The Becker-Posner Blog

Terrorism and Poverty:Any Connection?BECKER

A former president of the World Trade Organization, the current British Chancellor of the Exchequer, the House of Bishops of the Episcopal Church, and many others have claimed without citing any evidence a close connection between poverty and terrorism. Poverty may be related to terrorism, but in ways that are far more indirect and weaker than alleged. Any sizeable effect of poverty on terrorism is not apparent from what is generally known about terrorist activities. The suicide bombers in the 9/11 attack were mainly highly educated Saudis, not poor Moslems from other parts of the Middle East, Asia, or Africa. The Basque region of Spain may not have done well economically in recent decades, but the members of its ETA terrorist organization are generally middle class and reasonably well educated. The same goes for the Baader-Meinhof German terrorists, and many other terrorist groups in different nations. Examples such as these can usually be chosen to support a particular position on most issues, so more complete evidence is necessary to draw any conclusions with confidence. Fortunately, a few studies do systematically analyze the relation between poverty and terrorism. Harvard economist Alberto Abadie has recently studied both terrorism within a country and transnational terrorism for almost 200 nations (NBER Working Paper No. 10859). He estimates the poverty-terror relation after controlling for the degree of political freedom, religious and ethnic heterogeneity, and other variables. He finds little net relation between the degree of terrorism and poverty, where poverty is measured by per capita GDP, the degree of inequality within a country, and a couple of other ways. Clearly, terrorism is important when there is political, ethnic, religious, and other conflicts between groups. Jewish terrorist organizations attacked the British army in Palestine, the Tamils oppose the Sinhalese and Moslems in Sri Lanka, the Moslems and Hindus of India and Pakistan continue to battle, the IRA has attacked both the British and protestants in Northern Ireland, and so on for many other examples. Abadie finds these connections as well as an important relation between terrorism and the degree of freedom. Countries with the greatest political freedom, such as Western Europe, the United States, and Japan generally have relatively little terrorism, although a number of exceptions include Germany’s Baader-Meinhof terrorists and Italy’s Red Brigades. Highly oppressive regimes effectively deter terrorism by close surveillance of their populations, and by severe punishments to apprehended members of terrorist groups. Countries in the middle ranges of political rights usually suffer the most from terrorism, perhaps because as Abadie conjectures, these countries are in political transition, with considerable disorganization and conflict. Alan Krueger and Jitka Malechova examined the backgrounds of about 130 suicide bombers from Hezbollah in Lebanon who died on missions between 1982-1994. They found that these bombers were not poorer but rather were much more educated and better off economically than the general Lebanese population. One of Krueger’s graduate students at Princeton found similar results for Palestinian bombers: a much smaller fraction came from poor backgrounds than is the fraction of poor in the Palestinian population as a whole, while more than half of all bombers went beyond a high school education compared to a small percentage of the Palestinian population who did. I agree with the basic conclusions of the studies by Abadie, Krueger et al, and of a few others that poverty is not directly an important cause of terrorism. But a couple of significant qualifications are in order. The first is a technical point that may be crucial in interpreting some of the evidence. Any terrorist organization has available a supply of potential suicide bombers or other terrorists who have different levels of education and economic opportunities. To make my point in a simple way, suppose all potential bombers gain the same utility from destroying members of a hated group, such as Israelis, through successful attacks that are likely also to kill the bombers. Suppose too, they suffer to the same extent if they fail in their missions-they may be captured without hurting anyone, or they may only kill themselves. Recruits with good economic opportunities would only be willing to undertake suicide missions that have a relatively high likelihood of destroying some enemies too. For they would not be willing to go on missions that have little chance of succeeding since they would then prefer safer terrorist activities, or doing well economically while working peacefully. In this case, relatively highly educated terrorists will be sent on missions that are more likely to succeed in destroying their enemies as well as themselves. As a result, the education and other determinants of the economic opportunities of successful bombers will exceed the opportunities of bombers who fail (and who may be captured). Similarly, the education of captured bombers would be less than the education of all bombers since low educated individuals, such as the many teenagers sent on suicide efforts to Israel, would go on missions with smaller chances of succeeding. To protect against these misleading interpretations, the sample of bombers or other terrorists must be representative of all terrorists- not mainly either “failures” or “successes”- before reliable conclusions can be drawn about the relation between economic opportunities and the recruitment of terrorists. This analysis suggests that the Krueger- Malechova study of Hezbollah terrorists who died on their missions may be biased toward their finding that terrorism and variables like education appear to be positively related. A second possible qualification would arise if the process of rapid economic development reduces terrorism by orienting more educated and abler individuals toward advancing economically rather than toward terrorist activities. I have not done a systematic study of the link between say economic growth and terrorism, but nations or regions that are experiencing rapid growth appear to have lower incidences of terrorism. Continuing economic growth also eventually leads to greater democracy, so a positive link between economic growth and democracy and a negative link between growth and terrorism could help explain the observed negative relation between terrorism and democracy. To be sure, terrorism may be less common when nations are growing rapidly because the causation goes from terrorism to little growth; that is, terrorism discourages investments and other engines of growth. Whether the causation is from growth to little terrorism or from terrorism to little growth would have to be discovered from systematic and careful studies. But I believe that some of the causation runs from growth to reduced terrorism because it becomes harder to interest many individuals in risky terrorist activities (and other political activism) when economies are expanding rapidly and opportunities are booming.

