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05/15/2005

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» Becker vs. Posner from A Taxing Blog
The two heavyweights grapple over the estate tax here. One of Posner's key moves is to argue that while the cost of estate tax avoidance is high, so would be the avoidance costs associated with hiking up income taxes or [Read More]

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Gary Becker has some excellent (as usual) comments on the estate tax and its impact. [Read More]

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Joe Merchant


While you put forth convincing arguement for abolition of estate taxes, I believe you are distorting several points through omission:

1- there has always been a significant "per recipiant deductable" of some $600,000+. So, a $10 million estate divided five ways is taxed at much lower rate than the same estate inherited by a single heir. $600,000 invested conservatively will create more gains than Joe six-pack (mister median income) can earn working 40 hours a week.

2- creation of a new form of taxation, such as a Federal consumption tax (and I'd like to see how that can be made progressive without creating work for an army of tax evasion accountants) - will not really erase the old forms of taxation. Politically, the Congress will not do something so radical as to dismantle the income tax system before implementing consumption tax - and thus we will have all the old taxes, plus this new one. More complication in an already Byzantine system.

3- The largest estates need to be broken up over generations - not paltry little $5M and $10M mom and pop businesses, but the $1B and up fortunes need to be dispersed. Otherwise, the Colliers would still own 10% of South Florida, the Rockefellers would be bigger power brokers than they were in their heyday, and the heirs of Bill and Melinda Gates would own the entire moon.

I am in favor of increasing the "deductable" to keep pace with inflation, something where a single inheritance, invested at prevailing conservative rates for the previous 10 years, would yield a median income.

I would also be in favor of tax free gifts in an annual amount perhaps up to 10% of the inheritance tax free limit.

In the case of an inherited small family business worth some $10 or 20M, a long term low interest tax payment plan would seem to be both compassionate and just.

However, when the extremely wealthy pass away from this world, if they have not fulfilled their moral philanthropic duty to disperse of the bulk of their material estate to persons and causes of their choosing, I have no problem with giving the bulk of it to the federal and state government.

Odds are, these same deceased billionaires have also failed to pass on significant human capital (wisdom) to their heirs. The world doesn't need a large number of Paris Hiltons.

TheOC

I think the most important argument against the Death Tax is that it is immoral. The idea that when my race is run, our government is going to decide how much of my hard earned (and heavily taxed) earnings they will "allow" me to distribute as I see fit infuriates me.

JM,
Large estates disperse themselves over generations without any help from the government. Do you know who the richest American families were in the 18th century? Neither do I. Their wealth was dispersed over many generations.

And we need as many Paris Hilton's as we can get!

Bernard Yomtov

My impression is that there is little or no empirical support for the claim that estate taxes often force the sale of farms or small businesses. Even if a small business is valuable enough to generate an estate tax liability (and remember, many small businesses, especially those whose value is in the millions, have multiple owners) there are very generous provisions in the tax code for paying the estate tax over a long period.

As for the accountants, lawyers, etc., again I would like a touch more than a simple assertion to accept this. Somebody is paying $24 billion after all, and it's not poor people.

Nor do I think it is reasonable to argue for the abolition of the estate tax on the grounds it produces "only" 1% of federal revenues. If we could take the tax code and break it down into one hundred items, each of which produced one percent of total revenue, would we simply abolish taxes?

As for the inequality issue let me just note that we are moving towards a tax system that has a strong tendency to create a hereditary aristocracy. Taxes on capital income have been reduced dramatically, and now the estate tax is up for removal. Allthe talk about human capital notwithstanding, we are in the process of creating a class of wealthy individuals who pay little or no tax. This is not a good idea.

Corey

Why we should cut taxes on the super-rich and stick it further into the poor people in the form of a consumption tax in 5 pages or less. Yay.

Consumption taxes ARE regressive. It is irresponsible and disingenuous to describe them as potentially progressive. Since you are a prize winning economist, I assume you know about the diminishing marginal utility of wealth. I feel silly reminding us of it.

