patrick.net

ajh,

I don't think the problem lies with estate tax (it's hard for me to feel too sorry for people who are inheriting money). It's more of a fundamental problem of shortsighted tax/fiscal policy without accounting for inflation.

theotherside,

I acknowledge the "cute baby" factor, but it really applies to the parents rather than the baby itself.

I myself lived in a 12x8 caravan in a farmer's field in Yorkshire, England for the first 6 months of my life. (My mum keeps reminding me that we don't know what a really tight RE market is these days; it's just a question of price. In post WW2 England, even as late as the mid-1950's, there was a genuine housing shortage.)

Did that worry me, and the subsequent 2 1/2 years in a rented flat in Nairobi, Kenya? Of course not; I literally have no memories from that period.

astrid,

Any way you cut it, a marginal inheritance tax rate of 40% is too high.

With respect to indexation, even an honestly calculated CPI is the wrong measure, as it systematically penalises real income growth. Median income would be better.

The tax issues are different here in Australia. We have no inheritance tax at all, but we can't deduct mortgage interest on property owned for personal use. I wouldn't mind an AMT at all, it would rein in the more egregious tax minimisation techniques including some which have exacerbated our housing bubble.

I don't think a 40% marginal inheritance tax is particularly high, when compared to approximately 50% taxation on salary. I can't say how the other Anglophone countries deal with this issue, but to me, the US system is basically the opposite of fair, where the hardest working is penalized the most and where the indolent rich are rewarded for their womb picking skills.

Also, inheritance tax is just taxing dead people...a dead person is unlikely to notice a difference.

Huh, sorry, that was me typing without my thinking caps, didn't mean to be impersonating ajh.

Anyhow, I would like to hear a formula for defining a "decent/stable ... income outlook." My personal experience is that unless you work for the government, there is no such thing as a stable income outlook. As for decent...what's decent for the BA again?

I’m also looking forward to meeting Bizarro Randy H…

He's currently living with me again, after having burned through another spouse. He shares my last name and many of my genes, although he's a few years younger. When he told me he's eying some great condo in the city that just dropped below $1m I retreated to my "study" and opened the '84 port. He lives in the bearded Spock universe.

Inheritance taxes are ridiculous in all forms. It's double taxation. The government already got its cut once, why should it get a second piece of the pie? The only taxable exception should be tax exempt stuff like 401(k) plans that still had funds at the time of death.

I'm telling you, the picture of the frazzled bird at the beginning of this thread = your average Silicon Valley new mortgage owner.

That doofy-lookin' bird is the face of your average, bamboozled Silicon Valley Adjustable Rate Mortgage holder.

Ha, ha!

Keep on flappin' your little winglets, ARM owners. Keep 'em flappin' into the hurricane force financial winds beginning to blow in from the Pacific.

You little housing Icaruses...

astrid,

40% is high enough so that people go to extreme lengths to avoid it, thereby introducing inefficiencies into the overall system.

It's the same with the difference between the top income tax rate in Australia of 48.5% vs the over-12-months capital gains tax rate of 25%. A lot of people are prepared to take big risks to change their 'income' into 'capital gains' because of the differential.

(I could bore you to tears about how that impacts the Oz RE market, suffice it to say that's a major factor why we have consistently high prices.)

Any system where the benefits from (legal) tax avoidance significantly exceed the benefits from increasing income is flawed.

I believe the biggest single bonus paid by Goldman Sachs last year was to the head of the London "Structured Finance" team. I.e. to the guy heading up the tax avoidance team.

Brand,

I agree with you, in any case, being a middle class in the US of A is the worst combination of all when it comes to tax suffering (speaking of which, I am in the middle of doing my taxes).

ajh,

I was recently on a flight with an English couple who flew to Taihiti to camp out so as to escape estate tax from UK IRS. According to them, UK IRS can still get their tombs if they happen to die within 7 years of moving overseas, so they told me that there is a wave of financially better-off UK seniors retiring overseas early in the hope of escaping that death tax, and seeking warmth on the side.

completely OT, but is an amazing story that occurred here yesterday. Girl got sucked up into a storm on a paraglider, went up to 30,000 ft and -40 deg, was unconscious with oxygen deprivation for an hour while the glider flew itself, beaten by melon sized hail, then landed safely, and inadvertently set a new record for a human at altitude...

Mount Everest is 8848 metres, or 29,028 feet. Ms Wisnierska's track log - a flight trajectory downloaded from her GPS handset and altimeter - recorded her top altitude at 9946 metres.

+ here

One of the more intriguing taxation proposals I recall - and I imagine it's from sufficiently long ago that some here may be too young to remember it - was Steve Forbes' flat tax.