Terrorism and Poverty--Posner Comment

Most efforts to link terrorism and poverty are politically motivated, just like most efforts to link crime and poverty. Liberals do not like either force or poverty, and so faced with crime or terrorism they prefer a solution that involves alleviating poverty rather than one that involves applying force. They sometimes dress up this politically motivated preference by distinguishing between the "root causes" of terrorism or crime, on the hand, and the "symptoms"--i.e., overt acts of terrorism or criminality--on the other hand, and arguing that a problem can be solved only by removing the root causes. But this is incorrect. It's the effects--the acts of terrorism, the criminal offenses--that we care about, and often the effects can be eliminated at lower cost than the causes. In any event, there is little basis either theoretical or empirical for thinking that poverty causes terrorism. In addressing the issue we need to distinguish between the individual level and the population level. As Becker points out, the terrorists who commit the most significant acts of terrorism are unlikely to be at the bottom of the income/education distribution; indeed the leaders are likely to be even further from the bottom. The ablest terrorists are the leaders, and the ablest members of a terrorist group are also the scarcest and so they rationally take the fewest risks. Terrorism requires not only leadership (apart from "lone wolf" terrorism, which I discuss below) but also motivation, invariably political in at least a broad sense; and the motivation is often supplied, or at least articulated and enhanced, by intellectuals. Think of the role of the Russian "intelligentsia" (intellectuals preoccupied with politics) in Russian terrorism culminating in the Bolshevik revolution. At the population level, it is difficult to see why wealthy countries should have less terrorism than poor ones; and among the wealthy countries that have been afflicted by terrorism, one has only to think of the United Kingdom (plagued by the Irish Republican Army for so many years), Germany (the Baader-Meinhof gang), Italy (the Red Brigades), Japan (the Red Army and Aun Shinrikyo), Spain (the Basque separatists), Saudi Arabia (al Qaeda)--and the United States. Think of "Bloody Kansas" in the 1850s, the Ku Klux Klan, the anarchists of the late nineteenth and early twentieth centuries such as Sacco and Vanzetti and the assassin of President McKinley, the Puerto Rican separatists who tried to kill President Truman and turned later to bombing buildings, the Weathermen, the Black Panthers, the Unabomber, Timothy McVeigh, and the unknown anthrax assailant of October 2001. These examples make me skeptical that democracy and liberty are antidotes, even partial ones, to terrorism. For one thing, democracy and liberty encourage independent thinking, which may nourish Utopian fantasies that can breed violence. The kind of lone-wolf terrorism illustrated by the career of the Unabomber is particularly likely to flourish in a society that encourages people to think for themselves, because the diversity of individual thought is very great and one tail of the distribution consists of dangerous maniacs. For another thing, democracy and liberty create expectations of privacy and free speech that make it difficult to repress subversive movements in their incipience. As Becker points out, the direction of causation may be from absence of terrorism to democracy and liberty rather than vice versa, since, as civil libertarians warn us, fear of terrorism tilts the balance between security and liberty away from liberty. What does seem to be true (or so at least I found in a study reported in Chapter 3 of my book Frontiers of Legal Theory [Harvard University Press, 2001]) is that a nation’s per capita income is positively related to political stability. Wealthy nations can create the institutional framework required for political stability. But political stability is entirely consistent with terrorist activity. All the wealthy nations that have a terrorist problem are, with the possible exception of Saudi Arabia, politically stable.

Blogging--A Response by Posner to a Comment

I want to respond to a single comment because it reflects interesting misunderstandings of the blogging phenomenon. The comment takes Becker and me to task for not responding to all the comments (on our postings) that are criticial of us. By thus not responding, we are said by the commenter to be shutting off debate. We are not shutting off debate, and this for three reasons. First, a failure to respond to a criticism may end a debate in the sense of leaving nothing more to be said, but it does not "stifle" debate or silence the critic--on the contrary, it leaves the critic with the last word. Second, the comments are public--they are accessible to readers of the blog, at no cost, with a click. We "enable" (as the blogging expression has it) all comments; we engage in no censorship. Someone who reads a comment critical of a posting of mine or Becker's and observes that we have not responded to it will be more inclined to agree with the critic than if we did respond. And third, and most important, bloggers have no "market power" that might enable them to limit debate. Not only are there 10 million blogs, but because it is costless (except for opportunity costs of time--though these can of course be significant and are one reason why Becker and I do not respond to all the comments on our postings) to create or post to a blog, and as any posting is diffused throughout the "blogosphere" essentially instantaneously, there is no way in which inaccuracies in a blog can be insulated from prompt correction. There is nothing to prevent the commenter fronm creating his own "anti-Becker-Posner" blog devoted to correcting our mistakes and omissions! There is another point worth noting. Inaccuracies in blogs are less pernicious than inaccuracies in the mainstream media even apart from the superior opportunity for prompt correction of bloggers' errors. The reason is that bloggers are known not to employ fact checkers or editors; there is no pretense that they have the resources to eliminate all errors in their postings. The mainstream media, in contrast, represent to their public that they endeavor assiduously to prevent errors from finding their way into articles and broadcasts. They ask the public to repose trust in them. Bloggers do not. That is why serious errors by the mainstream media are played as scandals; they are not merely mistakes--they are breaches of trust.