Consumption taxes burden those who consume 100% of their earnings, namely the middle and lower class. The estate tax burdens un-charitable billionaires who want to exercise control over their empire from beyond the grave.

Despite the 4 billions worth of lawyer and accountant families that get fed by the estate tax system, the government still manages to collect $24 Billion to spend on social services and Bombs for Democracy. Sounds like a success for me, your plan would presumably eliminate 30,000 professional jobs and force every taxpayer to shell out $240 each to make up the difference. Thanks! Great idea, I really didn't need that money for food and rent, and God knows Paul Allen needs another helicopter so both helipads on his newest yacht will be full.

"The idea that when my race is run, our government is going to decide how much of my hard earned (and heavily taxed) earnings they will "allow" me to distribute as I see fit infuriates me."

Minimum wage is hard-earned, if you made enough surplus money in your life to be eligible for the estate tax then you were either lucky, or employed dishonest means. The estate tax only applies to millionaires. People do not become multi-millionaires or billionaires by working hard. Our GNP averages out to $33,000 per year per person, if you make more than that, someone else is making less, very likely someone who works FOR YOU without which your enterprise would not function. (Sometimes I just want to smack Americans upside the head for being so obtuse. Bunch of computer engineers getting paid $100K a year to check stocks and surf the web at work and whine about their jobs being outsourced... then you bring up taxes and all of a sudden they are noble hard-working salt of the earth. What did you say to the last homeless guy that asked you for a quarter? Yeah, I thought so.)

All the estate tax says to people is, be charitible before you die or the rest of us will tax you.

Nathan Kaufman

Regarding social mobility and education, you might want to read an article in the April 22, 2004 New York Times. Written by David Leonhardt, the article is titled "As Wealthy Fill Top Colleges, Concerns Grow Over Fairness."

R

"I think the most important argument against the Death Tax is that it is immoral. The idea that when my race is run, our government is going to decide how much of my hard earned (and heavily taxed) earnings they will "allow" me to distribute as I see fit infuriates me."

One doesn't need to be Corey to find fault with this analysis. I don't mean to backhand Corey here (not entirely), just saying that the argument against taxation from morality is a particularly loathesome one, and should appear so to both conservatives and liberals.

Conceding that, for the wealthy and poor alike, some hard work goes into earnings, some luck is also involved. The very thing that makes markets work pragmatically -- the information gathering effects -- requires that markets also be unpredictable. With unpredictability comes luck. Yet there is no moral argument for lucky findings -- you don't deserve your luck. Hence: no moral argument for absolute private ownership. There are good pragmatic arguments, of course.

Then there's this one: property rights do not exist without some sort of public enforcement of those rights. You cannot pass on your wealth to your deserving heirs without the government enabling you to do so. Otherwise it goes to the angry hordes. I don't understand how you can ignore the amount of public infrastructure that is required to sustain highly complex private markets.

And no, we do not need more Paris Hiltons.

I tend to enter the fray only when there are particularly bad arguments. This one was exceptionally poor. You are presumably a Republican -- go read Oliver Wendell Holmes. He has something to say on the matter.

monkyboy

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.


The income of the bottom 5th of American families has been flat for over a quarter century ($11,000/year in 2002 dollars). Is there any evidence that a significant percentage of people rise above the status of their parents if they start life in the lowest quintile of American families?

Stephen Darwall from The University of Michigan has called into question the accuracy of your reasearch done on this topic in the past:

In 1987, Gary Becker "summed up the research by saying that mobility in the United States was so high that very little advantage was passed down from one generation to the next." Many researchers believed that the effects of socioeconomic birthplace tended to wash out over two generations.

The problem is that the past research turns out to have been deeply flawed, and more recent research has shown significantly less, and significantly decreasing, mobility.

Can you offer up a ballpark figure as to what percentage of Americans rise above their lower-class start in life these days?