He had computer modelling done to see what the figure would have to be to provide a budget surplus (at the time) if all deductions of every kind were eliminated for both individuals and corporations. It was just shy of ten percent. Add up what came in this year, move the decimal one to the left, and then cut Uncle Sam his check.

No incentives involved, no social engineering or calculations of depreciation and so on, and on...

Well, memory's a beast. It was 17%.

HK has the optional flat 15% rate even now -- I believe you have the choice of doing all the usual calculations, or else just cutting them a check for 15%.

Oz used to have estate taxes ('death duties') levied on a state basis, so when one state removed death duties as a ploy, the flight of grey capital to that state meant all the other states soon followed suit...

I found in looking up Forbes' ideas that many of the countries which made up the former Soviet Union have adopted a flat tax. In Russia, the figure is 13%, and capital gains, inheritance, pensions and savings are exempt.

This is giving me ideas, though I imagine St. Petersburg's a bit chilly and dark about now.

I'm not a fan of flat tax systems, unless I can be convinced that social justice will be served by letting off people who have far more than they need to live lightly. You will still have 5% unemployment and welfare needs to service. However, you might see the disappearance of many of the tax avoidance advisors, which would be a welcome relief, although I'm concerned that people would still seek to avoid even the 15% tax rate. It might be better to close off some of the more obvious avoidance loopholes instead. Most ordinary wage earners find it very hard to find much to claim as a deduction in general, unless they are tradespersons. Altho if total tax revenues were reduced considerably, what would be the first thing to go? Expenditure on arms and the military-industrial complex? Congress salaries and perks? Maybe Washington would be less manipulative on the world stage with less money to throw around...

One of the more intriguing taxation proposals I recall - and I imagine it’s from sufficiently long ago that some here may be too young to remember it - was Steve Forbes’ flat tax.

I remember that... aside from that he had some other "interesting" ideas early on that are summed up in this wiki entry:

http://en.wikipedia.org/wiki/Steve_Forbes

Steve Forbes claimed, in a TV ad, that he helped craft a tax cut in New Jersey prior to entering the 1996 primary. Forbes entered the Republican primaries for President of the United States in 1996 and 2000, primarily running on a campaign to establish a flat income tax. He also supported the ideas of re-introducing 4 1/2% mortgages and term limits in 1996, but dropped both in 2000 (as they were minor planks in his overall platform).

In his 2000 campaign, Forbes professed his support for social conservatism along with his supply-side economics. Despite holding opposite positions in 1996, for the 2000 campaign, Forbes announced he was adamantly opposed to abortion and supported prayer in public schools.

Ah... voodo economics.

I don't imagine a flat tax would be a cure-all. The speculations and fiscal abuses retailed here would, I think, still be possible were we to scrap the current byzantine code in favor of flat taxation. Nonetheless I'm attracted by the prospect of so many personal and business decisions freed from consideration of tax implications.

Forbes had other planks in his platform which are evident within the current administration, legislature and courts.

DS,

I remember the 'Joh for PM' campaign, where he was pushing a flat tax. 25% and nothing on capital gains IIRC. He's also the guy who started the 'race to zero' with respect to state death duties.

I have wondered about how a flat tax at that level starting from dollar one would go if it were combined with every adult citizen getting an allowance equivalent to the age pension.

The problems of unemployment benefit eligibility would instantly vanish, so we wouldn't see so many people faking it to get disability pensions and the like. The social security system could focus on retraining and real problem cases. Give children's allowances to custodial parents.

Massive simplification at various points of the financial system would ensue.

Here. You know what to do...

Profiting on Foreclosures
by Jeff D. Opdyke
Tuesday, February 13, 2007

The bidding on home number 546527 -- a moss-colored brick house in Baton Rouge, Louisiana -- began at $103,333.33. Less than a minute later, Ray Williams owned a home he had never set foot in. His winning bid was $130,000. The appraised value: $155,000.

After looking it over, Mr. Williams figured he would spend $20,000 repairing rotted wood and other defects. Then he will put it up for sale -- at $205,000.

Seven months ago, Mr. Williams joined a legion of investors who buy and sell foreclosure properties. So far, he has bought seven.

"If I'm not confident I'll make $30,000 per property, I don't bid," says Mr. Williams, 42, who used to own and run Domino's Pizza outlets. He has hit his goal on the first five.

As interest rates rise, more homeowners are falling into foreclosure. That is what is prompting the wave of bargain-hunting investors now descending on courthouse auctions across the country.

"It's just crazy. We have 100 houses [at auction] each week, when we used to have 10 or so," says Elaine Began, a deed clerk in Macomb County, Mich. Three years ago, the Montgomery County (Ohio) Sheriff's Office was "lucky to get 50 people to an auction," says Laura Wright, a foreclosure clerk there. Today, 120 often show up.