Blogging, Spam, and the Taxation of Internet Transactions�Posner

The rise of the Internet has created a host of social, economic, political, and regulatory issues, a few of which we address in this week�s postings. (Another, at present under consideration by the Supreme Court in the Grokster case, is copyright infringement by means of file sharing.) One that is naturally near to our heart concerns proposals to regulate blogging, either formally or through voluntary adoption of ethical standards. Many blogs are electronic counterparts of newspapers, magazines, and other advertiser-supported �mainstream media,� and the argument is that since the mainstream media have adopted ethical standards concerning such matters as reliance on anonymous sources and retraction of errors (with electronic media such as television stations subject to formal regulation), so should bloggers. The idea of parity among media is attractive, since exempting the producer of a close substitute of a taxed or regulated product from taxation or regulation tends to promote inefficiency; the exemption operates as a subsidy. The parity issue is starkly presented by the question whether to tax Internet transactions, discussed below. With respect to blogs, the contention is that exempting them from ethical or other informal (or formal) regulation subsidizes their competition with the mainstream media. Not that they are or would be totally exempt from controls over content; there is no legal exemption for a blog that defames someone, invades the person�s right of privacy, exhibits child pornography, reveals classified information, infringes copyright, or otherwise violates generally applicable laws, though in many cases the bloggers will not have sufficient resources to make suing them for money damages an attractive course of action. But there is no compulsion on bloggers to comply with the ethical standards applicable to the conventional media. Moreover, they face less market pressure to comply with ethical standards than the conventional media, because they generally are not supported by advertising revenues (though this is changing) and thus don�t have to worry about offending advertisers�or for that matter viewers, since bloggers do not charge for visiting their sites. Nevertheless I think this �exemption� of blogging from the ethical standards applicable to the mainstream media makes good economic sense because of economic and technological differences between those media and the �blogosphere.� There are vastly more bloggers than there are newspapers, magazines, and radio and television stations. In fact, there are some 10 million blogs, though most of them are personal rather than oriented to news and opinion�yet there are doubtless thousands of the latter. The large number is related to the fact that there is no set-up or operating expense for blogging except telecommunications line charges and, of course, the opportunity cost of the blogger�s time. As a result not only of the large number or blogs but of the speed of transmission and the fact that many bloggers are far more specialized than journalists, the blogosphere pools information with extraordinary completeness and rapidity, in a speeded-up version of Friedrich Hayek�s well-attested model of how the economic market pools information efficiently despite its decentralized character, its lack of a master coordinator. The blogosphere is a larger and faster-paced network than even the global marketplace. This means that errors in a blog, to the extent they concern matters of public interest and concern, are corrected almost instantaneously. Not only by other bloggers, but by the bloggers� readers, who post comments to the blog; the comments become a further part of the information network. There is also greater political diversity in the blogosphere than in the mainstream media, because a conventional journalist�s career appeals disproportionately to liberals The self-correcting machinery of the blogosphere is more efficient than the internal fact-checking departments of conventional media enterprises. This is not only because many more people (not only the bloggers, but also, as I have just noted, their audience, which can communicate with them instanteously by means of the comment feature that most blogs enable) are watching out for mistakes; it is also because corrections are disseminated virtually instantaneously throughout the network. In contrast, even when the mainstream media catch mistakes, it may, especially in the case of the print media, take days or weeks to communicate a retraction to the public. The process is especially deficient in the case of newspaper retractions, which are printed inconspicuously and, in all likelihood, rarely read. Given these differences between blogging and the mainstream media, the case for imposing ethical standards on bloggers is weak. Moreover, there is no way in which thousands or millions of bloggers could agree to adhere to a set of standards, whereas such (benign) collusion may be feasible in a highly concentrated media industry, such as the newspaper industry. A criticism of blogging that has some merit is that there is less advance filtering than in the case of the mainstream media, which because of fear of offending advertisers (more precisely, the advertisers� customers and so derivatively the advertiers) engage in a degree of self-censorship, much of it desirable�censoring out hate speech, wild rumors, and fantastic conjectures and misinformation. Blogging is less constrained and there is a valid concern that it encourages and reinforces antisocial tendencies. The problem is not limited to blogging but includes other uses of the Internet, such as chat rooms. It is not, however, a problem amenable to solution or even alleviation by a program of promoting the adoption of voluntary ethical standards, and there are practical as well as legal obstacles to official censorship. There may also be an actual social value in allowing antisocial elements to blow off stream�and by doing so to identify themselves to law enforcement and intelligence agencies, which can monitor blogs and chat rooms for dangerous movements. What is more, self-censorship motivated simply by a concern with avoiding offense may impair the marketplace of ideas by excluding heterodox ideas and perpetuating comfortable myths. A genuine externality created by the Internet that may call for some kind of government regulation is the phenomenon of �spam.� Spam is advertising (broadly understood to include the various scams that seem to occupy a significant segment of spam space) that is emailed to people�s computers. Because the cost of spamming is very low, enormous volumes of spam are emailed despite a very low response rate, the explanation being that the lower the cost of advertising, the lower the break-even response rate is. Something like 75 percent of all email is spam, and this figure is expected to rise to 95 percent by next year in the absence of regulation. Spam imposes costs (without offsetting benefits) of two kinds. First, most of it is of no interest whatsoever to recipients and some of it is downright offensive; hence receipt imposes a cost. (An earlier example of the first cost was faxed advertisements, which cost the recipient the paper the fax was printed on.) That in itself does not differentiate spam sharply from many other forms of advertising, such as junk mail, but the bother of discarding junk mail is trivial compared to having to pick through a flood of spam to find the emails one wants to read. In the case of much other advertising, moreover, such as the advertising one finds in newspapers and magazines and on television, the recipient is compensated for having to encounter unwanted advertising, in the form of a lower price for a tied product that he wants to consumer, such as �free� television (i.e., paid for by advertisers). Second, the cost of filtering out spam (the demand for such filtering being further evidence that spam imposes net costs on most of the people who receive it) to the computer industry, and of �binning� in in hard drives and servers, is already in the billions of dollars a year, for which the spammers don�t pay. Spam thus creates a negative externality, a form of pollution. True, spam is not completely worthless�if (setting aside the scams) it generated no sales at all, it would be abandoned as an advertising medium. But the worthwhile spam can be preserved by a system in which spam is allowed to be sent to people who subscribe to the receipt of either all spam or particular categories of spam. A different kind of externality has been created by the federal law (the Internet Tax Freedom Act, enacted in 1998) that bars state and local taxation of sales made over the Internet. The effect is to divert sales from conventional retail outlets to Internet sellers, such as Amazon.com. The exemption of e-commerce from normal taxes operates as a subsidy of that commerce. The most frequently heard arguments for the exemption are, first, that it is necessary to encourage the �infant industry� of e-commerce, and second that it is necessary to prevent a further growth of government. I find neither argument convincing. An infant-industry argument may make a little bit of sense for a country that has a promising industrial future but cannot finance the start-up costs of industry other than by preventing import competition, i.e., forcing consumers to finance those costs by paying supracompetitive prices. (Just a little bit, at most, because the global financial market is huge and highly efficient and therefore should be able to finance any promising commercial venture.) But there has never been difficulty in financing Internet-related ventures, even after the bursting of the dot-com bubble. And the �feeding the beast� argument is unconvincing because state and local taxation, unlike federal taxation, is effectively constrained by competition, since businesses and individuals can move with relative ease from high-tax to low-tax states. If states obtained substantial revenues from taxing Internet sales, there would be pressure to reduce tax rates. Banning state and local taxation of e-commerce seems a gratuitous blow to federalism. In summary, I see no pressing need for imposing ethical standards on bloggers, but controls over spamming, and a repeal of the Internet Tax Freedom Act, deserve serious consideration.