Fred

So the wealth-haters, hardly better than racists in their mindlessness, come out. It's not enough that this group, the well-off (if hardly all "rich"), even before paying taxes, contributes more than any other to society economically by creating businesses and jobs. It's not enough that the group that works the most, and the most efficiently, and is taxed at the highest rate thoughout their lifetimes. It's not enough that they pay the vast majority of all income taxes. It's not enough, after a lifetime of hard work, that they must spend their dotage worrying about unloading their wealth one way or another to avoid the death tax. No, after all, their just the evil rich, who deserve that the government take away half their money yet again on their deathbed, defying their last wishes.

Sam Gross

Interestingly death is already one of the best tax breaks you can get. The stepped up basis in assets once passed on by bequest not only allows for nonrecognition of gain on inheritance, but gives the recipient a fair market value basis. This basically forgives all the tax inherent in the assets at death. This makes a kind of conceptual sense if we have decided that only amount above a certain point e.g. 1 million in estate tax, should be taxed at death. Without an estate tax I can't think of much reason for it. Any discussion of the elimination of the estate tax should include the possibility of elmininating the stepped up basis at death.

Jonathan Schwartz

Becker's main argument against an estate tax seems to be that he favors a consumption tax. Since Becker thinks the consumption tax is best, he would likely write similar essays for all non-consumption taxes (i.e, abolish and replace with consumption tax). To the extent that it is unlikely that we will have a consumption tax as the main source of government revenue, I think Becker should answer the estate tax question 'ceterus paribus'.

R

Fred, assuming you write in jest, bravo.

Corey

He's not joking. He drank the Horatio Alger kool-aid. The rich are hard-working and benevolent, the poor are lazy and squander the opportunity presented to everyone in this great and magical land called America!

Remember that one from grade school? We've got the right reminding us of the myth each day so it is an easy trick to fall for. How do you think they got all those immigrants to pound spikes into the railroads until their hands bled?

People's abilities and motivations do not differ by as much as people's wealth does. I worked as many hours in the last 7 years as Bill Gates ever did in a similar period. There are only so many hours in a week. He earned nearly $1M per hour and I earned $35 per hour. Is someone trying to tell me that Gates is 28751 times smarter, more efficient, or more worthy than me or you?

NotCorey

Corey = Brain Dead.

"Is someone trying to tell me that Gates is 28751 times smarter, more efficient, or more worthy than me or you?"

Judging by your posts, I would say that "28751 times smarter" is a lower bound on the difference between you and Gates.

Brain Dead.

lincoln

As is usual,a very interesting subject.I remember reading an old book of my mother's by James Gould Couzzens where an elderly judge admonishes an attorney who is rabid about high taxes destroying fortunes by reminding him that society is unstable when so much wealth is concentrated in a few hands.The other side of the coin is that the abilty to inherit rather than have the crown take the estate was considered an advance in English justice.I wasn't aware of the yearly revenue,which is a factor,but not that much after I know the details.I was, as I often am ,bemused by Corey's statements.Evidently ,he doesn't feel wealth can be created,just redistributed.This is a canard of the under educated left.I have a feeling the people who come away fom college with no math,no foreign languages,no econ,no sciences(but a lot of PC studies classes )haven't ben trained to critically think.This could explain the rants,which they probably even believe.

touche

Here's an interesting dissertation topic: Create a model to simulate intergenerational wealth accumulation. One could have a lot of fun with this. I'll bet with no estate taxes, you would see the creation of family dynasties that would last for hundreds of years.

Corey

"Corey = Brain Dead."

"I have a feeling the people who come away fom college with no math,no foreign languages,no econ,no sciences(but a lot of PC studies classes )haven't ben trained to critically think."

Nothing gets me ridiculed faster than attacking the Horatio Alger myth.

Interestingly enough lincoln, I nearly had a minor in math on my way to my electrical engineering degree. I never once took a "PC studies" class, unless you count law courses taught by Law & Economics devotees.

I understand that "wealth" can be created, at least in the sense of exploiting a previously dormant resource. I am arguing that concentrations of wealth do not correlate to hard work nor moral merit. Wealth would not be created without workers who labor and invent. Industrialists, who "commission" such labor, take a larger share of the profits than all of the workers combined.