Some may be sorry they did. Novices face a host of risks. Foreclosed homes can come with hidden debts. Homeowners generally won't let you inspect the home before you try to buy it out from under them. Not knowing the local rules, which vary from state to state, can also cost you big.

The notion that $250,000 homes can be had for a few thousand dollars "is largely a myth," says Peter O'Connell, a former banker who has invested in foreclosures for years, including near his home in the Florida Keys. "If there is any equity in a house, you're generally not going to get it cheaply."

Here's a primer:

The Process

The process usually begins when mortgagees fall three months behind on payments. The lender sends a default notice to the homeowner and to the county. If the homeowner can't pay up, a foreclosure date is set. County officials handle the auction and use the proceeds to pay off the mortgage and any other debts secured by the house. Leftover money goes to the foreclosed homeowner; leftover debt, in some cases, is the new owner's responsibility.

The mortgage lenders typically bid up to the remaining principal amount plus any foreclosure fees. Their goal is to recoup what they are owed, either from investors bidding more or by buying the home and reselling it. Foreclosed homeowners sometimes join the bidding and win the auction, even though they don't have the money, effectively delaying their eviction until another auction is held.

Investors can get in the game before or after auctions, too. They can try to buy directly from homeowners beforehand or from lenders who win the auction.

etc...

ajh Says:
I have wondered about how a flat tax at that level starting from dollar one would go if it were combined with every adult citizen getting an allowance equivalent to the age pension.

You could start a 'housing credit' system where people never pay rent, everything they pay goes into an 'equity' balance throughout the lifespan -- sort of like the 'rent to own' schemes in the UK. This would get people out of the trap of never being able to save a deposit because they are paying too much rent to do it.

But the politicians would never do it, they are too wedded to keeping everyone on the edge of desperation, except their well-heeled mates who own all the housing as landlords and the means of production...

I think you're a little off the mark all round, Shmend Rick... it remains to be seen whether housing gains the serious attention of politicians -- there was a recent Congressional enquiry into housing prices, for instance...

ajh Says:

> I believe the biggest single bonus paid by Goldman
> Sachs last year was to the head of the London
> “Structured Finance” team. I.e. to the guy heading
> up the tax avoidance team.

I don’t know the guy from Goldman in London but I know others at Goldman who work in “Structured Finance”. The Goldman guys I know (and everyone else I know that has ever used the term “Structured Finance”) are doing mostly CDO type debt and have nothing to do with tax avoidance…

Different Sean Says:

> You could start a ‘housing credit’ system where people
> never pay rent, everything they pay goes into an ‘equity’
> balance throughout the lifespan — sort of like the ‘rent
> to own’ schemes in the UK. This would get people out
> of the trap of never being able to save a deposit because
> they are paying too much rent to do it.

We already have great systems in the US to get people out of the “trap” of paying too much rent to save a deposit.

The first “system” is great for lazy people since they don’t need to work harder or get a new job. All they need to do is use the “room for rent systems” (including Craig’s List and Classifieds) and find smaller cheaper place.

If someone is not lazy and/or stupid they can use the “higher education system” and do anything from going to Junior College to learn how to be an IT guy or go to a couple real Colleges and become a corporate tax attorney.

Corporate tax avoidance is a bit different.

I don't buy the double taxation argument. It's one thing if you're getting double taxed on a single taxable event (like AMT taxing dollars you've already lost to your state government), it's a different matter when we're in fact dealing with multiple taxable events - which is what taxing inheritance tax would be.

Otherwise, if you are hit with sales tax or property tax paid out of your net income, you're getting double taxed. Money can be taxed numerous times, as long as its taxed at separate events, it's pretty standard procedure.

Furthermore, in the US, your estate get a step up in valuation at time of death (or 6 month afterwards) regardless of whether it ends up paying inheritance tax. For the vast majority of Americans, death will be a tax saving event, even if they end up paying a little bit of marginal estate tax.

I'm more inclined to buy the efficiency argument, but only if someone can demonstrate how it's more efficiency or desirable to heavily tax earned income. To me, taxing work seems the worst. Taxing capital gains or dead man's money at least has relative painlessness going for it.

DS,

Renting offers certain advantages over owning, such as flexibility and cheapness, that may in fact be a positive for working class or lower income but upwardly mobile people. Those people often needs flexibility of payment, flexibility to move, and comparative cheapness much more than whatever equity they might be able to accumulate in the first 10 or 15 years of "ownership."

Furthermore, debt servicing on any concept of short term "ownership" will largely wipe out the advantage any actual equity.

The big money is in corporate tax anyhow. Short of moving to a tax haven or doing heavy lifting trust work (which is arguably quasi corporate anyhow), a high income wage earner has relatively few tax saving options - most can be exercised without the help of any tax attorney.

Once you own a business, esp. once you own a C corporation or two, huge tax planning issues/opportunities come up and tax attorneys become a "must."

