« The Gates Foundation and the Estate Tax--Posner's Comment | Main | Response on Giving and Taxes-BECKER »

07/02/2006

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DosPeros

I consider myself a conservative (or classical liberal). But I don't understand Professor Becker's argument against the estate tax. If there was an estate (death) tax of 75% it would certainly be unfair, it would punish the proginy of the hardworker, but would it really discourage hardwork and economic success. The incentive for success seems to me to be rooted much more in the here and now.

I'm just thinking about this from a personal perspective. I have two daughters. I work hard and create a business, a product, a service, I manage and grow the business. When I die, my daughters get 25% of the capital that I accumulated, rather than 75% or 100% -- what is my alternative? Out of spite towards taxation, I punish my family even further by not working, not creating and not being successful. That doesn't seem rational.

I might just be bitter and bias, as I've known some truly iritating trustifundians.

Larry

The estate tax is the most unfair of all taxes. It tells individuals who have been paying the most taxes at the highest rates that when they die, the government will take half their money again. I don't see why dying wishes shouldn't be honored.

Furthermore, it makes a lot of people who have worked hard all their lives have to spend their dotage figuring out how to get rid of their excess, rather than being able to retire and relax.

It also punishes people who are succesful financially but have to misfortune of dying young before they can figure out what to do with their money.

Finally, it doesn't raise that much money and is a massive form of social engineering/government intervention into our private lives.

Petter

I was deeply touched by Warren Buffets gift, because the combination of competence and selflessness with which it was given was another testament to the potential for good that resides in human beings.

Warren Buffet also shares his opinion on inheritance. He calls those who are left big fortunes "members of the lucky-sperm club". DosPeros (above) is wrong, however, in suggesting that estate tax does not reduce the incentive to work hard to build a fortune. Assuming that each individual is facing a trade-off between creating a large estate and other goods (eg. leisure or time with the family), then that trade-off is tipped in the direction of the other goods as estate tax increases.

arationalist

I have long thought the best solution to the estate issue is the following and wonder what you think of it.
For moral reasons (you should be able to do what you want with what you earned) other than paying the usual capital gains taxes at death, you may pass on your estate free of any additional taxes. At the death of your beneficiaries however, they may pass on only the excess they made over some benchmark (say the growth of the US Economy over the time period). This would for example mean that all fortunes such as the Rockefeller's would have vanished after one generation and wealth dynasties such as theirs would become essentially impossible. Obviously there are technical issues involved that may be insoluble but as a "modest proposal" this seem to cut through the knot.

Drossos Stamboulakis

Just a few things in regard to the estate tax.

(1) It is a steeply progressive policy (in fact, I'm not aware of any other tax policy which is more progressive), affecting only the richest of the rich in the US (300,000 at last count). The aims of a redistributive tax/transfer system seem well served by collecting tax here.

(2) In the US it is applied only on the "taxable estate" (less than the entire estate); there are significant deductions/exemptions available (which peak at an exemption up to an estate worth $3.5m in 2009 - but the status after this is unclear)

The current exemption stands at $1.5m - that is to say; it will not apply until it reaches this level. Even if it does, the current marginal tax rate (of every additional dollar of taxable estate value over $1.5m) is 50% (falling to 45% from 2007-2009).

I accept that it does distort incentives (as any redistributive policy is want to do). However, the inefficiencies created seem minor to those that would be created elsewhere (e.g. if the same taxation revenue were to be made up from increased income taxes).

Nonetheless, I am strongly in favour of such a tax. It has been recognised (especially amongst the richer people themselves - e.g. Warren Buffet) that the highgly progressive nature of this tax is beneficial.


It does not tax those who can least afford to pay (as many regressive taxes do), but targets the richest of the rich. Furthermore, the substantial exemptions and deductions available, and the marginal tax rate (45% of the taxable estate, as of 2007) leave substantial assets to be inherited (contrary to the claims of those who support the abolition of the tax; this tax does not 'strip' rich people of their assests).

Haris

The incentives of the estate tax have been brought up, but no one has addressed the effects of large inheritances on incentives. While a high estate tax does lower incentives to be productive and/or amass great wealth [the two aren't congruent], doesn't a lack of estate taxes lower incentives to work in the next generation? That is, if Warren Buffet had left his entire fortune to his children and they had inherited it all tax-free, what incentive would they have to work at all? While I understand that in practice [not necessarily in theory] the very wealthy are necessary because their savings are used for investment, I feel that a large fortune destroys the incentives to work for the next few generations. This is especially damaging because the children of the very rich usually go to the best schools, receive the best health care and nutrition, and generally have the best potential to be productive members of society. While keeping them out does open the door for others, I am sure no one is advocating that productive members of society not work so that others have a chance, just like no one would want the best athletes in a sport to sit out so that more people get to be major leaguers.

Arun Khanna

Billionaries should simply start new universities instead of or besides giving money to a foundation. A really smart play on keeping foundations conservative would be to provide a seperate line of funding for incremental compensation for top officers of the foundation. True conservatives in the non-profit sector still care about their take home pay (more than others in the non-profit sector).

Ben Casnocha

Prof. Becker -- You didn't address Buffett's comments about the failures of capitalism, something Levitt noted on his Freakonomics blog. What do you think about his public remarks on this topic?

Jake

What an interesting post by Prof. Becker.

As to whether Warren Buffett's wishes concerning his gift will be honored posthumously, I doubt it. Someone always has a better idea than the next person (or the deceased) about how money should be used. Were that not so, economists by and large would have little to do.

