Happy Bastille Day! Let’s look at the likelihood of kids being able to afford that trip to Paris…
Taxes weren’t a factor in our decision to relocate to Florida, but it is interesting to look at how a parental move to Florida can affect the wealth of children. I built a spreadsheet positing an already-sort-of-rich Massachusetts resident who moves to Florida 30 years prior to his/her/zir/their death (e.g., will live in Florida from 52 until 82, the median age at death of a COVID-19 victim here in Maskachusetts). The assumption is that this person will pay the top rates for any progressive taxation scheme. Since big numbers are tough to work with, I looked at the effect on the margin. The parent decides not to buy a $100,000 C8 Corvette (marked up from the $60,000 list price in our “no-inflation society” (TM)) and instead invests the money in the stock of a standard C corporation, to be saved for the benefit of the children. Keep in mind that this is a post-tax $100,000, which might have required earning $200,000 pre-tax (or, for those who prefer not to work, having sex with someone who earns a reasonably high income; see Real World Divorce for state-by-state child support profit calculations).
I started by assuming that the government isn’t lying to us and therefore use an inflation rate of 3 percent. If we assume real profits of 4 percent, that gives us a nominal return of 7 percent. The company pays 24.6 percent state and federal corporate income tax (Tax Foundation/OECD). We assume that these dividends are qualified and therefore a federal tax of 23.8 percent is due (20% plus Obamacare surtax). Maskachusetts income tax is 5 percent vs. 0 percent in FL. [2023 update: the MA tax rate on successful people was bumped to 9 percent via an amendment to the state constitution in 2022. The wealth difference would be larger for high-income people, therefore.] We assume that there is some way to invest these dividends and get a 5 percent annual return. When the 82-year-old is killed by Delta Epsilon Zeta variant COVID, Massachusetts estate tax takes 16 percent of the accumulated total while the Feds take 40 percent. Florida has no estate tax. Thanks partly to the miracle of compound interest and partly to the miracle of inflation, the $100,000 invested would have turned into $956,012 in a no-tax environment. In the Florida environment, however, it turns into $391,526 at death. In the Massachusetts environment, $275,287. Children end up 42 percent richer if the parent moves.
[As noted above, for children of the successful, the difference would now be larger due to the 5 percent income tax rate having become 9 percent. I redid the spreadsheet. The MA net goes down to $265,821, so the children of the FL resident become 47 percent richer.]
(You can check my calculations in this Google spreadsheet (downloads in Excel format; also available as a Web page).)
What’s the effective tax rate? In “I Can Afford Higher Taxes. But They’ll Make Me Work Less.” (NYT, 2010), Harvard professor Greg Mankiw calculated the total marginal tax rate on additional earnings for him was 90 percent (assuming that his goal was to help out his children). If we look the profits in nominal terms, subtracting the original $100,000 investment, we find that there was $291,526 profit in Florida compared to $856,012 in the no-tax case. Florida didn’t take anything, but the Feds and maybe some states via corporate income tax took 66 percent. In MA, the nominal profit was $175,287, resulting in a tax rate of 80 percent. What if we look at this in real terms, though. The $100,000 would have grown to $242,726 just from inflation alone. If we subtract this from the MA net of $275,287, the result is a total tax rate of 95 percent, since the real after-tax profit was only $32,561. The tax rate for the Florida residency case comes up to 79 percent of real after-tax profits (again, because of Federal taxation, not because Florida has an income or estate tax).
What if we assume the same real return on investment for corporations, but set inflation at 8 percent and therefore nominal earnings are 12 percent? The effective tax rate for a Floridian is remarkably stable, moving up to only 81 percent (from 79 percent). The effective tax rate for the person who lives and dies in Massachusetts, however, is 98.6 percent. (See revised spreadsheet (or as a Web page).)
What if the parent is a genius at picking stocks and he/she/ze/they selects only those with 8 percent real earnings (11 percent nominal)? The numbers are fairly stable, with the Florida corpse being worth 43 percent more. The Massachusetts real tax rate falls to 88.5 percent (from 95 percent).