Comment on Regulating the Internet-BECKER

The internet is one of the most remarkable and important innovation of modern times. Although initially encouraged by the American government, it has mainly grown worldwide in an unregulated, unsubsidized, and decentralized fashion. Its impact has been huge on communication and information, and to a much lesser extent as yet, on sales, and its development during the next couple of decades is likely to be just as important. The present and future revolutionary impact of the internet, and my skepticism toward government regulation and involvement, colors my attitude to informal or formal regulation of blogging and spam, and extends to taxation of internet transactions. I agree with Posner that additional regulation of blogging and other internet postings is undesirable and unnecessary. Robert Merton, the late outstanding sociologist of science, demonstrated that the main way plagiarism and dishonesty are �policed� in research is through the incentives provided other researchers to discover and expose such malfeasance. These incentives are even more powerful in blogging and other internet activities, where many thousands of individuals seek to discover serious errors committed by bloggers, business leaders, and politicians. I have been impressed by the extent of the information revealed in comments on our blog, far more than in the responses per column from readers during the almost 20 years I wrote for Business Week magazine. The case for taxation of internet transaction is to level the playing field with conventional retail and other outlets. A couple of years ago over 100 economists signed a petition to Congress to allow taxation of internet transactions for precisely this reason. Evidence by my colleague Austin Goolsbee does indicate that internet purchases are higher in states with bigger sales taxes. Although this argument about equal treatment of different type of sales has merit, it is not enough in my opinion to overcome the case against internet taxation. I oppose taxation of the internet not because it is an �infant industry� that needs artificial stimulation to grow, nor because sales taxes of a few per cent alone would destroy this industry. Rather, my reluctance to interfere with the dynamics of the growth of the internet largely explains my opposition to taxation of transactions and other activities on the internet. I fear that the additional regulation of the internet that would inevitably accompany efforts to enforce taxation of transactions by either American states or the federal government would have a negative effect on internet growth in the United States. Any significant sales tax on internet transactions would induce sellers and buyers to find ways to evade paying the tax. That includes setting up offices outside the United States, perhaps while shipping from places within the country, false invoicing, and still other methods from creative minds intent on evasion. All taxes induce avoidance and evasive actions, but internet transactions are particularly difficult to police, as seen, for example, from the proliferation of internet pornography. Hence attempts to collect taxes is likely to lead to substantial regulations that would slow down the so-far remarkable rate of innovation on the internet. There are a few good other arguments against taxation of internet transactions. But the most important, I now believe, is its effects on further regulation of this dynamic media. Spam does create real problems since it wastes time of recipients, and discourages use of email and other parts of the internet. As Posner indicates, spam has grown rapidly, and is commanding a larger share of all emails sent and received. The main factor behind its rapid growth is the low cost of sending spam in large volumes. A report by students in the Graduate School of Business of the University of Chicago collects very useful information about the spamming industry. Their study clearly shows how much cheaper spam is to send than either junk mail or telemarketing. About 150 spam operators appear to control the industry, and they collect many millions of names by scanning the internet. They then sell lists of names for tiny amounts per name. The vast majority of spam is unwanted by recipients, but spam is costly either to block, designate as spam on recipient email accounts, or read and then send to trash. In other words, spam creates what economists call negative externalities or harm to recipients, which sometimes calls for regulation or taxation to discourage the activity producing the harm. However, Guity Nashat (my wife) has indicated to me that the negative effect of spam is mitigated to the extent it substitutes for more costly intrusions on the time of recipients, such as telemarketing and junk mail. The total harm caused by spam is net of this reduction in other intrusions by sellers on recipients� time. The harm from spam is probably still positive, but less than when evaluated in isolation. To the extent that the net effect of spam is a serious problem, there would be a case for simple and effective methods to reduce spam. By simple I refer to my concern expressed above over inducing additional regulations of the internet, in this case to control efforts to avoid anti-spamming approaches. A 2004 Federal Act requires an opt-out notice with a valid return email address, and places restrictions on unsolicited commercial email. Europe instead has a presumably more effective opt-in provision, but apparently does not provide any opportunity for companies or consumers to sue for damages. The effectiveness of either of these laws appears to be very limited, partly because many spamming companies have moved their operations to countries like Taiwan and China that do not yet regulate spam. Other proposed solutions to the spam problem include Bayesian filters, challenge-response systems, blacklists, and digital signatures. Perhaps some combination of these systems will prove effective against spam without overly regulating legitimate email. As yet this has not been the case. So while it could be advisable to experiment with various approaches, it would be a mistake for governments to move aggressively against spam until more evidence is available on which anti-spamming devices are effective without imposing major costs on legitimate uses of the internet system. Otherwise, the attempt to regulate spam is likely to end up causing more harm to the internet and to society at large than any benefits that accrue from reduced spamming.