Then you have the problem of "investors", who do no actual work and merely risk surplus wealth on the ventures of others. Again, the investor gets an exponentially larger share of any gain vs. the employees of the enterprise whose ideas and labor caused the gain. (Even in relatively progressive "employee stock option" companies, the workers collectively will always own significantly less than senior management. I've seen it across the board.)

Where we differ is that I place moral authority on the worker, and you place moral authority on the capitalist. I see profit as a taking, you see it as the divine right of kings.

You are perhaps mistaking my having read Das Kapital before I read Adam Smith for economic ignorance. To the extent that you believe there is only one orthodoxy in the world of economics, I think it is you who need to study some more.

What you say about the under-educated left may be true, but I do not know or talk with those people. If it is your intention to demean people who attempt to place morals and ethics above logic and numbers, then perhaps you were born in the wrong time. Been there done that.

I would have thought that the 20th century taught us the problem with turning over all policy to the technocrats. It seems that memories are short and the history of facism really is cyclical.

Inheritance was considered an advance at a time when the crown was corrupt and tyrannical. Looking back to that time ignores the centuries of development in the realm of democratic checks on tyranny. If you are looking to check the government then you have a choice between the wealthy elites, or the polis. Problem is the wealthy elites are also capable of even greater tyrannies.

Brian

Corey: as I'm sure you're aware, every realistic consumption tax proposal includes either exemptions on "necessities" or a universal rebate, thereby making it progressive.

"if you made enough surplus money in your life to be eligible for the estate tax then you were either lucky, or employed dishonest means. The estate tax only applies to millionaires. People do not become multi-millionaires or billionaires by working hard."

Not solely by working hard. It also takes financial discipline, and to some extent avoiding bad luck, which is quite different from requiring good luck. Investing $3300 a year at 7% for 45 years gets you to over $1 million. That might be difficult for those earning $30k or so, but it's not impossible. After all, people who only make $25k aren't starving. (And of course it would be far easier if the regressive payroll tax were abolished).

Corey

A rebate doesn't make a tax progressive, it simply exempts those people at the bottom that would be otherwise put out on the street (or stop voting republican) because of the tax. The tax is still flat for everyone else.

As one gets richer, one approaches the limit of one's ability to purchase consumer goods, and the effect of the consumer tax diminishes. The result
is that the burden is felt within a particular band, namely the middle class.

Further, exemptions for "necessities" are paternalistic and intrusive. People here often profess to libertarianism, why then don't they get outraged by the government presuming to tell poor people that they can't buy a stereo but they can buy milk. I personally am nowhere near being a libertarian, but it seems to me that should bother them. (Maybe it does)

"After all, people who only make $25k aren't starving."

Depending on where they reside they aren't really living either. Have you ever gotten by on less than $35K a year since leaving school? Did you save 10%? It does not make sense to talk about things we all know will not happen in reality as if they possibly might.

I agree on the abolishment of the employee paid portion of the payroll tax, but a flat consumption tax would just do the same thing.
I think it is telling of the priorities of this administration that lowering the top tax rate and abolishing the estate tax were the first things chosen in their plan for "reform". It would be no less regulatory and intrusive to abolish the employee paid payroll taxes and raise the property tax.

EconOpinion

When it comes to taxes, the states will often step in when there is an opportunity given to them on a silver platter. If the federal estate tax is abolished, would at least some of the states that do not currently have estate taxes seize the opportunity and impose them? Would states that currently have an estate tax raise theirs? Differences in state taxation rates and schemes produce economic distortions too. Would these distortions worsen? These questions constitute the difference between dynamic scoring and static scoring. Dr. Becker is taking the static scoring approach.


There is no compelling political or economic reason to abolish the federal "death tax." It has been repealed already--for 99 percent of estates. Although its existence is largely symbolic, symbols are important sometimes. So long as the estate tax rate is not so unduly high as to discourage the incentive to work and accumulate wealth, this is one tax that should be left alone.