Loosely related, a statue celebrating the “world’s first commercial airline flight,” which operated from St. Petersburg to Tampa beginning in 1914. The airline was started by Thomas W. Benoist, who died in an accident in 1917… stepping off a streetcar.
Wikipedia says that the signs should be amended to read “first fixed-wing scheduled airline” because the Germans were operating Zeppelins earlier. (The photo is from the St. Petersburg Pier, June 2021.)
Most people go senile before they die & end up rewriting insane beneficiaries into their will, so inheritance tax is hardly a meaningful impact on wealth. What does impact generational wealth is the parents staying near a job center & having the kids live at home well into their 40’s.
Soviet Union tried that formula but it did not survive. Those multi-generational households are getting dense sometimes. But yes, it is a great idea to make your pooch and your canary main benefactors of your estate. Why give it all to the lefties who are smirking at your hard work?
If you figure out the weath lost due to compounded taxes on the most weathy families over years, you’d realuze that a full-blown space colonization program could be just a hobby project for one of them. And so is world-wide purchase of nature reserves to save the animals, etc.
Taxes are a terrible burden… just imagine impact of bandits taking half of what you earn every year, year by year on your ability to accumulate capital. To make it worse the bandits spend it on waging massively destructive turf wars and on keeping hordes of low-level thugs who go around bossing you and other people for no reason other to keep you docile. That’s government in a nutshell. The most idiotic idea the humanity ever came up with.
I haven’t checked the spreadsheet yet and I will, because this is fascinating and I want to show it to a couple of others. I am a little sad, though, that the Dad decided not to purchase the $100,000 C8 Corvette by finding a dealership that agrees not to mark up the price very much, because for $100k you can get the most super-awesome C8 anyone could want. I don’t know how they will hold their value, but as one of the last purely internal-combustion ‘Vettes, I would imagine pretty well. And the boys (and girls) would benefit from riding in that car. I know, it’s irrational. It’s irrational, but wow – what a car!
I mean, ‘ya know – the Dad is a very rational guy most of the time. When other kids ask: “What does your dad drive?” they say: “A Honda Odyssey Minivan…except every couple of weekends, when we take out the 2021 C8 Corvette and hang out with the car guys.. He likes it because it has Apple CarPlay…”
The Vette gets em wet!
C’mon, we know you are just going to spend the excess on airplanes and other toys. If not, the Democrats will find a way to tax it to support slavery reparations.
Re MA taxes:
I’m a 44-year old MA State Trooper with 24 years of “service.” For my dedicated “service” to the good citizens of MA, I deserve to get paid! I’ve got bills! Alimony & child support to three ex-wives, payments on my Escalade, Harley, and speed boat. I’m juggling three girlfriends, and have some serious gambling debts. I now make just over $200K per year but deserve more! Not too bad for a high school grad who was washing cars before I got on with the Staties. I did, however, earn my on-line A.A. degree in “Criminal Justice” from the University of Phoenix on the State’s dime. You wouldn’t believe how easy that was. The “instructors” were buddies on local PDs, so I passed w/ all As w/o cracking a book! And that silly degree got me a 20% pay increase!
Last year I “worked” tons of OT to spike my pension and next year I turn 45 y/o and will retire and start collecting my $100K lifetime pension with built-in annual COLA. In 20 years, I’ll be 65 (the retirement age for most of you stiffs), the 3% COLA will have nearly doubled my pension to $200K per year! My life expectancy is 88 years of age, so my pension will double again to almost $400K per year by the time I die. It gets better; my lovely 20-year old Filipina mail-order bride will collect my pension long after I die. Her life expectancy is 90 years of age. She’ll collect my growing pension for another 25 years after my death! Twenty-five years on the job will trigger almost 70 years of growing monthly pension checks! The State of MA has been very, very good to me. And I know you don’t feel appreciated, but a big thank you to the MA taxpayers. Now get back to work and pay those taxes! Oh, by the way, F.U. Pay Me!
