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11/11/2007

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eddie

I agree with everything here except the contention that wealth in America does not have appreciable effects on politcal outcomes. I think the evidence of the Bush years is that that it does in spades. I think the legislated reduction of the estate tax is a clear case of a few very wealthy families funding political think tanks and causes which have resulted in a material reduction, albeit only temporary at this time, of the estate tax. Frankly the political economy of this issue is hard to fathom; it appears obvious that an estate tax is a perfect example of an inelastic tax on the few to benefit the many. When the wealthy few somehow get passed a reduction in the estate tax, which clearly disadvantages the many, one can only surmise that weath has had an undue effect on the outcome of the political process.

anonymous

Although technically rather complicated to implement I have often thought a better version morally of the estate tax would work as follows: you can pass on what you made free of tax, however your heirs can only pass on what they made over and above the return on say the S&P 500. Otherwise it is taxed at 100%. The rational being that it would mean that dynasties would no longer exist unless each generation made new wealth to pass on.

Richard Mason

John D. Rockefeller's income was about 1/3 of 1 percent of the much smaller American GDP of his time, whereas Bill Gates' income is less than 1/12 of one percent of current US GDP

In considering this statistic one should observe that the national population roughly quadrupled over the same period. So for the income share of the single richest individual to go down by a factor of four is perhaps what one would expect ceteris paribus.

Matthew Hartogh

Tax Strategy and unintended effects.

Bill Gates and other wealthy individuals clearly have personal preferences in their philanthropic activities. Sometimes, selfish motives lead to altruistic results. Case in point - the Howard Hughes Medical Institute, which has done or sponsored some of the most seminal work in medicine.
It was set up with the primary goal of a tax shelter, but has given great benefit to society.
-- Matthew Hartogh

isaac

Sometimes, selfish motives lead to altruistic results.

quite agree with the above comment.

Jim

I do not understand this insatiable appetite to tax the rich. Any tax avoidance by individuals or individual families is nothing compared to what corporations (legally) get away with. I am sure someone can tell me why this is a stupid idea, but why not implement a flat tax, eliminate corporate taxes, and redeploy these high priced tax lawyers.

Deepish Thinker

"This tax yields a moderate amount of revenue, but at the cost of creating a large industry of highly skilled estate tax professionals who would have used their talents at more socially productive activities were it not for the demand to find loopholes"

True. But this is hardly the most significant loss. Far more important is the way in which inheritance tax distorts the activities of the nation's most successful entrepreneurs.


In addition to priceless time lost meeting with tax lawyers, the nation's best and brightest have a huge incentive to shift their focus from working, investing and otherwise creating economic value to re-arranging their wealth for tax advantage.

Even if you believe that inheritance tax motivates charitable giving, which is dubious, it is highly questionable whether society gains more from that charity than it loses from having its most successful entrepreneurs turn away from the most productive use of their talents and time.

iratecat

The 39 mega-rich may be responsible for 0.75% of the GDP, but what about the "just" rich, of income larger than, oh, $250,000? How big of a slice do they get, and how big of a slice have they gotten previously? It would be something useful to know, I think.

Nick

So are you just going to compare two historical points in time (now vs. the gilded age)? How does the income gap look when you trend it through the whole of the last century? I think you (and Paul Krugman)know what you will find.

Michael Martin

A fascinating fact that I saw recently is that the current group of the world's richest is not the richest in history.

http://www.nytimes.com/ref/business/20070715_GILDED_GRAPHIC.html#

Gates is actually fifth after Rockefeller, Vanderbilt, Astor, and Girard.

Madge

I do think that a flat tax will simplify the tax system. As long as the standard deductions and exemptions are large enough to cover all necessary spendings of individuals, the poor or even the so called "middle class" (As the gap is getting larger, even a lot of middle class cannot afford medical insurance and it's a shame to still call them middle class!) would end up not be taxed. And there will not be any loop holes for the rich to avoid tax as the tax rate is fixed and besides standard deductions and exemptions there is no other rules to avoid tax. Whereas estate tax, we should replace it with inheritance tax. If individual is taxed for his/her income rightfully when it's earned, it should not be taxed the second time. However, when one die what one owned should give back to the society via charity. If one choose to give to other individual, then there should be an inheritance tax on the windfalls to eliminate some gap between the rich and poor. We all know it's easier to get richer if your wealth is greater.

