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05/15/2005

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One of the most interesting law-related blogs is the joint blog published by Professor Gary Becker (Nobel Prize-winning economist from the University of Chicago) and Judge Richard Posner (of the U.S. Court of Appeals for the Seventh Circuit). [Read More]

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Gary Becker makes a great deal of sense: 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... [Read More]

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John David Galt

There's a simple reason that the wealth of young families in America has been steadily declining since the '70s, and estate taxes have nothing to do with it.

It is because of the racket known as urban planning. Local government and its planning agencies are, by and large, owned and operated by local residents who already own nice houses. Naturally, they want the prices of those houses to continue to skyrocket. So they use the planning agencies to insist that almost no housing be built, and that that little be the condos and apartments prescribed by the pseudo philosophy of "Smart Growth".

While they're at it they also insist that most of our gas-tax funds be wasted on transit that nobody will ride, instead of the new and widened freeways that we desperately need to relieve congestion. After all, in the cartel's view, if you don't already live in [insert city name here], you don't deserve a say in its policies, and you certainly don't need to move here. Never mind the fact that job growth, plus the deliberate housing shortage, will force millions of people to commute into the city, it's "theirs" and they don't have to let it grow.

We need the federal anti-trust enforcement people to go after the urban planning industry, and the groups whose secret agenda is to keep the cartel all-powerful, such as the Sierra Club. As long as the "I've got mine, you can live somewhere else" people control local politics, it will continue to be impossible for most working families to afford to purchase a house -- despite huge amounts of land which are now going to waste.

Kyle Hasselbacher

What if you're starving because you gambled away all your hard-earned cash?Gambling is considered by experts to be an addiction, like alcoholism. I support treatment.What if you're sick because you refused to purchase health insurance you could have afforded?Ideally, opting out of health care would not be an option (sort of like opting out of retirement planning isn't an option with Social Security).What if you're sick because you ate lots of lobster and steak and refused to exercise and now you have heart trouble?You seem to be implying that those who knowingly don't care for themselves do not deserve the care of others. Is this behavior OK if the patient is ignorant of the consequences? What do you do with people who became addicted to cigarettes before learning of their effects? How do you prove what they knew or didn't know? While I have a little less sympathy for the self-destructive, I don't regard that as proof of irresponsibility, and I wouldn't be surprised to learn that it's cheaper just to treat them all the same than to spend the money sorting the willful from the ignorant.What if you're starving because you spend all your cash on expensive sneakers and cars?This is the same as "what if you didn't buy insurance?"Can someone really claim to be starving and sick when he has cable and over a hundred compact discs at twenty bucks a pop?No. Who are you talking about?It seems that everyone in the United States lives at a minimum standard of living that is much better than that of most people in the world. Is your minimum relative to?It's true Americans are much better off than the rest of the world. I can't parse your question.Or is it objective? Does the line keep changing as the economy keeps growing?This is a good question for the people as a whole.Why aren't basic public utilities like electricity and sewage and indoor plumbing considered a "minimum standard"?They are.I can tell that you have never worked for Peace Corps!How do you think that would change my opinion?

Corey

"I would also challenge Corey to give me a reason why wealth inequality is inherently undemocratic."

I'll give you an anecdote. A former congressman who was on the 9-11 commission recently spoke at my law school, he relayed many stories about how congress works. Offhand, he mentioned a policy discussion he had with Rockefeller when he stopped by for his regular visit. This congressman modified his opinion based on that meeting.

Rockefeller can get a private audience with any congressman he wants at any time. You can not. You can write a letter or yell something at a town hall.

Rockefeller can contribute money that you do not have. Hence, inequalities in wealth lead to inequalities in political power. This is 5th grade civics and I am talking to college graduates here. Come on guys. You can deny that equality is more valuable than whatever you believe in but do we really have to debate that money = power?

Corey

Winfield, if I were an elitist, then at least the elitists would like me.

You can quote apologists for lassiez-faire in India all you want, doesn't change the reality that millions of people there are in the grips of horrible poverty that would make most Americans sick to see. I remember once before someone here quoted with joy the fact that third world minimum wages had risen 100%!... From $1 a day to $2. ooooooh.

I did not say that growing the economy would not benefit the poor. I said that growing the economy benefits people in proportion to their original share of the economy.