We could not agree with you more. We wuz ROBBED! Just because we weren’t F Troop doesn’t mean we didn’t deserve that money.
Two things:
1. “Dr” Phil continues to perpetuate the “Big Lie” of a 82 y.o. mean Covid death age in Massachusetts. In fact the average age is 73 (some recent 2-week periods are in the 60s) — not even close.
2. “Dr” Phil says the federal estate tax on his theoretical $100k marginal earnings is 40%. That must mean his net worth exceeds $23,000,000, the federal estate tax exemption. I knew he was a rich idle guy with too much time on his hands (see hundreds of pictures of mask signs on this site), but I didn’t know he is that wealthy.
If one really has that net worth, simply earn 5% tax free in municipal bonds, take your $1.2M a year and live comfortably. Your kids, grandkids, and great-grandkids will never have to work a day in their lives, and they will still have $23 million in the bank to pass to your great-great-grandkids.
Why don’t the peons making an honest $75,000 salary as an engineer in the Midwest have sympathy for folks like the “Dr” Phil family…?
Mike: The purpose of the original post is not to elicit sympathy, but to see if some apparently small taxes can end up having a large effect over time. Responding to your other points…
(1) I hope the 82-year-old median age is not a “Big Lie” since it comes straight from an official state source https://www.mass.gov/doc/covid-19-dashboard-august-11-2020/download (this is the most recent information available, as far as I know; the state removed deaths-by-age when it was time to decide whether or not to reopen schools). Maybe it is “Small Lie” because the state says that 82 is the “average age” and I said “median”. But if the average as of August 2020 was 82, the median might well be a little higher than 82 since it is possible to be 82 years younger than 82, but it is not possible to be 82 years older than 82.
(2) the Maskachusetts estate tax exemption is $0. Estates of over $1 million (and remember that the hypothetical in the original post is ” an already-sort-of-rich” person) are taxed starting at $0. The $11 million/person ($22 million for a married couple) Trump-era exemption? I wouldn’t count on that lasting for 30 more years. The Federal exemption has moved up and down quite a bit over the preceding 30 years.
[Also, maybe Biden can do a clawback for the estates of those who died during the Trump years. Given that Trump was not a legitimate president, the Trump estate tax exemption is not legitimate. So a higher estate tax rate/lower exemption can be applied retroactively.]
(3) earn 5% yield tax-free on municipal bonds? That would be a -0.4% real yield given the latest inflation number (5.4%; see https://www.nytimes.com/2021/07/13/business/economy/consumer-price-index-june-2021.html ). In fact, however, the real yield on Muni bonds currently is roughly -3% (nominal yield of just over 2% minus inflation of 5.4%; see https://www.munibondadvisor.com/market.htm ). The “great-grandkids” you’re talking about would have suffered not only a 3% annual erosion in the value of the portfolio (let’s assume 90 years for your scenario, or 30 years per generation). And, if they stayed in Maskachusetts, they’d have suffered three estate tax events, each chopping the value of the portfolio to less than half. I was curious to see what happened. Starting with $23 million in 2021 dollars, the great-grandkids 90 years from now would have $382,254. And that’s if they didn’t spend any of the muni bond yield, but instead reinvested it. What if they did as you suggest and actually spent the bond yield on lifestyle? They’d have $59,851 in today’s money. See https://docs.google.com/spreadsheets/d/e/2PACX-1vSFXFHwEJMmYcnnfwx-Q7GmJCSX77blRGGRluAgKZp1ABzK3BdhLkxqWWr1XxyOcEbBPoKp7MmTExCF/pubhtml
(or https://docs.google.com/spreadsheets/d/e/2PACX-1vSFXFHwEJMmYcnnfwx-Q7GmJCSX77blRGGRluAgKZp1ABzK3BdhLkxqWWr1XxyOcEbBPoKp7MmTExCF/pub?output=xlsx for the Excel version)).
