Nothing succeeds like succession

August 8, 2010

So virile, he did chinups with his hands backwards. IN A SUIT

George Steinbrenner died last month. Although he was the stereotype of the stuffy, autocratic tycoon, that stereotype’s validity is now as dead as The Boss himself.

Steinbrenner came from wealth – relatively modest wealth, compared to what he ended up creating. His father owned a shipping company, transporting ore and grain on the Great Lakes. Steinbrenner fils succeeded in the family business before expanding into sports. If you’d ranked the Major League Baseball owners by net worth, Steinbrenner would have been a lot closer to the bottom than the top. Unlike his fellow owners, Steinbrenner’s income stream consisted of little more than the revenue generated by his team itself, and its ever-increasing franchise value.

The federal estate tax, which can be as large as 55%, lapsed on January 1. Steinbrenner died at the right time for his heirs to avoid having to possibly liquidate the franchise to comply with a backwards, outdated tax based more in jealousy than in economic rationale. Still, people including our political betters argue that concentrating wealth in the hands of the Steinbrenner clan is somehow obscene and maintains the folkloric gap between rich and poor.

Well, what’s the alternative to letting dead people turn their wealth over to their children? There are two:

1) Evaporate the wealth. Destroy it. Flood the gold mine, unlock the doors on the sporting goods store, set the car dealership on fire after cancelling the insurance policy.

2) Hand the wealth over to the appropriate bureaucrats in the federal government.

Again, an important distinction with a huge difference: “the government” is not just an amorphous entity that inhabits stately marble buildings, denies you access to certain empty plots of land and gives you a convenient address to send your taxes to. It’s comprised of people. A rich dead man’s wealth that succumbs to the estate tax doesn’t go to “the government”, it goes to particular people. Who then mete it out to other people. Whether any of those people are entitled to said wealth isn’t the issue here: the important thing is that the recipients and transfer agents of this forced largesse are humans with prejudices and biases.

There are plenty of characteristics that distinguish America from a world full of lesser countries (four-down football, the Imperial system of weights and measures, Hamer guitars, Holly Halston, bison, the republican form of government, concealed possession of firearms, the Amazon Kindle, etc.) But one that’s taken a hit in recent years is the absence of class envy. Ten years ago, the only place you could find resentment of rich people was in the sociology department at the University of California’s main campus. Wealth was something to aspire to, not to begrudge.

That was before the lines between the political class and the financial class blurred. Put a former Goldman Sachs chairman in charge of the Treasury Department, give him unfettered access to taxpayer money, let him funnel it to men who run corporations of sufficient size and political bent, then defend it with one of the most ludicrous statements issued by a president (:28), and it’s easy to see how rank-and-file taxpayers might get resentful or at least suspicious. Especially given that this miscarriage was perpetrated by the political party that ostensibly stands for small government. The subsequent and current administration doesn’t even bother to mouth such ideals, and can afford to be more dogmatic. And reactionary. And confiscatory.

The argument for the estate tax is that wealth shouldn’t be concentrated in a few hands, or we’d end up like Mexico, where conventional wisdom states that only 150 families or so own almost all the means of production.

But isn’t that just a judgment call? Say Larry Ellison died tomorrow (we chose him instead of Bill Gates or Warren Buffett, because Ellison is the richest guy on the Forbes 400 who hasn’t gone public with his intention to will most of his wealth to someone other than his kids.) Ellison is worth ~$27 billion, contingent on what Oracle stock did today. He has two kids and a (fourth, childless) wife. The wife presumably signed a prenup the size of Mount Whitney.

Is three heirs too few to enjoy Ellison’s wealth? If the answer’s “yes”, then how many should share in Ellison’s estate? All 300 million of us? Or the few thousands who would benefit indirectly were IRS agents to take $14.85 billion of that to distribute as they see fit?

It’s relevant, so perhaps we should mention that the author has no pig in this race. Nor does he believe that rich people are entitled to any fewer of the freedoms that middle-class and poor Americans accept as their birthright. The establishment and continuance of the estate tax puts government workers and legislators in charge of deciding who gets what. They might even be adept at this, that’s not the point. The point is that they should have no more right to award wealth than the person who created said wealth.

If Ellison dies on January 1, 2011, when the estate tax will presumably be reinstated, his heirs will be forced to sell controlling interest in Oracle. Which could mean the company’s eventual direction will fall in the hands of people without Ellison’s vision. Maybe irrationally motivated corporate raiders, maybe the agents of the federal government itself (why not? Go dig up General Motors founder Billy Durant and ask if he ever envisioned taxpayers “buying” his brainchild.)