The free market does not magically become egalitarian simply because regulatory schemes are subject to corruption in undeveloped countries. This corruption is an argument for improving democratic political structures and the rule of law, not for sideswiping the same by turning over control to multinationals and unaccountable elites.

The fact is in developing countries often the wealthy elites and the corrupt governments are the same. If you sincerely want to fix them, then I suggest conditioning participation in the world market on establishing human rights and stable democracies. And I am not talking about the World Bank or IMF plan. I am talking about Arco and Unocal pulling out of places like Burma and Uzbeckistan until the government stops shooting protestors.

I understand that this has gone way off topic, so I don't need a reminder posting.

RWS

You can deny that equality is more valuable than whatever you believe in but do we really have to debate that money = power?

This statement indicates to me that you have almost no respect for the viewpoint of the other side, which I would contend is a fundamental problem for you. In my prior post, I clearly stated that there is a tension in democracy--the wealthy have more power per person, but the nonwealthy have a whole lot more votes, and in a democracy, the most votes wins. Which one is dominant? Who knows. A union boss can also walk into a congressman's office, esp. a Democrat, because the union boss may hold hundreds of thousands of votes in his hands. It's not a simple question, and it hasn't been simple since Plato's Republic. The above statement suggests otherwise, and I contend that would be in error. Interestingly, the party that has been most hurt by banning unlimited soft money contributions has been the Democrats, not the Republicans, for precisely the reason I argued in my first post--successive generations of wealth tends to engender a great deal of idealism, maybe an inefficiently high degree of such. That may be why a lot of old money folks are attracted to liberal idealism.

---

Answering Kyle, your original scenario did not postulate that there was no other conceivable form of currency, but if you now add that to your hypothetical, I would contend that's exactly why your hypothetical is not realistic. Nothing prevents nonrich people from being productive and trading amongst themselves with some form of currency or another. If you need a primer on the economic analysis of what a currency product is, email me and I'd be happy to give you some online articles to read or something.

I think a major hidden issue with the estate tax, as we've discussed supra, is the charitable alternative for that money. My point is not that charity is inherently bad but that there are a lot more inefficient and wasteful charities than people realize (I've worked in some), and perpetual endowments present particularly big problems, problems that can be even worse than government, because at least government is accountable to the people eventually and can be changed. A perpetual endowment is under the sole control of trustees. I would contend that it is very arguable that leaving capital in markets rather than locked up in a perpetuity may be better for overall welfare.

RWS

By the way, for those whose appetite for this topic has yet to be satiated, Paul Caron's TaxProfBlog has links related to this estate tax mini-debate around the blogosphere that Becker and Posner have contributed to, including a few other bloggers' comments about their posts here.

http://taxprof.typepad.com/taxprof_blog/

It's the first post on Tues., May 17.

Also, http://taxprof.typepad.com/taxprof_blog/2005/05/estate_tax_musi.html

Corey

"the wealthy have more power per person, but the nonwealthy have a whole lot more votes, and in a democracy, the most votes wins. Which one is dominant? Who knows."

I know, or rather I can guess. It seems that the one with the least collective action / transaction costs will win.

Wealth can also be used to influence votes. For instance, by commissioning books and academic studies and funding politicians that disparage the teachers union. Or just by flat out buying votes. The union representative ideally represents a consensus achieved through hard work and discourse. The wealthy elite at best represents a purchased "consensus." (At worst a special interest view.) I think that buying support is inherently less democratic than talking it through.

Although I often do, I am not required to respect the viewpoint of the other side. I am required to respect the other side's right to a viewpoint.

R

"Do campaign finance reform and the estate tax "let the market function"?"

Not sure about campaign finance reform, but with regard to the estate tax, I think we need to ask the question of whether there is really a market at work at all -- whether the market forces that we generally want to promote are actually promoted by post mortem control of wealth.

The best arguments for market economies usually involve information and incentives. A free market is the best way for people to transmit information about what is valuable, what isn't. It inspires people to create, work like dogs, etc., all of which is, in the end, good for all. Fine. This is a simple picture -- Corey (and I) would like to poke holes in it -- but these are the basic benefits of markets. There are market failures all around, but generally we like markets because they inspire people to work and create, and they transmit information.