Estate Taxation--Posner's Response to Comments

My posting precipitated an interesting debate in the comments about the ethical, political, and economic issues presented by inequality of wealth, which has become very great in twenty-first century America. These issues are important, but estate taxation is only peripherally related to them. Without unforeseeable increases in estate tax rates, coupled with extremely stiff gift taxes, estate taxation will continue to have negligible effects on wealth inequality. I agree with Becker, moreover, that even without explicit gifts wealthy people can transfer substantial wealth to their children by investing in the children's human capital (earning capacity)--not to mention the genetic endowment that high-IQ parents transfer to their children. I believe that these transfers are increasingly important, for two reasons. First, with the decline in the importance of strength and stamina as factors of production, the economic return to intelligence has risen. And second, with the breakdown of traditional barriers, such as religion and ethnicity, to assortative mating (likes with likes), there is more matching of IQs in marriage and so a greater production of highly intelligent people. I do not think there would be an ethical objection to efforts to reduce the inequality of wealth. Even if one does not regard one's genetic endowment as a form of unearned luck (as I do not--"luck" to me refers to purely adventitious factors in one's success or failure in life), luck plays an enormous role in wealth; stated differently, the variance in wealth is much greater than the variance in intelligence, character, effort, or all these things combined. And if wealth could be equalized costlessly, there would be a net gain in economic welfare because of the phenomenon of declining marginal utility of income--that last dollar is worth more to a poor person than to a rich, so transferring a dollar from the rich to the poor will increase aggregate utility, and this effect could continue until incomes were equalized. The objection to efforts to equalize wealth, including by drastic changes in estate and gift taxation, is that they are very costly. The have adverse incentive effects on both rich and poor, and a variety of other negative consequences as well. Paradoxically, equalizing wealth can increase envy, because one is more likely to envy someone who is slightly better off than one is than someone who is unimaginably better off. Few people envy Bill Gates, because they cannot imagine what they would do with so much money; but they know very well what they would do with the additional income of their slightly wealthier next-door neighbor. It is important to recognize, moreover (a point that Oliver Wendell Holmes, Jr. stressed repeatedly), that personal wealth, no matter how great, is a part, and a constructive part, of aggregate social wealth. The rich do not burn their money, or put in boxes under their beds. If saved, the money is invested; if consumed, it provides incomes to the people who produce the goods that the rich buy; if given to charity or to politicians, it affects, not necessarily for the worse, the social, cultural, and political character of the society. The opportunity to amass wealth also channels the ambitions of aggressive people into relatively harmless channels, even if Samuel Johnson exaggerated when he said that people are rarely as innocently engaged as when they are making money.

Reply on Estate Tax Elimination-BECKER

I enjoyed reading all the comments. As the discussion makes clear, the issue of estate taxation raises many interesting questions that would take more than one posting to cover at all adequately. Let me try to respond to some of the points raised. As some of you indicated, and others denied, the estate tax is not necessary to get a circulation of the very rich since wealthy families did regress over time even before the estate tax became important. Although many of the descendants of John D. Rockefeller are still quite rich, as a family they have fallen greatly in wealth compared to the Gates� and other much newer wealthy families. There is nothing intrinsically regressive about consumption taxes. There can be various rebates, exemptions, and credits that would make the overall system progressive in the usual meaning of that term: that the average tax rate rises with level of consumption, or that marginal rates rise at some consumption levels and do not fall at any others. My preferred way to make a consumption tax progressive is via exemptions. The most efficient way to implement a progressive consumption tax along these lines is to allow all savings to be deducted from income, and then tax the residual (which is consumption), with an exemption at the lower end that should be quite generous. The NYTimes article that referred to my 1987 Presidential address to the American Economic Association badly misstated what I said. I did not claim that children�s income was not much related to the income of their parents. In fact I assumed for the sake of discussion that about 40% of the parents� income advantage was passed on to children. Note that grandchildren would then only have about 16% of the advantages of their grandparents. It is true that some recent work claims the fraction passed on might be as high as 50% rather than 40%, but that is controversial, as Dean Lillard of Cornell and others have argued. I also stand by my claim that there is no credible evidence that the degree of intergenerational mobility has fallen during the past few decades. If consumption were taxed, the basis would automatically be �stepped up� since that true basis would determine consumption spending. Even if one does not like a consumption tax, surely an inheritance tax is much better from any equity standard than the estate tax. I agree that the value of the inheritance for tax purposes should be based on the market value of inheritances, not the purchase price. I do not believe that if the Federal estate tax were eliminated, it would simply be replaced by much higher estate taxes by the states. For it is easy for many rich persons to change their state of residence by moving to states with lower estate taxes. That is certainly a lot easier than changing country of residence, and a considerable number of the very rich even do that.

