Charles Lemos has a post over at MyDD discussing an article in the New York Times about the struggles of the super rich in this economy.
Mainly what caught my eye were some of the figures Lemos quotes about how the super rich families prospered in the last 20 years of the 20th century:
Lax regulations of financial markets allowed old money to turn serious money into some rather serious money. Between 1982 and 2000, the Rockefellers went from $3.3 billion to $8.5 billion, the Mellons from $1.6 billion to $10 billion, the Phippses from $1.2 billion to $7 billion, the Pritzkers from $1.0 to $10.0 billion, the Mars from $1.2 billion to a very robust $16 billion, the Hearsts from $500 million to $7 billion. The ‘financialization’ of the economy coupled with the low tax regime has been very good to them. If in 1981, the top one percent accounted for 9.3 percent of the national income by 1997 that share had grown to 15.8 percent.
Compare that to any figure about the standard of living and wealth of the middle class you care to choose for the same period, and the difference will be significant. Reaganomics were good for these families. And it’s these people who are the prime beneficiaries of the fierce battles to repeal the estate tax during the first part of the Bush administration. (Due to Congressional accounting shenanigans, next year is the best year for you to have your super rich relatives die — the estate tax disappears for a year only to reappear in 2011.) This repeal was never about small businesses and family farms. Name any estate exemption in the single-digit millions you care to, and chances are you’ll have broad Congressional support. But, it’s the estates worth 10s of millions, 100s of millions, and billions that are paying for the lobbying on this movement. A crappy $10 million exemption is a rounding error to some of these families.
Say what you will about the evils of taxation, but the fact is that it has to exist. Now we’re just haggling over the price. I have yet to hear any rational justification for preferring the rights of an heir in an estate to the rights of the working man in his paycheck at the end of the week. So, I can’t see repealing the estate tax before we’ve worked out a way to eliminate payroll taxes, income taxes, sales taxes, and the rest of the taxes that affect people who have done more for their money than simply luck into the right set of parents or grandparents or great grandparents or however far back the dynastic wealth goes.
And, at the end of the day, it’s fair that these folks pay more for the government since the government protects more of their stuff. Our courts legitimize more contracts for them, our police protect more of their houses and bank accounts, our roads carry more of their products, etc. (Not to say that the little people should be entirely exempt from taxes even if that was possible — I think there is value to having citizens be invested in their government.)
Just another of my periodic rants that the estate tax (or “death tax” if you prefer the propaganda approach) is one of the more justifiable taxes in a world where some form of taxation is necessary. The dead don’t need their stuff anymore, and heirs have less of a claim to that stuff than workers have to their paycheck.
Yes, you do go about this from time to time, and it always leaves me perplexed. If one earns a huge pile of money, why should that person be able to direct it to his kids upon passing? Or, to a foundation or non- profit?
You haven’t at all made the case why it is more just that Party ‘A’ that didn’t earn the money is a better recipient for it than Party ‘B’. It just smacks of jealousy. You feel for the poor. Ok, that’s noble enough. Your methodology is just plenty unjust. The means do matter.
And yes- there is merit in citizens being invested in their government. That’s why all classes of earning should be taxed. What is it, nearly half of the people in the US don’t effectively pay income taxes, when taking the refund at the end into account.
NYC Mayor Bloomberg once made an astute observation, that the entire City budget was based upon the incomes of approximately 30,000 ultra-high income folks. He points to the importance of keeping those people in the City, and not driving them away. People leave the cities for the suburbs over tax laws and regulations. They leave states for the same reasons. We are an immigrant nation, and there’s some great prevailing arrogance that we could never become a place people leave. I think we’re getting closer to that. The push to take yet another financial decision away could well contribute to that.
You have it exactly wrong. It’s my lack of sentimentality that leads me to my conclusion. It’s just that I don’t care much about the dead. They’re dead. They have no need of their stuff, and their feelings on the subject while they were alive don’t concern me nearly as much as the feelings of the living.
Investment in the government can come in ways other than income taxes. Sales taxes, payroll taxes, property taxes, use fees, excise taxes — generally you’ll see someone key on the income tax when they want to feel sorry for the rich.
The immigration scenario you paint is fairly interesting, and maybe it could lead us to good policy as a thought experiment. Where are these rich folks going to relocate? Maybe we should look at those places and see how their people are doing to see whether we want to emulate their policies.
Europe seems like a fairly fun place to live, but their tax policies are far more burdensome on the rich than our own. China has a booming economy, but their government is far more oppressive than our own. Plenty of third world countries have far fewer regulations and much weaker tax policy, but unless you want to hire a private militia and/or live inside walled compounds, those places wouldn’t seem to be that desirable. I guess maybe there are some island nations where you could hole up and hope that international policy lets you enjoy your money from there while also enjoying stable markets of large populations in mainland countries.