Jim

If you believe Fogel, and why not, the poor in this country are far different than the poor in this country used to be. That is, they are much better off. To Madge- I am guessing the working class you speak of probably have two cars, cell phones, cable television, designer clothes, travel once or twice a year, probably eat out on occassion, and choose to consume all of these other goods instead of buying their healthcare. So should we re distribute wealth since some people are lucky and others are not?

Jack

Hey, Jim, that one's an easy assignment!

"but why not implement a flat tax, eliminate corporate taxes, and redeploy these high priced tax lawyers."

.............and I chuckle every time I think of the Forbes heir spending $60 million to sell a "flat tax" that would be highly beneficial to himself and others in his economic bracket, w/o ever getting into any details. Problem is, of course, "flat tax percentage of what?" as it's not hard at all to look up the taxes owed on the IRS chart once income is established.

At this point some reply glibly "Well X percent of income" Oh? like say the gross income of an apartment building that has little to no net income? Or the gross income of a wholesaler with very thin margins compared to say the earnings of a work at home professional with few costs?

After fixing these problems with a host of "deductibles", there you are, back with the same tax code but a "flat rate" that WILL take tax burden from the upper incomes of the very rich and place it squarely on the stooping shoulders of the middle class with Forbes and the Walmart heirs grinning like Cheshire cats at having put yet another one over on those working for a living.

One of our greatest social problems is that of incomes at or below median having been stagnant since 1980 while the "rising tide" of productivity increases have all accrued to much higher incomes that are creating the very nation of haves and have nots that we once scorned in nations such as Mexico and Brazil. If you want to maintain something of a democracy it simply will not work in a nation of such vast disparity.

For those feeling the urge to call me something like a "socialistic redistributionist" I'd like to point out to them that the "class warfare" has taken place over the last 30 years with the upper income group having taken all of the new territory and leaving us with the domestic problems that will be front and center in this year's elections, assuming Iraq does not, again, take all the oxygen from the room.

Jack

Deepish Thinker: One aspect of a stiff inheritance tax that I would support, especially after reading "The Rich and the Super Rich" many years ago dates back to even the time of Andrew Jackson. With the Brits' system of lords and serfs still in mind one solid reason for an inheritance tax WAS that of breaking up huge fortunes that would have undue political influence. In the process we're automatically accomplishing the goal

"The rational being that it would mean that dynasties would no longer exist unless each generation made new wealth to pass on." mentioned by "anonymous".

As for those sitting up nights trying to figure out how to duck the inheritance, or any other taxes, it's up to them how they like to use their time. Perhaps some here are aware that while Gates and Buffet try to do their best with passing on much of their fortunes that the Walmart heirs ARE in fact using undue political influence to try to push Congress into getting rid of the inheritance tax, that's exactly why many favor breaking up huge inheritances.