Should the Estate Tax Go? BECKER

The tax cut law of 2001 included a slow phase out of the estate tax by 2010, but the tax is supposed to be reinstated in 2011 when the entire 2001 law expires. This strange political compromise on estate taxes presumably will not last, so it is a good time to consider what should be done about this tax. I believe taxes on estates should be permanently abolished since they do little to reduce income or wealth inequality, benefit a vast army of lawyers and accountants whose role is to find ways to cut taxes on the estates of the wealthy, create problems for some families with smaller businesses, and do not raise a lot of tax revenue. In April the House of Representatives rather strongly voted to repeal permanently the tax on estates, so the issue now goes to the Senate, where some Democrats are promising a filibuster. In earlier times, bequests of assets, especially property, were the dominant way to pass economic wealth from parents to children. But after the knowledge revolution took off toward the end of the 19th century, bequests of financial and material wealth have become less important in the overall economy. Instead, the most important way for parents to �bequeath� economic position is through the transmission of knowledge in the form of education, training, and other human capital. Such capital embodied in people now comprises over 70 per cent of all �wealth� in economically advanced nations, far more important than material capital. In modern economies children of better educated, higher earning, and more able parents on the average receive greater training and schooling, better health, and are more encouraged to develop their talents than are children in other families. Primarily for these reasons, children of parents with greater human capital form an economic elite that tends to have better jobs, less unemployment, and higher earnings. But this elite circulates over generations, and there is no convincing evidence that the degree of circulation, the degree of social mobility across generations, has been falling during the last couple of decades. Some defenders of a sizeable estate tax rate claim not any major effect on inequality, but that it allegedly brings in lots of revenue with little disincentive to wealth accumulation and other behavior. However, estate and gift taxes in fiscal 2005 are expected to contribute only $24 billion in federal tax revenues, which is about 1 per cent of estimated total federal tax receipts, and just one third of federal revenue from excise taxes. The rise in exemptions may have reduced revenue from estate taxes, but this tax did not contribute much more even a decade ago. $24 billion is not small change, except to politicians, but if the estate tax were abolished, the lost revenue could be made up without difficulty with only modest increases in income or consumption taxes. A main reason for the small yield of estate taxes is that very rich persons with large estates often pay little to the government since they employ skilled lawyers and accountants to help them find ways to sharply cut their estate taxes. Trust and estate planning is the specialty of about 20,000 lawyers who, along with accountants, spend their expensive time discovering ways to reduce the amount owed in estate taxes. These ways include gifts, trusts that may skip a generation, insurance trusts, and charitable trusts and foundations. These talented individuals should be spending their time in more economically productive ways. Since the average estate-planning attorney earns more than $150,000, spending on 20,000 of them would be in excess of $3 billion. If another $1 billion goes to estate accountants, total spending on tax avoidance would seem to be in excess of $4 billion. This is more than 1/6th of the revenue generated by this tax, a strikingly high percent. The estate tax is a bad way to reduce the effect of inheritances on inequality in the distribution of incomes and wealth, even for families that do leave large estates. For this tax does not consider how many children, parents, other relatives, or friends share estate resources. A parent who leaves $10 million to an only child has a larger effect on the personal inequality of wealth in the next generation than does someone leaving the same amount to be divided among several children, nieces, nephews, friends, and employees. Similarly, a large bequest to successful children with high incomes raises inequality more than does the same size bequest to children with low or just average incomes. This is why taxing inheritances rather than bequests would be a better way to reduce inequality in succeeding generations. That is, $10 million in bequests divided five ways should generally be taxed at much lower rates than the same amount given to one person, while $10 million divided among several well off children should also be taxed at higher rates than the same amount divided among children with modest incomes. Although an inheritance tax would be better than the estate tax, I am not advocating a direct tax on inheritances, for there is a better approach that indirectly does tax inheritances (see the discussion later of consumption taxes). The estate tax also makes it harder for families to pass successful businesses on to their heirs. Despite the 2001 tax law that increased exemptions, families are still sometimes forced to sell more successful and profitable businesses upon death of the principal owner in order to pay estate duties. This is why farmers and other owners of small businesses continue to be active politically in advocating much lower estate taxes, if not their complete abolition. High tax rates on estates may be thought to be universal, but in fact many countries have low taxes on estates. Moreover, some countries, including Canada and Switzerland, essentially have not taxed bequests to close family members, although they may tax capital gains on assets transferred to children. I cannot go deeply in this discussion into the reasons why I believe a tax on consumption, perhaps a progressive one, instead of income and corporate taxes, should form the heart of the federal tax system. Suffice it to say that consumption taxes, unlike income taxes, do not distort savings decisions, a particularly important issue for the United States. A general reliance on consumption taxes would, among other things, replace an estate tax by indirect taxes on inheritances. The tax on inheritances would be indirect because they would not be taxed when they are received, but only as they are spent. So if a family receives a large inheritance that raises their consumption several fold, the amount they would pay in consumption taxes would also increase several fold for as long as the family continues to consume at a much higher level. So my conclusion is that the estate tax should go, or at least have greater reduced rates, since this tax has little effect on inequality in a knowledge economy, encourages costly avoidance behavior to take advantage of various tax loopholes, raises only a modest amount of government revenue, and reduces incentives to form family businesses and other entrepreneurial activity. Estate taxes do not even tax the right base if the aim is to reduce the effect of inheritances on inequality in the personal distribution of income and wealth. The energy and political capital spent on supporting high estate taxes is better spent on trying to raise opportunities to children from poor families by improving their education, training, and health.