I don’t understand the term “Death Tax”. They’re not taxing dead people because they died. They’re not taxing dead people at all. They’re taxing living people for receiving income they didn’t earn. It should be called the unearned income tax.
Just a few questions: what level of exempt from taxes would be acceptable? What about businesses (farm and non farm) that are dependent upon continuing operations at the level they have attained? Example: Cook operations headquartered in Bloomington–husband and wife owners but what could happen in the future?
The answer to the question probably has to do with the justification for the exemption. The reason for the exemption, I suppose, is that people will work harder when they are alive if they can pass the fruits of their labor along to their kids. At some point, though, I have to think the utility of that produces diminishing returns. Are folks really going to work 10x harder to leave $100 million than they would $10 million? I doubt it. Figure out the peak of the curve and set the exemption level there.
If the closely owned businesses are worth something beyond that, the kids can get loans like any other prospective buyer and pay them back from the profits.
Doug –
I just backspaced over what may have been a personal jab – which I don’t think you deserve.
Still, I disagree with you – your reasoning seems to assume that the state will be an obviously superior steward of my assets than my heirs would be – and that I should have zero say in this, beforehand.
At least we could stop paying for wills and that pesky estate planning under your regime – yay, less money to lawyers!
– Parker
BTW, is your blog persona becoming grumpier over time? You seem to be having less fun with all this, I think…
Just a couple of notes:
First, Mike’s claim that 50% of the population pays no taxes is patently false. See the CBO study @ http://www.cbo.gov/doc.cfm?index=5746&type=0&sequence=1
Even the lowest quintile pays almost 6%. Remember that payroll taxes are also federal, as well as excise taxes. The study does not include state & local taxes (i.e. sales tax). It does, however, measure effective taxes, not scheduled taxes, which is important in comparing actual tax burdens.
Second, I think Doug’s point isn’t that the government is a better steward of money. It is that the government provides services – courts to enforce contracts, police to secure property, a State Dept. to enable international business, etc… The wealthier one is, the more services you consume, and the more benefit you derive from those services. I have no data, but I can’t see anyone making $40,000 a year utilizing more court services than someone owning 5 companies and an $8bln net worth.
Besides, I don’t believe that the estate tax deters capitalistic motivation. Sam Walton didn’t stop building stores because they would be incrementally taxed when inherited. So if you are a supply-sider that believes in the Laffer curve, Estate taxes should be fine, since they wouldn’t impact productivity.
I could be getting grumpier – hard to say. I’m too close to the subject to be objective on that point!
But, in any event, maybe I wasn’t clear – it’s not that heirs are better or worse stewards than the government. The point is that government is going to require taxes; we need to figure out the source of those taxes. What I’m attempting to argue is that income taxes, sales taxes, and most other kinds of taxes are worse sources of revenue than estate taxes because, with most other kinds of taxes, a person’s claim to the money is stronger than that of heir to inheritance.
And it’s not about the wealth — having spent a bunch of time today watching football, I’d say if a guy got paid $1 million for playing today, his claim to that money is a lot stronger than a guy whose grandpa left him $1 million. But, in recent years, we’ve seen a lot stronger push to eliminate estate taxes than to eliminate income taxes.
In an economy supposedly based upon the theory of rewarding merit, competition and struggle, where is the justification for any inherited wealth? The last thing a society needs is an aristocracy whose political and legal power is based upon inherited [as opposed to earned] wealth. It places power in the hands of those unqualified through personal merit. It is inconsistent with economic effiiency. And at some point the dead shouldn’t govern the living via disposition of value. And as for fairness, Real Weekly Earnings peaked over 35 years ago in September 1972. Using the CPI to adjust wages to today’s dollars, the average worker made $738.48 per week in September 1972. In January 2008, that figure was $598.18. Saturday, October 3, 2009. http://www.creditwritedowns.com/2008/03/populist-interpretation-of-latest-boom.html.
This decline of the middle was at the same time as the concentration of wealth at the top. I am not hearing much argument that the country is a better place than it was in 1970. [pardon any typos]
Just hope the outcome of any tax policies have a long term benefit to the whole situation (situation defined differently depending on one’s prespective.) Is redistribution of wealth a legitimate goal of a free enterprise system? Is penaltizing some to benefit others a cause to be widely supported? etc. etc. I am not rich nor have any hope of any inhertiance but over simplication of situation as to “get the rich to pay for things because they can” or “if they did not earn it they don’t deserve it” (could question the mulitmillion “salaries/bonuses” of some and find it very distasteful) but what balance is correct for our system? Even with the excessive lifestyle of some (both those with money (earned or inherited) and those who are wantabes it seems it would be difficult to find a good compromise.
