You support an arbitrary tax because it is politically palatable to do so.

If taxes don't squelch greed, then you are free to pay me 90% of your money. Let's see how hard you work.

Fiscal responsibility can only come when there is some notion that there are limits on what government ought to do and therefore a limit on how much money it should collect for those purposes. Absent that, the government will spend until it is clear that the goose is being slaughtered.

Geoff said...


"The 12k on personal gifts is the current law, which is where the figure comes from." Yes, I know. I was trying to point that this figure is arbitrary.

"Considering nearly every transfer of wealth is currently taxable, the burden of proof is on demonstrating why estates and gifts should not be taxed."

Okay, can we agree that _no_ transfers of wealth should be taxed then? That should alleviate your concerns about fairness.

I appreciate you correcting me on my over-the-top assertion about your views on profits. I have a visceral reaction to the use of the phrase "windfall profits" when it is used as a pejorative. I mistakenly categorized your use of the phrase in the same light.

I have very strong feeling about the whole notion of taxing transfers of wealth in any form. I do not believe that society has any claim on an inheritance when someone dies. Or if I hand you $100,000 in cash. Or if I give Adam my cabin on the lake. Why is society suddenly entitled to any of it? What is it about "transferring" goods that makes it taxable?

Okay, I'll let it go...

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