Posner on Estate Taxation

I agree with Becker that inheritance taxes are preferable to estate taxes and that consumption taxes are preferable to income taxes. However, I do not share his strong opposition to the federal estate tax. The government needs revenues, and taxation is the principal means of obtaining those revenues. An ideal tax from an economic standpoint is one that generates substantial revenue without distorting the allocation of resources. These turn out to be linked concerns. A narrow-based tax, such as a tax on sports cars, is undesirable from this standpoint because, unless the tax rate is very low, in which event little revenue will be generated, the tax will deflect consumers to close substitutes that are not subject to the tax, and thus little revenue will be generated, because of substitution away from the taxed product. A recent article in the New York Times calls the estate tax �perfect� on the ground that it does not distort the allocation of resources because people can�t escape death. Were this true, the estate tax would be analogous to a �head tax��say a tax of $1,000 a year on every U.S. citizen. Such a tax would be difficult to escape because substituting away from the taxed activity (or rather status) would require expatriation, which is very costly to an individual. The tax would generate almost $300 billion a year in revenue. The estate tax is not nearly so �perfect� as a head tax, because contrary to the Times article it is easily avoidable, as a head tax is not. I emphasize �easily�; for that is the reason the problem with the estate tax is not, as it might seem to be, that it is a tax on savings and can thus be avoided only by consuming all one�s wealth before death and therefore is likely to distort people�s consumption decisions, which would make it an inefficient tax. People who have no bequest motive�that is, who are not interested in having a positive balance when they die�are not greatly affected by estate taxation because they already have every incentive to dissipate their wealth before they die. People who do have a bequest motive are not much affected by the estate tax either, because they can transfer their assets to their children or to other intended heirs before death, reserving the income from the assets for their lifetime (the equivalent of an annuity, which expires on the annuitant�s death, leaving nothing for distribution to heirs). As a result of these incentives and opportunities, the estate tax does not generate much revenue for the government. It collects some, however�and I do not consider 1 percent of total federal tax revenues a trivial amount�and its distortionary effects are probably modest. Becker is correct that it is costly in effort expended by lawyers to minimize the impact of the tax on their clients (though he may exaggerate the cost by attributing the entire income of estate-planning lawyers to tax counseling, when even in the absence of estate taxation legal counseling would be required for the preparation of wills and other documents required for large estates). But in that respect, it is no different from the income tax. Were the estate tax abolished, the revenue it generates would have to be made up by some other tax, which is as likely to be as distortionary as the estate tax and would invite avoidance efforts by tax lawyers. The more interesting question to me, though I have no good answer to it, is whether the estate tax should be stiffened, or other measures used to limit bequests. An article in last Friday�s Wall Street Journal, echoing remarks that President Summers of Harvard made at a conference at the Kennedy School that same day, notes a possible, and possibly troublesome, decline in social mobility in the United States. Wealthy people seem increasingly able to guarantee that their children and even grandchildren will remain in the upper income tier, leaving fewer places for the children and grandchildren of the poor to occupy. Through �legacy� admissions (as at Harvard!), expensive private schooling and tutoring, including tutoring in taking college admission tests, as well as by means of direct transfers of wealth, wealthy people are able to �purchase� a secure place for their children and grandchildren in the upper class. Even if, as Becker argues, social mobility has not actually declined in recent decades, it is lower than it used to be and the conditions for a decline seem in place. But the normative implications are unclear. For example, one concern with declining social mobility is a fear that rich kids won�t work as hard as poor ones, so that economic growth will lag. But if they don�t work as hard, they will lose jobs to the poor. They may continue to live quite well by clipping coupons, but the poor (or rather the former poor) will occupy the high-paying jobs. And because rich kids can take financial risks that the poor cannot, and risk-taking is important to innovation and hence to economic growth, bequests may lead to an increase rather than a reduction in economic growth, though this depends on the balance between the drag on growth from rich kids� working less hard and the spur to growth from their taking more financial risks. Furthermore, the positive correlation between parents� and children�s wealth may conceal the actual causality. It may be that the parents are wealthy in part because of a genetic endowment that they pass on to their children, who because of that favorable endowment would become wealthy even if they didn�t inherit any money. But probably wealth does enhance the advantage in having such an endowment. If lack of social mobility is a problem, nevertheless it is unlikely to be solved by trying to limit bequests, since wealthy people can transfer much of their wealth during their lifetime. To have an impact on the transmission of wealth across generations, therefore, a stiff tax on bequests would have to be complemented by a stiff tax on gifts, and �gift� would have to be broadly defined to include such things as paying $50,000 a year for tuition and expected donations at a fancy private school in New York City. And really stiff estate and gift taxation, even if feasible, would be undesirable because of the disincentive effect on the work effort of those people�and they are numerous�who, to a significant degree, are motivated to become rich by a desire to make their children and grandchildren better off than they would otherwise be. There is a traditional concern with dynastic fortunes�that is, with accumulations of wealth that are so great that they confer disproportionate political power on a family. The founder will usually be too busy making money to participate heavily in public affairs, though there are exceptions, such as Joseph P. Kennedy, President Kennedy�s father; Michael Bloomberg, New York�s mayor; and George Soros, the billionaire backer of the Democratic Party. The next generation, the generation of the inheritors rather than the creators of wealth, may decide to devote full time to public matters, for good or for will. Concern with accumulating political power over generations lies behind the esoteric �rule against perpetuities,� which forbids making a bequest that will not take effect until more than 21 years after the death of currently living persons�this to prevent transmitting wealth to one�s remote unborn descendants. As a curious tandem to the movement of abolish the federal estate tax, many states are allowing the rule against perpetuities (a rule of state rather than federal law) to be undone by the device of the well-named �dynasty trust,� whereby a wealthy person places money in trust with instructions that the trustee invest the money for the benefit of specified beneficiaries, such as the descendants�however remote�of the creator of the trust for as long as there are such descendants. Depending on the amount doled out by the trustee in each generation, the trust might over time accumulate enormous assets simply by the operation of compound interest. The device is quite recent yet already some $100 billion have been placed in dynastic trusts. See the study by law professors Robert Sitkoff and Max Schanzenbach, forthcoming in the Yale Law Journal. Should we worry about the dynastic trust? Probably some degree of wealth inequality is potentially destabilizing politically. But on the other hand the creation of centers of private power acts as an offset to growing governmental power and so may actually serve to preserve liberty. Notice in this connection that abolishing the estate tax would reduce the incentive to make charitable bequests, which are tax exempt. I should note finally two possibly illusory aspects of the proposed abolition of federal estate tax. One is that states may respond by increasing their own estate taxes, which are less efficient than federal estate taxes because it is easier to evade a tax by moving from one state to another than by expatriating oneself, and so such taxes affect locational decisions more than the federal tax. Second, the current estate tax gives heirs a �stepped up� basis in capital that they inherit. That is, should they later sell a capital asset that they inherited, the cost basis for computing how much capital-gains they owe will be the value of the asset at the death of their testator rather than the cost that the testator incurred to acquire it originally. So abolition of the federal estate tax would be offset to an unknown degree by increased capital-gains taxation of heirs, and also by increased administrative expense since it is often difficult to determine the original value of an asset that was acquired many years earlier.