Abolishing the estate tax is not so important as lowering the confiscatory rates at which it is imposed. The estate tax is easily avoided by (A) paying attention to a smart financial advisor early in one's life path toward wealth accumulation, (B) spending it all before you go, or (C) giving it all to charity.

None of the three choices above is a "bad" decision our tax code should dissuade.

Collestro

There is a name for those of us who believe in capitalism, competitive markets, free trade, free speech and free enterprise. We are liberals, liberals without the quote marks.

Richard Mason

Becker: I do not know of any prominent examples that moved the other way, from initially liberal to becoming conservative over time.

The Catholic Church and the Republican Party come to mind as non-profit organizations (though not ones founded by a single wealthy benefactor) that have arguably followed this trajectory.

Dan Kahn

The estate tax is a huge straw man for the simple reason that we have a full capital gains basis step-up at death.

Warren Buffet for example is reputed to have never sold a share of Berkshire Hathaway. We can assume however, that he has amassed massive capital gains on the initial value of his stock. Removing the estate tax simply strengthens the lock-in effect and distorts all incentives to trade the stock when nearing old age.

Talking about the estate tax w/o mentioning the treatment of capital gains at death vs. other occasions is silly.

PS: thanks for that great comment Collestro!

Elliot Reed

What is the evidence that there is substantial competition among foundations? Competition exists among businesses because the purpose of a business is to make money, and my competitors' income often comes at the expense of mine. There's no analogy with foundations. While charitable foundations must pay attention to their revenue, a foundation that acts as a donation-maximizing institution is betraying its donors and its institutional role.

There is surely at least some competition between foundations, but I am unconvinced that it is a substantial driving force of foundation action, or should be.

Mike Petrik

I serve on the boards of two foundations, and I agree with Elliot's post.

Also, Richard Mason is mistaken in his notion that the Catholic Church was initially liberal but is now conservative. From its inception the Church always taught what we would today regard as "conservative family values" in social matters, and never really espoused an economic philosophy at all since She never confused economic systems with a way of life. She always advocated charity, but the specific role of government in these matters is not a part of the Magisterium.

Peter

"That Buffett could resist the temptation to have a foundation monument in his name testifies not only to his wisdom but also to the inner confidence of the man."

Confidence? I can't help but wonder whether a dozen different terms might be more fitting. Selflessness, perhaps?

Selflessness, however, is less attractive from a micro-economics perspective. Is it rational to be selfless? What are rational acts to pursue as one nears death?

I love free markets and capitalism as much as the next man, but it is important to consider where its theoretical and real boundaries end. People don't always act rationally and in many cases, we ought to celebrate this! Buffet and Gates are spectacular examples of people who have achieved their self-interested goals in life, and have progressed on to a higher plane of contribution - humanity triumphing over rational self-interest.

What rationality is there in being rich and dead?

James

I am surprised by the fact that Buffett seems to be drawing negative feedback from some in the press. In the website Comment is Free, run by the UK's Guardian newspaper, there is a piece by Gavyn Davies, former Goldman Sachs partner and head of the BBC. Davies says: "So Gates will probably become the all-time champion giver before he dies. But whether this will get him to heaven is another matter entirely. The Gates foundation currently employs fewer than 300 people to decide how to give away the $3bn a year that a foundation of $60bn will create. Can they get a good return on this money, in terms of lives transformed for the better? And can they do this better than governments, who could tax these massive bequests and then spend the proceeds? We shall see"

Well given the wastage that is legendary in Government spending, I doubt the last comment very much. And although Davies has recently been on the public payroll, it isn't where he's spent most of his career and I would be amazed if he suddenly announced that he finds the government departments in which he's now involved to be more efficient than the likes of Goldman Sachs.

And what is with the comment about the number of employees at the Gates foundation? There aren't that many more at Goldman Sachs relative to the amount of billions they make decisions on day to day; in fact, I'd wager there are less.

I find Professor Becker's anaysis rather more convincing.

Lord

I think it is less that charitable organizations drift liberal over time, but that the act of giving is liberal leaning and giving draws this out. Conservatives don't give that much over their lifetime because they are conservative and believe people should fend for themselves.

While the estate tax is nominally a wealth tax, it is best considered an income tax, income on which no tax was ever paid on or it would never have amounted to that much, and for which the recepient has done nothing but chosen the correct parents. As motivating as demotivating. If you want to leave a particular size inheritance, you would just have to accumulate that much more. Leaving children to live lives of indolence and squander is about as immoral as it gets.

Isocrates

Buffett deserves the praise he is getting for his philanthropy, but his decsion to let Bill Gates control his money rather than the government seems to indicate a lack of confidence in the government's ability to allocate resources. But if he considers the government a poor allocator, why does he want the rest of us to give our estates to the U. S. Treasury?

He shows great wisdom in keeping his estate away from the government. I wish he would let the rest of us do the same.

N.E.Hatfield

Everyone seems to be talking about Buffet's and Gate's billions and what "really" should be done with them. Do I detect a green eyed demon in all of this? As for myself, I'm just hoping and praying that my pension will still be there when it comes to retire. As for understanding Buffet's actions you really need to be a graduate of Rose Hill school. ;)

Anonymous

I personally support the estate tax. I think a moderated estate tax is useful. I think all estates should be taxed at a flat rate. I think it would be fair to tax the transfer as a capital gains to the recipient.

I think progressive tax structure create poor incentives.

We cannot control our parents, and it seems unfair to me to tax the income on the living but not the transfers of the deceased.

An estate tax is useful to raise funds. There are many tax planning techniques that will preserve an estate.

The law and economics issues are very legitimate. But I feel that income taxes are too high, and any means towards income tax relief for the middle class is highly desirable.

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