(The above is just my deranged ramblings and does not constitute tax planning advice or indeed advice of any kind.)

ubermonkey says: I think that are a necessity if you want any kind of meritocratic society. Otherwise, ones wealth will be based mostly on one’s parents merit, not on one’s own.

Eliminating the death tax would not create such a situation. That would endure one generation. Then the third generation would get a reduced amount because the second generation relied on their inheritance instead of working hard and producing something of value.

If a goal of tax policy is to prevent the formation of a quasi-feudal society (which we’re approaching in the U.S.) then taxing inheritance is one of the milder tools one can use. Be glad that we don’t have an asset tax on total financial assets (for example).

I think it's ludicrous to suggest that we are approaching a "quasi-feudal" society. The rich aren't suppressing the poor. The United States provides huge opportunities for immigrants who come here and work hard. I read a study on millionaires were a major percentage was first generation immigrants who started businesses and busted their butts.

We have a lot of well-meaning social programs intended to help less fortunate people. I think a lot of them aren't "less fortunate", they are simply mooching off the system. There is still money out there for hard workers. Maybe it's not in great locations, and maybe it's not great money, but this is still a land of opportunity for people who have drive and common sense. But I guess that's a lot less convinient than accepting government handouts.

If this system is going "quasi-feudal", it's because we're subsidizing a bunch of lazy people exploiting the system, including a whole lot of illegal immigrants. It is still a meritocracy because you can work your way up from fresh-off-the-boat to middle class in only one generation, as long as you can make disciplined sacrifices along the way. I fail to see where the rich or the government have done anything to undermine that opportunity.

http://post.polls.yahoo.com/quiz/financeresults.php

U.S. Housing starts in January dropped by more than expected to their lowest point in almost a decade. Has housing bottomed?

Yes 29%
No 72%

26499 Votes to date

Not exactly a huge vote of confidence. Did anyone read the CNN Money article on shoddy housing construction? Apparently builders were just slapping up homes as quickly as possible, and the quality on many new houses is quite low.

justme,

Like you, I've never lived under anything but a progressive tax system. But I'm willing to consider that placing progressivity in the realm of taxes removes it from life. Under the present conditions, if you work to build financial independence you keep less of what you've accomplished.

I'm no fan of tax dodges, but I think it should be evident that the current arrangement encourages the practice. If you set out to create a system to encourage an 'I've got mine and to hell with you' mentality, I think you'd have to be very clever to come up with one more effective than what we have now. Not that I aspire to change your mind. But to me, it is an issue of equality before the law.

I don't like to see any particular group favored over another, and if that means Scrooge McDuck pays an annual 13-15-17%, then so be it.

ubermonkey,

If some of the disadvantaged are living off the welfare system - your tax dollars - and some of the second- or third-generation wealthy are living off a trust fund - not your tax dollars - then what's your problem?

As a taxpayer, I am far more concerned with the former than the latter. The lower class forms an enormous base of people drawing benefits from tax dollars. We could take away everything that the rich own, and it would still only fill that deficit for a year or two.

By the way, all this communist garbage ignores the fact that the rich are often the greatest producers of wealth for the NATION, and not just themselves. Entrepeneurs create new businesses that draw in foreign revenues, thus increasing the corporate tax base from which the lower class will draw benefits in the form of jobs, health care and welfare. We should let wealthy business owners keep more of what they create, because it encourages them and benefits the nation as a whole.

And by business owners, I do not mean CEOs, who are generally a bunch of worthless puppets in suits. I mean private equity businessmen like Robert Kravis or Bill Gates, who build corporations that add tremendous worth to the U.S. economy.

Hear! Hear! I would certainly welcome a bumper crop of "corporate raiders" and shareholder advocates. There's a lot of similarity between many current Fortune 500 CEOs and G W Bush.

Brand. International estate dodge is a tricky business. Currently, most loopholes AKA planning opportunities lie in the IRC, not with moving abroad. I'll get more worked up about fairness or not of "double taxation" if salaries and capital gains are taxed at a similar rate.

Anonytroll,

Living with my parents in my teens/twenties would be preferable to living off my kids in my seventies. Freedom now can be deferred for greater freedom later.

Dear fake surfer-x (cowardly assmaggot that you are): If real estate is about community and making a home, then why do Realtwhores always position it as an investment? Possibly because if they called it what it was, then a lot fewer people would purchase homes in the Bay Area.

astrid,

Fine. Tax capital gains. Tax all sources of income. For everyone.

If you did, the rate would come in at or below the ten per cent I first mentioned, and you'd know that everyone you ever heard of from fry cook to Paris Hilton was paying the same tariff as you.

hmm, people are missing the mark, or point, even while shooting from all directions at once...

Would someone kindly delete the troll surfer-x comments.