I will disagree somewhat with stevelaudig. Although my son isn’t earning the money that he will one day receive from me as an inheritance, he is doing without my companionship during the time it takes me to earn that money. So in that regard, he should rightly claim that money when I die. But he should also have the same tax obligations that he would have had, had he earned the money himself. He will be receiving income. Income is taxable, in order to pay the country’s bills.
Free enterprise is only part of our system. Inter-generational transfer of wealth is another part.
I am bothered by discussions of the estate tax which occur almost totally outside consideration of their role in the overall tax regime. In a strongly monetized economy, such as ours, income taxes seem to be easier to administer than wealth taxes (such as the estate tax or, for that matter, the property tax) are. Other than that point, with the consequence that income taxes have become more common than wealth taxes, I have never been quite sure why income taxes are seen as less objectionable than wealth taxes. In our current economic client it would seem to me more economically prudent to tax wealth than to tax income. Taxing income dampens economic interaction between agents in an economy. A properly structured wealth tax, such as a tax on real property valued at its highest and “best” use, should encourage its owner to put property and wealth to constructive use.
That said I dislike the estate tax as a vehicle for taxing wealth. First, many of the old-line super rich families of America benefit from trust arrangements that predate the estate tax. These arrangements typically never vested ownership in the wealth but only paid out income. Because they predate the 1970’s they are not hit by the generation skipping tax. Such setups have helped some of the old super rich avoid the estate tax for generations. Thus there is a tendency for the estate tax to hit the newly rich more than the old rich. And even while the estate tax hits only a relatively small handful of families it at least has the potential for grossly disproportionate consequences. For one example, the estate tax is strongly biased in favor of families with longer life expectancies.
Another point that I am less sure of how to deal with is another part of the selective character of the estate tax. There are a number of families which live easily from generation to generation based on influence as much as wealth. Consider families which secure sinecures for their children through family controlled foundations or politics? How many generations of the same family have controlled the National Geographic Society? How about families (the Bush family, the Kennedy family) where your name can be your ticket to high political office? The estate tax only hits one class of potential nobility.
Doubtless the apportionment clause of the constitution would be raised as an objection, but barring that I think I’d just as soon see the estate tax replaced with an annual wealth tax (obviously at much lower rates).
Still not convinced as to just what is a legitimate amount of taxes should be put against estates nor had what level exemptions should be allowed nor even if the whole subject is based on any fairness principle. On the other hand for those football and other sports fans—if fairness is the issue is it fair for someone (sports or otherwise) to make enough to completely fund our local high school? Perhaps the return to income tax rates of 50 years ago would also eliminate many of the rich estates. And I am a free market/enterprise advocate but when get into fairness debates thing kind of get crazy.
One problem is that life isn’t fair. That kind of hinders arguments based on fairness.
I find the arguments against estate taxes a little curious. The opponents of such taxes early always presume that we are currently in a Pareto Optimal position where any redistribution of money creates a disadvantage for the wealthy. I realize mathematically that the wealthy position is necessarily decreased, but in reality are we really disadvantaging them? If someone inherits 600 million instead of 1 billion, are we to consider them damaged while maintaining a straight face?
Sometimes it’s an issue with disruption of productive capital.
To use the heart string tugging example, this happens when the family farm has to be sold to pay the estate taxes. (Aside – why aren’t we as sentimental about the family shoe store as we are about the family farm?).
That billion you speak of is not a bunch of large bills in an enormous sack – it’s typically ownership interest in productive enterprises.
Transactions to come up with cash to pay estate taxes can disrupt these enterprises, especially where their value comes from the whole of the thing, rather than a part of it.
This is incorrect. Protection rackets most certainly do not have to exist.
Kurt, actually a free enterprise economy cannot exist without some form of government and that form of government needs money to operate, so taxes are a necessary thing.
Discounting all the social services, national defense, police and fire, etc…, the government is the entity enables a society to have functioning markets. Without a governing entity to enforce contracts, provide a monetary system, and provide things like copyright and patent protections.
Without government, there is no free market. There isn’t a market at all.
It’s late. Sorry for the sentence fragments.
When did we ever get to the point where almost everything is considered “taxable”? Another black mark for Woodrow Wilson who started us down this path.
T: “Unearned Income Tax” — oooh, I like that!
This is correct.
This is also correct.
Your conclusion does not follow from your premises.