Of Course It’s Already Been Taxed
About a year ago one of my best friends had come into some inheritance. We were talking about the situation and it didn’t take long for him to express his disdain for the taxes that had to be paid on the money. He reiterated a complaint that many of my conservative-leaning friends have voiced: “It’s not fair to tax this money again since it was already taxed as income!”
He and I have a good back-and-forth relationship when it comes to politics, and he often challenges me to justify an ideology. So let’s take a look at a simplified situation to see why the “it’s already been taxed” argument falls apart. In order to avoid conflating points about states’ rights let’s just look at current federal taxes in the United States.
Meet Joe. Joe has a nine-to-five job that brings home a regular paycheck. But as we all know, Joe doesn’t get to keep 100% of his paycheck. Every month, a chunk is taken out as Income Tax, Medicare and Medicaid Tax, and Social Security Tax. In other words, the money is taxed.
Joe invests part of his income in stocks and mutual funds. He’s a casual investor who periodically moves money in and out of his investment portfolio. Whenever he sells a position, and if he comes out on top, Joe must pay capital gains tax. In other words, the money is taxed.
Joe also drives a car. Since Joe doesn’t own a Tesla, his car runs on gasoline. Joe may not know it, but a slightly more than $0.18 per gallon of gasoline he purchases goes to the government. In other words, the money is taxed.
Joe is also a gambler. Sometimes he wins, sometimes he loses. On a random stroke of luck, Joe once walked away from a casino up over $20,000. That money had originally been in the pockets of other casino patrons and had been taxed on their income. But Joe also owed a cut for his gambling. This is classified as “other income.” In other words, the money is taxed.
Because Joe is a nice man, he decides to give a good portion of his winnings to his loving sister, Jane. And, of course, there is a gift tax. In other words, the money is taxed.
Jane is somewhat of a whiskey connoisseur, so she tends to buy a lot. Like gasoline, whiskey is subject to a federal excise tax. In other words, the money is taxed.
The whiskey company is located in the United States and is rather successful. They make a profit off of purchases like Jane’s. The company must pay corporate tax. In other words, the money is taxed.
The whiskey company also has many employees that receive a monthly paycheck, just like Joe. And as such, they also pay into Income, Medicare, Medicaid, and Social Security. In other words, the money is taxed.
Joe, Jane, the whiskey company employees, and most other Americans go on and live their lives. They work, they buy, they consume. All the while they are paying their taxes. Then one day, Joe passes away and decides to leave his entire estate to Jane. As we already know, a portion of that inheritance goes to the federal government. In other words, the money is taxed.
This brings us to the point with which many people have problems. They don’t believe that inheritance should be taxed because it was already taxed. But by that logic, no taxes could exist at all because the whole system is a circle. Money isn’t really being taxed. Actions are being taxed and money is just the mechanic through which it is collected.
That is not to say that my friend is wrong. Perhaps inheritance tax is a bad thing. But “the money was already taxed” is not a logical reason why.