Sam Gross

All a progressive tax means is that higher rates of the activity being taxed are taxed more heavily. Thus a consumption tax that taxes the first $13,000 at a 1% rate and anything over $13,000 at a 50% rate is a progressive tax, b/c the total tax rate increases with each additional unit of the taxed activity. For each dollar of consuption over 13,000 the tax rate on their total consumption tax approaches 50%. Thus those who consume more are taxed at a higher level porportionately than those who consume at a lesser level.

e.g. total tax rate on someone who consumes 13,000 is 1% of consumption
someone who consumes at $20,000 tax is taxed at 18.15% of consumption
someone who consumes at $100,000 is taxed at 41.63% of consumption

The current income tax system works the same way, just with more layers and in regard to income (but all income is is taxing the present value of furture consumption), any sort of rebate/exemption/differing rate will produce a progressive tax, the only way to have a nonprogressive tax is to have it tax everyone proportionately (e.g. everyone is taxed at 1% of consumption)

The reason everyone says consumption taxes are regressive is that they are regressive as to income/wealth, not b/c they are regressive to consumption. Indeed a consumption tax that is progressive to income is possible; but it would require incredible complexity and reporting problems. Maybe a consumption tax that was progressive as to consumption (like the example I just gave with different numbers of course) would be a better solution. There is nothing inherently regressive or progressive about either the consumption tax or income tax.

I recommend David Bradford, formerly of Princeton, and David Weisbach's (of U of Chicago Law)work on the X tax as a fascinating discussion of this issue.

Joe Merchant

Venturing a bit off topic to the skewness of compensation in corporate America:

I work for a not so hypothetical company of about 500 employees. The average compensation breaks down roughly so:

CEO & VPs
~10 people average $500k/yr + ~100,000 options

Upper management
~20 people average $250k/yr + ~20,000 options

Middle management & upper tier technical + ~1,000 options
~70 people average $125K/yr

Lower tier technical, infrastructure, etc. + ~100 options
~250 people average $45K/yr (spread $8/hr to $60K/yr)

Sales / commission based
~150 people average irrelevant, highly varied, distribution actually very close to the above, capping around $250K/yr

-----------------------

Only the top two tiers, or upper 6% of my company will ever have to consider hiring an estate attorney. The rest of us would have to make a extremely lucky investments, or pursue DINK lifestyles to get to any significant net worth, because we are still consuming most of our income.

Needless to say, mobility between the layers is extremely rare, more likely to hire a new VP or upper manager from outside than to promote from within. Entry into the top 3 tiers requires a good education and extensive prior experience, typically at a similar level in another company. I tie this back to the estate tax theme by noting that noone in the top three tiers appears to have been raised in a ghetto.

The lower tier is accessible to all, but note the salary discrepancy. These people not only consume all of their income, they require dual incomes to support a home and family, and still they will have a difficult time saving any money for retirement. They might educate their children, and their children might have a shot at a third tier job someday, but they are essentially going nowhere themselves.

Arguably, the lower tier does not do "wealth creation" type work, but some of my layer - upper tier technical - certainly does. You may point to how well we are compensated compared to the line workers, but we are not offered anything approaching a participation stake in the future value of the company. We could go elsewhere, but elsewhere, the story is the same.

The wealth creators in my tier are typically malcontent over this state of affairs, but since we lack the resources to start our own ventures, we stick with the salaried jobs.

Our CEO came from money, and risked a significant minority of his fortune in funding our company as a startup. He occasionally puts in long hours, but across a year, I doubt he totals over 1500 true "company" hours. You could argue that he's efficient, but from my perspective, he started from an advantaged position, took a small risk, and got lucky. He hired a highly professional compensation department to ensure retention of people like me, and justification of his salary, benefits, options, bonuses, etc. Every year, compensation tests the lower limits of efficiency for the employees, and the upper limits of credibility for the top tier.

Whine whine whine - the unfairness of it all.

Would a stronger estate/inheritance tax correct this situation? Not immediately.

Would abolition of estate/inheritance taxes excacerbate this situation? I'd say, definitely.