What in particular does control wealth, post-mortem, add to this picture? Are you less likley to work during your life because you know that, when you die, you can't control your wealth? In a very real sense, when you die, you already can't control your wealth. There isn't really much lost here, as far as incentives. People will argue that providing for one's offspring is an incentive. I think that incentive works only up to a certain point. I don't have data on this, and people will disagree, but I think most individuals would suffer no loss in work-ethic from the knowledge that estate taxes negated any chance of creating some sort of dynasty. Provided that they knew they could pass enough wealth on to their kids such that they would not be destitute, I don't think you would see a substantial reduction in productivity.

In as much as some people actually are inspired to work primarily from the desire to set up a family dynasty, I am not sure that is an incentive we want to promote.

R

The second benefit of markets that I mentioned was information transfer.

I will be brief here: I can think of no cognizable argument that allowing people to transmit wealth over generations, and consolidate it, aids in information transfer. I am open to any arguments anyone wishes to make.

Wes

Most people would agree that the United States has a better form of government than the monarchies of the middle ages. In the middle ages, people believed in things like "divine right of kings" and "what's good for the king is good for the country". If a king decided that it was in his personal best interest to chop off someone's head then it was assumed that it was also in the country's best interest.

The key idea that lead to the improved United States form of government was the idea that (political) power should be limited: that there should be upper limits on power (no more "Off with his head!") and that there should be lower limits on power (the bill of rights).

What the founders of the United States neglected was the need for limits on economic power. As it is, someone can acculate money with no limits on the rate or the total amount and they can spend it (or not) in whatever manner benefits them personally.

What is needed is a system puts an upper limit (through 100% taxation) of one million dollars per year on income and a limit of ten million dollars on total assets owned by any one person. Furthermore, the system would also need to place lower limits on (economic) power such everyone was guaranteed a minimum income (enough to eat, limited health care, education, etc.) and minimum assets (a place to live, clothes, etc.).

Just as limiting political power is more broad than can be strictly justified (there are examples where allowing a king to order "Off with his head!" would be either advantageous to a country, or the king's "moral" right, or both), limiting economic power is also more broad than can be strictly justified. On the other hand, it prevents the kind of abuses that destroy an economy: concentrating economic power in the hands of a few individuals whether those hands are the corrupt politicians of a communist centrally planned economy or they are the corrupt directors of large corporations in a capitalist economy.

So, estate tax is unnecessary but upper and lower limits on income and wealth are necessary.

Wes

It should also be noted that rich people don't really earn their money, as such.

Suppose a "normal" person working on an assembly line assembles widgets at a rate of one widget every 50 seconds and is paid fifty thousand dollars per year. Now, suppose someone like Bill Gates works on the same assembly line and assembles the same widgets at a rate of one widget every 1/20th of a second (1000 times faster than "normal") and earns fifty million dollars per year.

In this case one could legitimately say that someone like Bill Gates deserves to earn 1000 times more than "normal". The reality, however, is that someone like Bill Gates would be at most a factor of 2 or 3 times faster (if at all).

The way rich people "earn" their money is either by using their power as directors of large corporations to give themselves multi-million dollar stock option bonuses, by leveraging a monopoly - granted initially by some government - on a natural resource such as real estate, oil or even so-called "intellectual property", or by owning a large fraction of a corporation that experiences large growth.

The first two cases obviously raises some serious ethical concerns and the third case raises more subtle ethical concerns. "Owning" a large corporation is like a king "owning" a country of serfs in feudal times or even like a cotton farmer "owning" slaves: when dealing with "ownership" of people or entities that encompass people there need to be much greater limits on the powers afforded to the "owner" over the owned object than when the owned object is something like a loaf of bread.

At any rate, these forms of earning money are clearly not beneficial to society as a whole and, as such, are not the kinds of things that society should be rewarded by allowing such people to "earn" more than everyone else.

RWS

Corey:

I agree that you need not accept all viewpoints, but I would contend that you should respect a well-articulated viewpoint enough to try to understand it fully before dismissing it. Others on this blog have repeatedly suggested to you that you fall short of that mark. As for mine, you neglected to read even the plain meaning of it, much less digest any implied meanings of it, before dismissing it. Perhaps a little more listening and reading and a little less writing would help the quality of discourse.

