Hacker News Reader

Comment by cperciva | Hacker News Reader

This is something people love to rage about, yet it's not one with an obvious fix.

In Canada, assets are deemed to have been disposed of upon death (or gifting) so the estate pays capital gains taxes on the accrued profit. There are a few exemptions for political reasons, e.g. to allow farmers to pass appreciated farm property to their children tax free, but they're sufficiently limited that they don't cost very much.

Seems like an obvious fix to me -- when the cost basis is stepped up, taxes are due -- and in practice it seems to work pretty well.

View on HN

Family farms are a good example but there are still plenty of others like a family business. I wouldn't care to see an increasing fraction of assets fall into institutional ownership simply because people are taxed out of owning them intergenerationally. There's a massive difference between "the government will tax you for part of your value" and "the government will, over a sufficient time, tax you entirely out of even a growing asset."

If the concern is how much the policy costs the nation, then I don't think that's a sufficient reason to change things either. The top 1% in America hold about 31% of a total $140 trillion, or $43 trillion. This is, in a very optimistic case, around twenty years worth of the current federal deficit. Given the trajectory it's taken over my entire lifetime I find it unlikely it would last more than a decade. If the concern is cost, we have a "money out" problem in the US, not a "money in" one, largely driven by our ballooning mandatory spending (much of which goes to a radically outsized group of old people, whose entitlements neither party will touch despite their outsized ownership of wealth) and the high interest expense that's caused. Even if we outright confiscated every dollar of the 1%'s net worth, that wouldn't represent a remotely sustainable solution. Hence my comment about most of these policies looking more like schadenfreude than a sincere desire to fix things.

Help me understand why a family farm would have such an issue if the owner-operator dies, but Walmart didn't when Sam Walton died? Is it an issue of incorporation/business structure?

Leaving aside the fact that Sam Walton was an American and so his assets had no "deemed disposition" upon his death: Walmart is a publicly traded company, so if his heirs inherited a few % less of the company it wouldn't make a big difference.

In the "family farm" (and "family business") scenario, we're talking about private companies -- whether incorporated or not, all the owners are related. If part of such a company needs to be sold off to pay taxes, it would presumably be sold to a someone at arm's length, which would fundamentally change the business structure -- just like running a startup with VC investors is different from running a bootstrapped startup.

Couldn't family farms plan around such an event occurring, either by having the cash on hand to pay taxes or through some sort of insurance?

Where does that cash come from? Family farms often are worth millions on paper, but it is all land. There typically isn't that cash. And the way tax laws and inflation works you are discouraged to not keep that kind of cash on hand - there is no place to save it that keeps pace with inflation after taxes that is low risk (If everyone tried this you will hear horror stories about someone who puts the money aside and then the parents die so it is needed but the market is down and so they lost money)

Thank you. I feel like I understand the structure better now

In the particular example of a "family farm" (mostly extinct since the 1970s in any meaningful way), profit margins were always slim. Furthermore, life insurance for grandpa isn't likely to cover the difference... the real estate value of smallholdings is positively astronomical in many cases (acreage alone does this, but it's often high quality land in many ways).

There's not many plausible routes to "paying the millions-dollar death tax so that developers don't turn the cornfield into a suburb" in such scenarios. Mostly moot though, this all played out and was over before most of us were born. I suppose there are gigantic 20,000 operations that "won't stay in the family"... but those farmers:

1. Aren't really living on the same piece of land that they farm

2. Having to sell off 1500 acres to pay the tax bill doesn't much affect their operation except that it's slightly smaller

3. Have someone custom combine it anyway... they're basically a management company that hires a bunch of contractors

4. Generally are incorporated in such a way that sole ownership hasn't been an issue since great-great-granpa died back in 1961

Family farms are, at this point, largely mythological.

Suppose you're a young 20 something with maybe $300 to your name. Daddy gets struck by farming equipment and dies. Now you have two choices:

1. Continue operations of the family farm, assuming you can come up with the money to cover taxes.

2. Sell the farm to Big Farm, Inc., get a $5M check and forget about it, regardless of the consequences that means to your customers.

The taxes are less than buying the farm outright so it would just be a very cheap buyout. I do not see the problem, you can get finance for that in civilized nations. It's not easy but neither is buying a farm normally.

Inheritance, even with normal tax, is a cheap way of keeping money in the family and keeping rich people rich. It is not based on merit, capabilities or need and serves no purpose in a society based on improving the lives of the entire population. (Which you can argue is not what [country with low inheritance tax] is)

[inheritance] serves no purpose in a society based on improving the lives of the entire population

I would say that society is served well by the ability of widows to inherit and not be left destitute. Similarly for minor children.

If you're talking specifically about inheritance by adult children, I agree the arguments in favour are weaker.

Is there no system which can provide for widows and minor children yet isn't able to be taken advantage of by the hyperwealthy?

Here in the Netherlands the (once setup as) farmers coop bank is notorious for not doing that, they heavily favour bigco and business models that capture subsidies effectively (which usually means scaling one part to ridiculous proportions).

> The taxes are less than buying the farm outright so it would just be a very cheap buyout.

If you have $300 to your name, you're not getting finance. The bank will just laugh you out the door.

So you create a startup.

- The first year it has 10k€ ARR.

- So it is worth 100k€. You must my pay 30k€ in capital gains taxes.

Like this, every year? Every time it has more revenue, it multiplies its future worth, therefore multiplies it FMV, therefore you must pay the CG on the multiple of your income?

Only if there is a "deemed disposition". Which in most cases happens when the owner dies.

You probably don't need to worry about this happening multiple times.

Amd this is why there are no mid-sized family businesses remaining in Canada, except for the occasional farm. Billionaire oligopolies are all that remain as only they are sustainable in the tax farm once known as the great white north.

Billionaire oligopolies are everywhere, this isn't a uniquely Canadian problem. TFA points out we live in an era of Gilded Age inequality.

I come from a province that is wholly owned by a billionaire family. They own all industry, all media, and basically every (barely) living wage job outside the government. Look up the Irving family.

Billionaires may not be a uniquely Canadian problem, but the lack of a wealthy middle of entrepreneurs and reasonably wealthy individuals is uniquely Canadian.

Canadians cheer at taxing the rich and as a result end up with a “middle-class” that is barely getting by, a billionaire class that rules the Kingdom, and nothing in between.

Canada is designed to support Oligopolies. It does so in the media, food distribution, telecom, insurance, banking and virtually every industry in the country. This is an intentional policy decision of punishing entrepreneurs and pushing us out of the country. Look at the recent wealth taxes and the national response to them as an example.

Reply on news.ycombinator.com