The upper tier already acts like a nobility class, and there is more than one ivy league degree up there. With the material wealth playing fields skewed 100:1 (in the case of stock options, which can be worth 10x salary for the upper tiers, some years), I, in the third tier, won't be able to afford ivy league schools for my children, waterfront property for my retirement, or any of the other highly exclusive comodities in life.

Oh, sorry, whining again.

It's a pattern that's repeated again and again. Those who have, act to protect what they have, so that the have-nots never will get a chance at it.

The drastic curve of compensation in corporate life mirrors life in general, and if those at the top are able to establish and maintain dynasties, they will. The United States is already being run by groups that do not protect the interests of the majority, they managed to secure ~50% of the popular vote in the last two dynastic presidential elections through some interesting plays on values. Abolition of estate taxes plays on some of the same values that got the Republicans elected by people who they are going to trod on economically. Joe six-pack may not himself have to worry about estate taxes, but if he did, he sure wouldn't like them. And he sure wishes he's win that lottery so he'd have the problem. And, ya know, even if he doesn't win the lottery, it's just not right, all them hard workin' CEOs having to pay another tax.

If the electorate isn't careful, the system may become so biased to the powerful that it falls out of popular control entirely.

Corey

"If the electorate isn't careful, the system may become so biased to the powerful that it falls out of popular control entirely."

I don't know, do you feel like there is any real popular control NOW? We may already be there. Certainly there is no popular control in the working world. Engineers still laugh at the idea of forming unions to protect their rights.

In tech companies I worked for, there was some upward mobility, from the "suitably trained" upper-middle tier into management. Even hereditary dynasties occasionally need new blood to renew the gene pool. (Witness the sordid genetic history of the English royals)

The problem I saw was that the individuals choosen to rise up the ladder were most often not the individuals who had created wealth. In fact, they were most often the individuals who were the best at stealing credit for the successes of others and sucking up to the whims of management.

On one level, anyone being chosen for promotion encourages the rest of the troops. It really only takes one or two internal promotions a year to keep the engineers working 70 hour weeks. By picking the syncophants, management sends a direct message that devotion to the hierarchy is preferred over devotion to truth.

This wouldn't be a problem except that it leads to discontent in the minds of innovators, who by nature are often "outside the box" anti-authoritarian personalities. Many of them get driven out or leave voluntarily after making significant contributions in the more free-wheeling startup phase. This is one of the reasons you often don't see lightning striking twice after tech-companies IPO or otherwise "go legit." You get a horizontal migration of talent that only really benefits in times when there is a high demand (that is, not now).

The bottom line is that the qualities necessary to be upwardly socially mobile in disfunctional American corporations are opposed to the qualities necessary to create wealth in the same. The whole system is based upon appropriation, whereby management is credited for the gain (and disproportionately rewarded) to which it only indirectly contributed. This is why I have no qualms about asserting that few to none of the rich EARNED their position on their own merit.

Investment may grow the economy if it is effectively directed to concentrations of innovators, but the growth falls in proportion to the initial distribution of shares in the economy. No one is benefited who was not already in line, except via inefficient and paternalistic methods like trickle-down.

TheWinfieldEffect

"Hence: no moral argument for absolute private ownership."

I think John Locke had one: "I grabbeth the fruit, therefore the fruit of mine labor is not thine! Get thy hands off my apple, scoundrel! Thou didst not pluck it!" The alternative is theivery. Are you seriously making the case that theivery is not immoral?

TheWinfieldEffect

"And no, we do not need more Paris Hiltons."

Spoken like a man who hasn't visited Paris and been inside the Hilton.

TheWinfieldEffect

COREY:"The whole system is based upon appropriation, whereby management is credited for the gain (and disproportionately rewarded) to which it only indirectly contributed."

Sounds like a bitter worker. But note this: it is the management that is accountable for failures and criminally liable if wrongdoing occurs. It may be true that Bernie Ebbers is rich, but it is also true that Bernie Ebbers is going to prison. Credit is the flipside of blame.

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