Wes:

You raise two main objections to very high incomes that I see. First, you contend that they could not possibly reflect actual productivity, as who could possibly be 1000 times more productive than a line worker, for ex. Second, you contend that owning a large corporation is akin to dictatorial power that we should rebel against just like we rebelled against the English king.

As to the first point, I would respond that (1) Gates really is a heck of a lot more productive than an uneducated line worker, including the extraordinary increases in productivity that would have come from his years of education, learning, experimenting, and obviously uniquely inquisitive and inventive mind. But, I agree that does not bring one from the modest blue collar income to unimaginable wealth, just maybe to extraordinary wealth (and his products really have had that great an effect on productivity to be worth quite a lot). To reach that second step, one must factor in his entrepreneurship and the great risks that he took. There were probably tens of thousands of people and companies like Gates in the 70s and 80s and 90s who would experiment and take risks in the area of computer and software design, in the hopes of coming upon a fabulous design that everyone would want and which would be greatly productive. They did so knowing that they would probably fail, but in the small chance they succeeded, they would make out like gangbusters. Most, of course, failed or only partially succeeded, and that is fine. It’s the American way to take a few risks. But you have to add in the hours and entrepreneurship of all of those people together in order to calculate the amount of brainpower and risk-taking that created our modern software marvels.

As to the second point, there are a few critical differences between a corporation and a monarchy. First and foremost, a monarchy has virtually complete monopoly power over a whole civilization. One could not move outside the English jurisdiction without having to go to a completely new culture and language. In contrast, if you don’t like working for Lame Corp., there’s no monopoly. You may quit and find another job instead of whine. Furthermore, a rational worker investigates the prospective employer for its reputation for employee care before signing on. So, workplace quality and employee care is subject to market forces. The king is not. Second, the king has police powers that no employer even remotely has, so that is another major difference. I'm sure there are others, but those are two big ones in my analysis.

Corey

"You may quit and find another job instead of whine. Furthermore, a rational worker investigates the prospective employer for its reputation for employee care before signing on."

You can't always just quit when you have a family, a mortgage, and credit card debt that will start charging you 35% interest if you are a day late.

You can't always find an employer that takes care of its workers. In good times, most employers look good because they are competing for talent. In times like now, all employers are cutting benefits because the unemployment situation favors them.

In practice, a corporation can feel like it is more in control of your life than the government.

There is no question that Gates and the other 20 people who put their careers on the line to start Microsoft deserve some kind of reward for their success. But given that theirs was simply one product out of hundreds that just happened to be selected (its an interesting story)... does he deserve as much as he got? (virtual monopoly on PC software for 25+ years) Right now Microsoft employs tens of thousands of people, and Bill is still being compensated as if current product is being produced by him or as a result of his risk.

In other words, its not an all or nothing proposition. We have to desice if we allow wealth accumulation to reward innovation or to encourage innovation by others. Then we have to find a mechanism to limit this reward to what is necessary to accomplish that goal (high top tax rate, estate tax, etc...) Otherwise, 25 years later, we may still be overcompensating someone at the expense fo other good ideas. (Re: Linux)

Kyle Hasselbacher

Answering Kyle, your original scenario did not postulate that there was no other conceivable form of currency, but if you now add that to your hypothetical, I would contend that's exactly why your hypothetical is not realistic.Indeed. I wrote that it was not realistic at the time that I introduced it.Let me try again, starting from my premises (which I don't see contested).Poverty results in suffering (and is therefore to be avoided). From "starving to death" to "can't afford a new kidney", lack of money kills. One could get "lucky" and live in poverty but never experience a serious illness, never suffer the effects of higher crime, etc., but that looks unrealistic to me.There's finite wealth in the world. What Gates has, others do not have. Wealth in the world increases over time as people create things of value, but on the day Gates dies, the money he has in the bank is, in a sense, deprivation for others who could have benefited from it.Therefore, concentration of wealth is bad. The estate tax discourages hoarding, and that's why I think it's a good thing.As I said before, if everyone could afford everything they need to live securely, I don't care about concentration of wealth. Until then, it's a problem that the estate tax addresses.