The estate tax leaves us with perverse incentives. It can discourage family-run businesses from reinvesting profits, if doing so only will only accelerate the company’s eventual disassembly. This isn’t just a problem for Sam Walton’s kids, either. Almost all American farms are owned by families. You know, agriculture – the one indispensable industry that all the others derive from. The Department of Agriculture’s own employees – federal teat-suckers all – admit that as many as 10% of farms could soon fall victim to the estate tax.

But farmers aren’t rich. Why would they have to pay the estate tax?

They have to own a ton of capital to turn a profit. Farming is about the most labor-intensive, capital-intensive business there is. And the most critical.

More to the point, estates have already been taxed throughout their existence. It’s not like George Steinbrenner wasn’t sending tens of millions of dollars to the IRS every year to maintain his wealth in the first place.

Sure, Larry Ellison’s kids had no hand in creating his wealth. If that’s the criterion for deciding who doesn’t deserve it once he’s gone, who does deserve it?

**This post is featured in Tax Carnival #74: Labor Day 2010 Edition**

**This post is featured in the Carnival of Wealth #3**

Filed Under: Taxes Tagged With: , ,

Forced Savings = Voluntary Servitude

July 4, 2010

Refund anticipation loan, IRS, Tax return, tax refund, tax refund loan, refund loan

Can we finally shoot some sodium pentothal into the idea that tax refunds are a good thing?

Refunds for taxes work on the same principle as refunds for anything else: you paid too much, and the payor returns the difference to you. Except you rarely require a refund in your everyday, non-taxpaying life, because private businesses are smart enough to know what to charge you and what to give you in return.

Imagine if a vendor – say, your home insurer – asked you to pay your annual bill in estimated installments throughout the year, and promised to pay you any overage at the end of the year. In other words, they’d like you to deposit some money with them, and withdraw it at 0% interest later. No homeowner in her right mind would consent to this, and no insurance company that wanted to stay in business would offer such an absurd payment plan.

Why people act any differently with their federal and state governments is a mystery. Especially when the government a) lets you defer payment, and b) might not refund your taxes on timee.

Oh, you didn’t hear? Our federal government is insolvent, as are most state governments. Like Rhode Island’s, whose Division of Taxation managers have now decided to refund taxpayers whenever.

The people who run the state’s Division of Taxation* have already postponed tax refunds a couple of times. The helpful answer for angry taxpayers is to “be patient.” Try telling that to your creditors. It’s a lot more difficult if you’re not representing a state agency.

State employees are keeping Rhode Island taxpayers (and Hawai’i taxpayers, and Georgia taxpayers etc.) waiting unduly long. But the taxpayers themselves share some of the blame, like a homeowner who leaves his door unlocked or a raped woman who wore a push-up bra**.

You don’t have to be in the position of waiting for some government tax clerk to mail you a check, not when it’s perfectly legal for you to make him wait for your check. We’ve said it before, and we repeat it in the book (available now on Amazon – for your bookshelf or your Kindle.) Get the minimum taken out of your biweekly paychecks, invest what you would otherwise have had withheld, and cut the government(s) a check on April 15. (Oh, you live in a state with an income tax? Sorry, couldn’t hear you over the guffawing of the Floridians, Montanans, Alaskans, Nevadans, Washingtonians, Wyomingites, South Dakotans, New Hampshirites and Tennesseans in the audience.) You can do this. You should do this. You’re insane if you don’t.

Why do lawmakers even allow this? Because they know that most taxpayers are terrified – of repercussions, and of themselves. Those pusillanimous taxpayers grossly outnumber the others, so much so that it’s not worth changing the rules to inconvenience those in the latter category. If you’re in the former category, letting the government enjoy your money interest-free all year, you can’t get in any trouble when the deadline to pay your taxes arrives. Government tax managers know this, and thus allow you to pay “tardily” (i.e., by the deadline.) Exploiting that – taking advantage of laws that everyone knows about but hardly anyone capitalizes on – is a crucial component of Controlling Your Cash. The government might be legally authorized to kill you***, unlike private businesses, but don’t forget to take advantage of the Law of Large Numbers. There are 300 million of us. The IRS and state tax agencies, as burgeoning as they are, can’t demand early payment from every one of us. They can only withhold your money if you give it to them first.

Understand, no one’s encouraging you to avoid paying your taxes. But take advantage of the legal ways to postpone the damage as long as possible. You have to cut the government a check anyway. There’s no discount for doing it early. In fact, we’ve shown that you can be punished for doing it early. So why wouldn’t you wait until the last possible second to pay?