Wes

I'm not sure what to think about the ethics of taxing the rich. It is worth pointing out that people like Bill Gates didn't actually make their money from a salary or even from the profits of selling a real product but instead from selling "ownership" in a company that they founded. To the extent that a company itself has value it's not clear that the founder has any more of a fundamental right to own that value than the employees who built up that value (or even the customers who ultimately determine that value).On the other hand, it's nice to only tax people (even rich people) when it's absolutely necessary. The thing is, in my view, the current financial crisis makes it absolutely necessary.Basically, if the US government allows interest rates to get too high then that's going to cause very serious problems in the lending sector - particularly the mortgage sector. Problems in the mortgage sector will cause serious problems in the real estate sector (and vice versa) although one could also argue that the speculators in the real estate sector deserve what they get.Anyway, the bottom line is that there are powerful reasons for the US government to avoid high interest rates.So how can the federal government keep a lid on interest rates? Basically, the key mechanism involves reducing government debt. That is, the less people are lending their money to the federal government, the more they can lend it to banks and other financial institutions. The more money that's available to banks the lower the cost of borrowing - or, equivalently, the lower the interest rate.So how can the federal government reduce its borrowing? Well, there are two basic mechanisms.The first mechanism is to reduce spending and increase taxes. The obvious way to do this would be to pull out of Iraq (saving hundreds of billions of year) and to increase taxes on the rich (not so much because the rich deserve to be taxed but because somebody needs to get taxed and the rich can best afford it).The second mechanism for reducing the government debt is for the government to "print" itself more money. The problem with creating more money is that the demand for liquidity is relatively inelastic. This means that creating money leads to inflation (and creating the amounts of money currently needed to keep interest rates low will lead to very very high inflation). Now, given that the federal government is in debt, inflation is not necessarily bad for the government (it reduces the real value of the government's debt). On the other hand, high inflation is bad for people who have savings. In fact, with severe inflation people can lose their entire retirement savings.Not only that, but high inflation will results in devaluation of the US dollar relative to other currencies. Because the United States economy is so heavily dependent on imports, a devaluation of the US dollar will dramatically raise prices domestically and quite possibly trigger a major recession. A major recession will, most likely, also further depress the real estate market which will further exacerbate the already severe mortgage crisis.When it all gets put together, the easiest way out of the current financial crisis is to increase taxes on the rich (along with cutting spending by pulling out of Iraq).

Jake

A disappointing post by Prof. Becker. Atlas will shrug if pushed hard enough.

anonymous

If the gap between the wealthy and poor has been decreasing, why has the Gini number been increasing steadily for the last several decades?

Madge

To Jim: Isn't it sad that people's priority change to value appearance more than their physical health? Guess they think that if they get sick they can just rush to emergency room..And I wonder why we are required to buy car insurance but not health insurance?

Raul

Any comments on this line of reasoning?

1. Most of us are NOT as productive / enterprenural / smart / (add your choice of epithets) as those who have (deservingly) accumulated enough wealth to be in the top 5% bracket.

2. Most of the population cannot expect to significantly better their own financial position by a magnitude needed to approach that of the top-earners. At least over a single lifespan.

3. More money is (usually) good. Most people are not unduly altruistic.They would not voluntarily choose to pay more taxes. Conversely nobody minds a free lunch!

4. These sentiments ought to lead to a sort of iterated game where the players in the majority want to subject the rich bracket(minority) to more taxes.

5. Fair or not, in a true democracy and in the long run this sentiment ought to prevail and lead to huge tax burdens on the rich.

Becker and Posner might choose to advise us to not adopt this path ut Darwinian self-preservation ought to lead most of us (relatively) "poor" folks to not pay heed! After all man is a rational being!

Of course, I can see the flip side. The incentive for the rich to participate in wealth creation is dulled. That will surely negatively impact our GDP, standard of living etc. in the long rug, you will counter? Surely, those effects will trickle down to this ruthless "majority" that I described.

But I say the "majority" will still impose higher taxes on the rich. That's due to a sort of a "tragedy-of-the-commons" argument. The effect on any individual of this loss of productivity is too small for it to affect his decision!

Raul

Any comments on this line of reasoning?

1. Most of us are NOT as productive / enterprenural / smart / (add your choice of epithets) as those who have (deservingly) accumulated enough wealth to be in the top 5% bracket.

2. Most of the population cannot expect to significantly better their own financial position by a magnitude needed to approach that of the top-earners. At least over a single lifespan.

3. More money is (usually) good. Most people are not unduly altruistic.They would not voluntarily choose to pay more taxes. Conversely nobody minds a free lunch!

4. These sentiments ought to lead to a sort of iterated game where the players in the majority want to subject the rich bracket(minority) to more taxes.