RWS

Kyle:

As I have stated twice, I would dispute your second premise. The stock of value in the world ("wealth") is not static. I have a lot of knowledge capital in my brain now. Well, maybe not a lot, but some. If I die tomorrow, that knowledge capital goes away. If you choose to take a day of work off tomorrow, the amount of value created tomorrow goes down by your work product. The stock of money is simply not the final yardstick for how much wealth is in society. If half of the buildings in America fell down overnight tonight, there would still be the same number of dollars in circulation, but much less wealth. Likewise, if all of a sudden cheap cold fusion were perfected, we'd all pretty quickly get a lot wealthier, even though neither the stock nor distribution of currency would change only because of that invention.

Kyle Hasselbacher

RWS,I don't think anything you said contradicts what I'm saying. The ammount of wealth in the world changes over time, but it's always finite, and where it is matters. Property destruction decreases total wealth. Creation increases total wealth. The fact that weath is created and destroyed doesn't change the fact that what we have is only so much.The stock of money is simply not the final yardstick for how much wealth is in society.I agree, and it's what I meant when I said, My hypothetical "wealth" is meant to emcompass all currencies.So what are we arguing about?

text

RWS -- the fact that wealth is fluid, and capable of overall expansion, does not change the fact that it is finite.

G-mail accounts allow for an ever growing amount of storage space. Nevertheless, at any given moment, the amount of storage space is finite, not infinite.

RWS

Granted, Kyle and text. I think what I am objecting to is more the underlying premise of the second point, which is that "on the day Gates dies, the money he has in the bank is, in a sense, deprivation for others who could have benefited from it." I object to this zero-sum analysis. Whether Gates has $50 billion or $150 billion in the bank does not deprive me of my own ability to produce value and wealth from my own hands. If one buys that the labor market at least roughly clears, I am going to make what I earn, period.

While I'm at it, I would also question that the conclusion follows from the premises Kyle stated. Kyle stated that poverty is bad (I agree) and that there is finite wealth (I agree, except to the extent stated above). It does not therefore follow that wealth concentration is bad. If, for example, some are richer than others but no one is poor, that obviously would be a counterexample, though an unrealistic one. However, if one posits that someone is chronically poor because they do not have a work ethic, then taking money from rich man to give to poor man does not really help much in the long run, and makes things doubly worse by giving rich man a mild disincentive to work and poor man a major disincentive to work. If, on the other hand, rich man employs poor man, or poor man borrows from rich man, the result is a more productive society. That would be a definite counterexample to Kyle's syllogism, EVEN if one accepted the premises as stated and implied.

RWS

Sorry to double-post, but to tie my second analysis to the problems I have with Kyle's second premise, the "deprivation" that he would assert does not exist just because the government does not take it from the Gates family to give to the poor family. The poor family could benefit from the use of the currency by borrowing it and using those borrowed assets productively. Or, Gates's heirs could buy stuff from the poor family's business. "Deprived" is simply not the right word for it, and it implies a problematic view of what currency is, fundamentally.

N.E.Hatfield

All of this reminds me of a rather humorous situation I once witnessed at a dinner table:

Johnny (in whiney voice): "But I don't want to be a Senator from West Virgina. I want to be a Senator from Massachusetts!"

Creaky old voice from far down at the end of the table: "Now, Now Johnny! you know full well that Massachusetts is for the Kennedys; West Virginia is for the Rockefellers."

It was real hard keeping a straight face through all this. And believe me the porridge was excellent. Kinda makes you sit back and think a bit. Does "Noblese Oblige" still exist?

Kyle Hasselbacher

If, for example, some are richer than others but no one is poor, that obviously would be a counterexample, though an unrealistic one.I agree, and said so: "if everyone could afford everything they need to live securely, I don't care about concentration of wealth."However, if one posits that someone is chronically poor because they do not have a work ethic, then taking money from rich man to give to poor man does not really help much in the long run, and makes things doubly worse by giving rich man a mild disincentive to work and poor man a major disincentive to work.I agree with this also, but I think "the rightfully poor" are the minority of "the poor." Even if they weren't, I might consider it "worth it" to help both groups equally even though one is undeserving.I object to this zero-sum analysis. Whether Gates has $50 billion or $150 billion in the bank does not deprive me of my own ability to produce value and wealth from my own hands.It's true that the wealth of Gates does not really deprive others of what they have (or their ability to produce more). That having been said, I see no way around a zero-sum characterization. Wealth is finite. What one has, another does not.