*It’s an important distinction: institutions don’t levy taxes, send soldiers to war, nor deny benefits. People do. Just like governments don’t allocate money, so much as government agents confiscate money from taxpayers and then spend it in a place of the agents’ choosing. If this sounds like a rant from a Bircher, it isn’t: my membership expired years ago. But it is an undeniable fact, and it personalizes what people too often think of as happening only in the abstract. The next time you hear “state x has a budget shortfall”, understand that a budget deficit is not some irresistible force of nature. What this really means is “the people who make economic decisions for the state chose to spend more of the taxpayers’ money than they could afford.”

**Relax, skirts. I’m kidding.

***America’s finest satirist, P.J. O’Rourke, points out that if you don’t pay your taxes, you get fined. If you don’t pay the fine, you go to jail. If you try to escape from jail, you get shot.

Filed Under: Taxes Tagged With: , , , , ,

Majority of the Tyranny

June 15, 2010

Founded c. 1775. Hope lost c. 2010.

We try not to get political here, but sometimes it’s impossible. So before we begin this week’s post, here’s some of our philosophy, without getting too detailed. These are not so much opinions as they are objective truths:

  • Governments should only provide what competition and a marketplace can’t – i.e., what everyone can benefit from, but which no private individual or business could receive a tangible return on were they to pay for it themselves. (Unlike governments, private agents have an incentive to reduce waste and increase efficiency – because they’re not using money blatantly confiscated from other people under penalty of death.) Which means governments should provide police, courts, a military, maybe some roads and not a lot else.
  • Taxpayer dollars are sacred and should be treated with the utmost of care.
  • Governments almost always do more harm than good.
  • Governments don’t and can’t create wealth. They can only take it from some and award it to others.
  • The higher the level of government, the greater the potential for damage and the greater the likelihood of inertia. It’s easier to reason with a county official than a state official than a federal official than a UN official.
  • Your job is not as critical to you as a politician’s is to him or her. Reelection is more important to a politician than any of the following: promoting individual freedom, increasing prosperity, fostering peace, curing disease, reducing and/or punishing crime. In other words, if a politician does something that seems illogical, it probably isn’t. It’s done with a nod to ultimately securing exposure, donations, or something that will hopefully result in more votes or the elimination of rivals.

If any of that sounds outlandish, let us know. Because this is what sounds outlandish to us:

The American Jobs and Closing Tax Loopholes Act of 2010. Like many other federal bills, this one’s title obscures more than it explains. You can read the 28-page summary here.

This bill punishes small businesspeople harder for committing the unforgivable, possibly racist and maybe even carbon-positive sin of trying to earn money without sucking at the ever-augmenting public teat.

In our new book (available in both physical and Kindle format on Amazon), we devote the final chapter to entrepreneurship – which is the only way to create lasting wealth. You really have to read the book (did we mention it’s also available at BN.com?), but in it we encourage you incorporate your small business as an S corporation – a special designation that gives you tax breaks single proprietors never experience. Setting up an S corporation costs only a few bucks but pays for itself many times over the course of your business. Or at least it did.

An S corporation lets you pay yourself a reasonable salary out of your profits, the remainder of which gets distributed among your corporation’s shareholders at the end of the year. This is NOT subject to self-employment tax, which is 15.3%.

The new law would affect anyone who has a professional services S corporation with fewer than 3 shareholders who actually have a hand in the company. In other words, one or 2 shareholders. In other words, people who would otherwise operate as a single proprietorship or a partnership – which are the most tax-disadvantaged ways to organize your business.

So if you’re an attorney, a recording engineer, a medical transcriptionist, a hairstylist, whatever – that all changes with the new law. It just becomes that much more difficult to operate, in an economic climate that isn’t exactly friendly in the first place.

People respond to incentives. This will encourage some people to simply give up their entrepreneurial dreams and go back to work for the stifling, soul-crushing man. It’ll encourage other people to get a little more creative with their business deductions. From the government’s perspective, this is wonderful – it’ll give all those new IRS agents something to do and someone to pester.

Here’s how your representative voted. The Senate is apparently set to give the House bill its imprimatur soon enough.

The Congressional Budget Office itself acknowledges that the bill would increase our already semi-comical deficit by $174 billion. (Oh, you think that’s cause for alarm? Look at you, you adorable little idealist. I bet you might even write a letter to your representative and senators, as if they read them or think your opinion matters.)

When is Congress holding its next hearing concerning whose nipple appeared on which TV broadcast? Or which baseball players injected what substances into their posteriors? Or which idiot thought the brake pedal on her Lexus was the one on the right? As long as it results in camera time for the politicians in question, who cares if it takes away from the business of actually freeing up the economy and letting capital and resources get allocated in the most efficient way?

But remember: it’s evil, greedy businessmen who are killing the country. Politicians and those committed to a life of public service are the real heroes.

(Thanks to Diane Kennedy of USATaxAid.com for drawing our attention to this horrid bill.)

Filed Under: Taxes Tagged With: , , , , , , ,
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