5. Fair or not, in a true democracy and in the long run this sentiment ought to prevail and lead to huge tax burdens on the rich.

Becker and Posner might choose to advise us to not adopt this path ut Darwinian self-preservation ought to lead most of us (relatively) "poor" folks to not pay heed! After all man is a rational being!

Of course, I can see the flip side. The incentive for the rich to participate in wealth creation is dulled. That will surely negatively impact our GDP, standard of living etc. in the long rug, you will counter? Surely, those effects will trickle down to this ruthless "majority" that I described.

But I say the "majority" will still impose higher taxes on the rich. That's due to a sort of a "tragedy-of-the-commons" argument. The effect on any individual of this loss of productivity is too small for it to affect his decision!

Jack

Raul: It has been a, theoretical, concern of "democracy" that the lower income folk would vote themselves benefits that would "break the bank". Interestingly no such thing has or is happening. Instead those closest to, or able to bribe the seats of power have carved off inordinate chunks for themselves. Obviously? having little to no inheritance tax would help to perpetuate a super rich "owner class" that would continue the tradition much as we are seeing (if we look) today.

In fact, it's difficult not to have this effect once a fortune is assembled. Consider, a very high inheritance tax, but one that could be ducked by setting up a foundation. So, if one inherited the several million not subject to the estate tax, and was Chairman of the Board of say the Ford, Gates or Buffet Foundation you'd have plenty of "walking around money" and, of course have entree to all the seats of power where it would be easy to further one's personal aims if they so desired.

A smallish example? Sen Kennedy, in addition to the name and having money to loan to his campaigns, for many years paid some of the salaries of his congressional staff out of his fairly deep pockets. Great! I suppose as those he reps got more than they had to pay for, but, of course any candidate or even other elected reps would not have these options and would likely have a lesser hold on their seat and their political power.

Raul if you do look closely, and many graphs are available, the rational concern would not be that of lower income folk taxing the wealth away from the rich, but their senseless snoozing on election day, or, even worse, voting AGAINST their own economic interests until there is nothing left for the lower income set to vie for at all.

Flaime

Concentration of wealth is still one of the greatest threats to fair government. That extreme amount of wealth allows the "ultra" rich unfair access and influence in government to the detriment of everyone without such resources. The founders recognized this in their reasoning for creating an estate tax in the first place. If anything, the estate tax should be more harsh, to diffuse the concentration of wealth. Maybe then we can avoid more Kennedy or Bush-like family political dynasties that do such harm to our nation.

pat toche

As always a very interesting post from Prof. Becker, thank you.


Current discussions of the evolution of inequality in the US and other countries emphasize 1) the increase in inequality that has occurred some time after 1950 and 2) the increased inequality among the top 1 percent of the richest Americans.

The Rockefeller example is of no comfort given current trends: the huge decrease in inequality at the top that occurred between the wars is currently well on its way to being canceled by recent increases.

One consensus which is emerging is that while taxes have played a part in reducing inequality early in the twentieth century, misguided monetary policies and asset market bubbles and crashes bear a larger share of the "blame", while the causes of increases in inequality towards the end of the twentieth century are less clear, but most likely technological.

Is there really some evidence that charitable foundations funded by billionaires have contributed to keeping inequality in check? Or put differently, are we to believe that if Bill Gates and Warren Buffet had not given away so much money the time series of inequality would look even more unequal than they actually do? Am I understanding correctly, Prof. Becker? I have heard of no such evidence, however, but perhaps work remains to be done on this intriguing hypothesis...

my references: Thomas Piketty, Emmanuel Saez, David Autor, Larry Katz, Melissa Kearney, Kevin Murphy, mostly, among others.

Jack

This is the policy for the vast majority of those who have an estate to pass on to their heirs. Does it seem onerous?