Posner's Response to Comments on Privacy Posting

There were as usual a number of very fine comments, some of which require me to extend my analysis in various ways. For example, one comment points out that people don't merely conceal discreditable information about themselves; it is more accurate to say that they make a selective presentation of the facts about themselves to other people, and this selective presentation may be more informative about the person than an unscreened flood of information about him. (The sociologist Erving Goffman wrote about this in a great book called The Presentation of Self in Everyday Life--it is an essentially theatrical conception of human social interactions: we create a self or selves to manage our interactions with other people. I formulate his analysis in economic terms in Chapter 25 of my book Overcoming Law (1995).) This is related to but extends my point that requiring an SEC-regulated prospectus-like disclosure of all material information about a person would flood society with trivial information. It would not only be distracting, it would actually reduce our knowledge of people by preventing them from signaling through their self-presentation how their intentions, motivations, and purposes should be understood. A point also made in the comments that is related but that I do not fully agree with is that people should be able to conceal information about themelves that would trigger ignorant or irrational prejudices on the part of other people. I think that in general people should be allowed to make their own judgments about other people--should be able, thus, to decide for themselves what is material information. But psychologists do correctly point out the operation of what they call the "availability heuristic," which is the tendency of the mind to be seized by features of a situation that are particularly arresting though not necessarily important from a rational standpoint. So knowing that a person was HIV-positive or had had a sex-change operation or had (in one commenter's analysis, "anal warts"--an arresting condition that I had never heard of before, and would prefer not to have heard of) might overwhelm one's attention to all the other facts about the person that might be more important in relation to the particular transaction that one was contemplating having with the person, such as retaining him or her as one's accountant. The problem with this insight is that it does not enable a sharp line to be drawn between concealment designed to take advantage of other people and concealment designed to prevent other people from reacting irrationally to one's offer of a transaction. Another point I have reservations about is whether reducing the privacy of medical records would cause people to shun doctors and if so whether this would be altogether a bad thing. People will not, merely to protect privacy, avoid seeking treatment for serious illness; and as for trivial illness, there is only a slight privacy stake and anyway it might be all to the good if people were less quick to seek medical treatment, including cosmetic surgery, for conditions that either are not serious or that are not medical conditions, in the sense of illness, at all. A further problem with concealment of medical records is that it disrupts the efficient operation of insurance markets. Low-risk people get pooled with high-risk because the high-risk people conceal their riskiness. The result is an arbitrary redistribution of wealth from the former to the latter. One comment reminded me--as a public official, I should not have needed this reminder--that a frequent and proper motive for concealment of information about oneself is simply self-protection: you don't want criminals to know the details of your financial situation, where you bank, your address and phone number, your credit card number, etc. That is, it is entirely proper to try to conceal information about yourself from people you don't want to transact with, unless you are the outlaw and the people you're trying to avoid are the law. One interesting comment points out the distorted understanding that can arise from the fact that the rich have more privacy than the poor; privacy is what economists call a "superior good," meaning that one consumes relatively more of it as one's income rises. If the poor have less privacy, so that more is known about their misbehavior, a false impression may be created that they misbehave more than the rich, whereas the amount of misbehavior may be the same and the only difference may be that the rich conceal it better. Against this, however, is the fact that there is much more curiosity about the private lives of the rich--which may be one reason why privacy is a superior good. The rich spend more to protect privacy, but the media, to gratify public interest in the lives of the rich, spend more on penetrating the privacy shield. So maybe we know as much about the private lives of the rich as we do about the poor, or even more. Let me pursue the "superior good" point a little further. Because privacy is a superior good, the amount has grown as society has become wealthier. Americans have far more privacy today than they did a hundred years ago. This results in greater happiness on the one hand, but (qualifying the increase in happiness) greater opportunities for fraud in personal and commercial relations, and indeed for terrorism, which requires a high degree of secrecy in preparations, on the other hand. Because of the serious downsides of privacy, the growth of privacy incites a responsive growth of methods of surveillance, now greatly facilitated by digitization, which in turn incites a countermovement for encryption and other methods of restoring privacy in the face of digitization. So there is a kind of privacy arms race.