Wes

...one must factor in his entrepreneurship and the great risks that he took.Perhaps it's a bit off-topic but the notion that risk (or even actual suffering) generates a moral right to compensation is an interesting one.Suppose some guy gets drunk and decides to impress his friends by jumping off the roof and ends up in a wheel chair as a result. The guy will be given a right to park in a better parking places even though jumping off roofs doesn't have much to do with better parking places.While a compassionate society should try to prevent the less fortunate from suffering too much, often this idea gets transformed into the idea that suffering or taking risks entitles one to be given more than everyone else.If Bill Gates had taken big risks and ended up dirt poor and living on the street then he could expect a compassionate society to help him get back on his feet. That is very different, however, from expecting society to give him lots of money just because he took big risks.More broadly, the mechanism by which rich people "earn" their money is that they manage to get control of major economic resources (corporations, real estate, natural resources, intellectual property, etc.) and then they use their control of the economic resource to make themselves rich.There is no question that major economic resources need to have someone controlling them or that the person controlling them deserves compensation. The question is whether a fair compensation is whatever the person in charge of the resource chooses to give themselves. It might be, for example, that the current U.S. president George Bush is such a great leader that he deserves to have absolute authority over the United States. It is, however, very difficult to determine the quality of someone's leadership. More specifically, it is very difficult to determine whether they are acting in the best interest of their country or (only) in their own best interest. The solution best solution to this problem at present, is to put limits on their power. Similarly, because it's so hard to determine whether someone controlling an economic resource is acting in the best interest of themselves or of society, the best solution is to place limits on economic power by have maximum and minimum incomes and assets.

RWS

Kyle: It's not zero-sum, because the value of that currency is ONLY its capacity to reflect the actual value in society. In a world of 10 farmers and $10,000, each person has $1000, and they trade around the food they grow. Take the exact same world but no one wants to farm for some reason. They still have $1000, but are far poorer. Likewise, the real world is not zero-sum. You (and your family) earn what you create with your own hands. The world may be zero-sum in terms of the number of dollars, but in no way, shape, or form is it zero-sum in terms of the amount of value creation. Value creation is most enhanced by strong property rights, I would contend, including intergenerational wealth transfers.

Wes: We are now getting to just a generic discussion of the value of welfare programs. This gets a bit far afield, probably, but my general point would be that helping the poor is best done locally, especially with local charities and religious institutions. For ex., my church would never hesitate to help out anyone in the congregation who deserved help, and our doors are always open. This is different from a govt. entitlement in that we would be in a better position to see who is free-riding and to help that person get back on their feet rather than become dependent on the entitlement. It's not as if the govt. is the only or anywhere near the best way to do such things for people who really did fall on hard luck while being diligent with their lives. That, though, gets a bit beyond the present question.

Let me also note that no one has criticized my view of perpetual trusts, which is where a lot of money goes when it is diverted from estate tax liability. I would be interested to hear if someone had a different analysis. From a variety of personal experiences, I have been less than taken by a lot of them--they often end up being entitlements of their own, and quite unaccountable sometimes.

sam

David -

"And no matter how entitled they may feel, the children of the rich have no 'right' to their parents' money."

True, in general, children do not have a "right" to their parents' money. In fact, many parents do not give (or leave) their children much (or any) money (or wealth) at all.

However, it would seem to me that parents, as people living in a free-exchange society, do indeed have a "right" to give (or leave) their money (and/or wealth) to their children.

In effect, you miss the point. This is not a debate about what children are entitled to, but about what types of wealth the government should tax (and what the tax rate should be).

sam

David -

"And no matter how entitled they may feel, the children of the rich have no 'right' to their parents' money."

In general, children do not have a "right" to their parents' wealth. That is obvious: many parents do not give (or leave) their children anything; the parents don't have to.

More to the point: what "rights" do people (including parents) have regarding their wealth, their property? In a free-exchange society, it seems pretty clear that people ought to be able to draw up a contract to control the distribution of their property upon their death.

Acknowledging that a government must raise revenue, the relevant questions are, What types of wealth should the government tax? And what should the tax rates be?

Taxing for purely redistributive purposes suggests that the government (whether elected or not) should have the power to determine how much wealth people "should" have. That's a lot of power.

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