If wealth preservation down through multiple generations were as simple as buying muni bonds, quite a few people in the estate planning business would be unemployed!
Mike, I think it is wrong to say that average age of deaths with coronavirus in MA is 73 overall. https://www.mass.gov/info-details/covid-19-response-reporting#covid-19-interactive-data-dashboard-
Through times when there were many deaths from coronavirus pandemics aka COVID-19 syndrome, August 2020 (earliest date on chart) to March 2021, average age of those who died was firmly at or over 80 years old, from 80 to 86 old. The chart shows weekly averages. Currently weekly deaths are small by comparison, From the link : “There were 1 new, confirmed deaths reported…. There were 0 new, probable deaths reported” Use of plural nouns are from the original. So if one 73 year old died testing positive for coronavirus from whatever reasons during last reporting week it does not outweigh 17,000 or so average age 80+ deaths.
LSI: Thanks for the link to that new dashboard. I hadn’t seen it! And, of course, your analysis is correct. The “average age” of a COVID-19 death in Maskachusetts for the past two weeks is 73, but the virus is mostly resting right now in MA. So this won’t change the cumulative average or median age due to the small number of deaths right now compared to in the spring of 2020 or in December 2020-March 2021.
Philip, the best investment is education. As you suggested in your reply to one of my comments, the best is to teach heirs of wealthy CRT and through connections find them job in government, to be on the winning side of taxation. If John D. Rockefeller Sr. figured that we can too.
There are risks of Venezuelan scenario and unlike heirs of Venezuelan government officials that now live in Florida there will not be another country to repeat the trick because other moderately free and law – abiding societies are on the same downhill, maybe except Switzerland.
@Mike, it looks to me that you just described the life of a public politicians and public leaders. They will spin numbers to satisfy the audience they are entertaining. They will live off tax payers money without working and yet take credit for getting things done when nothing is done.
Elizabeth Warren and Al Sharpton fit well into your description and you are welcome to name others from republicans, independents, etc. parties.
Public service, especially those in political office, should NOT be made into a career. Otherwise their so called “I will fight for you” will be a fight to fill their own pockets at the expanses of others and help family members [1], [2] and friends.
PS: I used to be an artist in a former live (went to art school and got my degree had few shows and all). I know how hard it is to sell your art work and even much harder to make a living as an artist.
[1] https://www.washingtonpost.com/politics/deal-of-the-art-white-house-grapples-with-ethics-of-hunter-bidens-pricey-paintings/2021/07/07/97e0528c-da72-11eb-9bbb-37c30dcf9363_story.html
[2] https://news.artnet.com/opinion/hunter-biden-art-1988251
What about kids whose parents retired to Puerto Rico and enjoyed its tax haven?
Scott: The Puerto Rico law dates only to 2012 so there aren’t, I hope, too many people who have moved and died (see https://www.gq.com/story/how-puerto-rico-became-tax-haven-for-super-rich ).
The new Puerto Ricans whom I know seem to love it down there in the Dorado. One is a righteous Trump-hater and Biden supporter who is presumably enjoying watching others pay tax to support Uncle Joe’s big plans. The other guy is apolitical and just enjoying not giving New York State and New York City taxes on about $100 million that is being paid out of some sort of fund he’s been managing.
But for every rich-ish person I know who has moved to Puerto Rico, I know 20 who have moved to Florida. Island life is not for everyone, even at 4% total tax rate (actually, looks as though P.R. may have a comparable estate tax to the U.S.: https://www.globalpropertyguide.com/Caribbean/Puerto-Rico/Inheritance ; so everyone who moved to Puerto Rico for Act 20 will need to move back to Florida on reaching prime COVID-19 death age)
Wow! Thanks for the reply. Quality of life is an issue, for sure. And volatility is a concern. I was hoping you’d run the numbers for me. But I guess that is an exercise for the user, lol.