For example, assume an estate of $3.5 million in 2006. There are two beneficiaries who will each receive equal shares of the estate. The maximum allowable credit is $2 million for that year, so the taxable value is therefore $1.5 million. Since it is 2006, the tax rate on that $1.5 million is 46%, so the total taxes paid would be $690,000. Each beneficiary will receive $1,000,000 of untaxed inheritance and $405,000 from the taxable portion of their inheritance for a total of $1,405,000. This means that they would have paid (or, more precisely, the estate would have paid) a taxable rate of 19.7%.

Jack



A History of the Estate Tax
At the core of the American experiment is our collective rejection of European hereditary aristocracy and vast inequalities of wealth. Yet, just 100 years after its founding, the United States was wracked by economic panics and the inequalities brought about by the industrial revolution and the excesses of the Gilded Age (1870- 1910). These changes shattered America’s perception of itself as a land of opportunity.

Fortunately, our nation rose to the challenge. We had a vibrant debate — in the public square and in Congress — about the great disparities of wealth and power that existed at that time. This robust controversy over how to address these inequalities involved ordinary men and women and the elites of the time, the Carnegies, Rockefellers and Roosevelts. The debate ran among farmers, urban reformers, religious leaders, and nascent labor unions.

Many Progressive Era (1900-1918) reforms resulted from this period, such as: child labor laws, voting rights for women, and the establishment of an income tax, which required the extraordinary step of amending the constitution. The estate tax was another one of these reforms. Those who made the case for the estate tax advanced arguments that are vital to the contemporary debate.

First, there was the belief that the hereditary transfer of concentrated wealth is incompatible with American values and democratic aspirations. Several decades after the passage of the tax, Franklin D. Roosevelt said, “Great accumulations of wealth cannot be justified on the basis of personal and family security … Such inherited economic power is as inconsistent with the ideals of this generation as inherited political power was inconsistent with the ideals of the generation which established our government.”

A second belief was that society played a significant role in the creation of individual wealth and therefore had some claim upon the wealth of the very rich. In 1906, President Theodore Roosevelt proposed a federal inheritance tax, saying, “The man of great wealth owes a particular obligation to the State because he derives special advantages from the mere existence of government.” Roosevelt recognized that wealthy citizens benefitted particularly from government protection of wealth and property rights.

The permanent estate tax, after a generation of agitation, got a final push toward passage as part of preparations for World War I. The Emergency Revenue Act of 1916 included an estate tax and also increased income taxes and instituted an excess profits tax to discourage war profiteering. The first estate tax was imposed on the value of an estate over $50,000 (roughly $850,000 in today’s dollars) at a graduated rate of one to five percent.

Facing a budget crisis during the Great Depression, Congress raised the top estate tax rate to 70% on fortunes in excess of $50 million ($666 million in today’s dollars). In 1936, the estate tax provided a full 11% of federal revenue. Until 2001, the estate tax remained essentially unchanged, apart from rate adjustments and periodic increases in the amount of money exempt from tax.

At the heart of the current campaign to abolish the estate tax is a systematic distortion of the facts as to who pays it and who would most benefit from wholesale repeal – allegedly, farmers and small businesspeople. In fact, behind the grassroots image, there operates an entire industry of anti-tax lobbies, think tanks, polling firms, and PR experts. The anti-estate-tax lobby was funded with money from some of America’s richest families, including brand names like Gallo (as in wine) and Mars (as in candy).

In 2001, estate tax repeal proponents were anticipating an easy victory until a Boston organization called Responsible Wealth organized a group of affluent Americans, including Bill Gates Sr. and Warren Buffett, to announce their opposition to total repeal. Faced with this opposition, and the need to limit the cost of the tax cut, Congress passed and President Bush signed a bizarre tax cut bill that slowly phases the estate tax out until 2009, repeals it entirely in 2010, and then magically brings it back to life in 2011.

In June 2003, pro-repeal forces tried to make repeal of the estate tax permanent. Thanks in part to a truly grassroots campaign coordinated by United for a Fair Economy, that effort failed in the Senate. Right now, the future of the estate tax is uncertain, but it will take a prominent spot on the public agenda in the coming months and years.

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