Doesn’t “expecting the unexpected” make the unexpected expected?
Yes, which makes the surprise unexpected when the government imposes a new tax.
While we can’t prove taxation started with Java Man, most historians think the first sales tax was imposed by Julius Caesar on Ancient Rome. The first income tax came from Ancient Roman Emperor Augustus. The blame for the first property taxes can be evenly divided between ancient Egypt, Persia, and China. The Roman Empire came up with the idea of inheritance taxes. Even the Rosetta Stone was about new tax laws in 196 BCE.
As individuals, we are subject to income tax, real property tax, personal property tax, sales tax, social security tax, Medicare tax, capital gains tax, estate tax, gift tax, user fees, sin tax, luxury tax, excise tax, and value-added tax. There are over 100 taxes in the US Tax Code. Add in the taxes imposed by states and local taxing units, and it is a wonder that you get to keep any money at all.
Most taxes are imposed to raise money for the government, but some taxes are imposed to drive an ideological belief or reward a political donor. Almost all taxes influence behavior.
The History of Taxes
In the 16th century Amsterdam assessed a building tax that was based on the width of a property’s façade. If you visit Amsterdam today, you will see the result of that tax; the houses are abnormally narrow.
When Ireland levied a tax on windows, building owners responded by bricking over their windows. Greeks placed green tarps over their pools to hide them from sharp-eyed tax collectors looking to impose a luxury tax.
Spiked seltzers avoid a distilled spirits excise tax by fermenting, rather than distilling, sugar. In New York, it is estimated that 324,000 cigarette packs a year are smuggled in to avoid the high excise tax on cigarettes.
A lot of people bike in Denmark because they cannot afford to pay the high gas taxes or buy new cars, which have a 150% excise tax. Electric cars are becoming popular in the U.S. because of the generous federal tax subsidies.
In 1986 the capital gains tax – the tax levied on the profit when an asset is sold- increased to a maximum of 35%. In response, investors sold their assets less frequently. When the capital gains tax decreased in 1997, a lot more assets were sold. This had a dramatic effect on the economy.
Taxes and Estate Planning
We are so easily manipulated by taxes that it should be no surprise that it is a major motivator in estate planning. Many people make decisions today on how it will influence their estate tomorrow.
Take the capital gains tax. You may have purchased a widget for $100 that has since appreciated in value to $500. If you sold it today for $500, then you would pay tax on your $400 gain. On the other hand, if you died and your beneficiaries then sold the widget for $500, there would be no gain and therefore no tax. Why? Because of your death under current law your widget would get a step-up in basis from its original purchase price to its current market value of $500.
Knowing that, you may decide to hold onto the widget so that your estate will be more valuable for your beneficiaries.
The step-up preserves inheritances. It is not a tax loophole. It is a necessity for families. It is a signal that death, alone, is not taxable.
More importantly, it is expected.
Hammerle Finley Can Help With Your Estate Planning Needs
Virginia Hammerle is in her fourth decade of practicing law. She is Board Certified in Civil Trial by the Texas Board of Legal Specialization and an Accredited Estate Planner. Contact her at email@example.com or visit www.hammerle.com. This column does not constitute legal advice.