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.

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.

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.

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

Sometimes, selfish motives lead to altruistic results.

quite agree with the above comment.

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.

Here's an alternate link to the Forbes list.

"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.

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.

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.

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.

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.

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?

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.

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.

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).

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

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

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?

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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!

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: 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.

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.

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.

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%.

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.

I too have been perplexed by the seemingly altruistic behavior of US citizens to not simply vote for confiscatory tax policies against the top 10% of income earners.



Here's my 2 cents on why:

1) Americans feel that they or their children do actually have a chance to move up to the top tier of earners. I went from the bottom 25% to the top 5% in about 12 years, so I for one actually believe this is doable. Needless to say, we need to be ensure people are upwardly mobile ... based on this study people still are.

2) Americans have a sense of fairness, and actually see confiscatory taxes for what they are, legal theft. Especially given that most of the current crop of ultra rich in the US have accumulated their wealth by creating their own enterprises,and not thru government purchased favors.



Contrast this to much of the rest of the world and you find that people feel they don't have the opportunities to move up (which they probably don't). Also, you find that many of the ultra rich in the rest of the world have not acquired their wealth through creating their own enterprises, rather through dubious government influence.

Regarding flat tax-

Sorry, I meant to suggest sales tax. So, you get to keep your federal income tax, and then you pay some national sales tax when you actually buy something. I am sure there are unintended consequences, but this would encourage savings, simplify federal taxes, and certainly not be regressive (like state lotteries, for example). Maybe it creates a stronger incentive for black markets, and I guess you need to not tax the first $40,000 or so (so send all households a check for the tax rate*$40,000). I guess my milk will cost $5.00 instead of $4.00, but having an extra $1,500 every month will help out.

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Marco: Upward mobility in the US has dropped so dramatically that other nations, Germany being one, has a higher rate than we have.

Also, after weighing the posts here and concerns as to the negative effects of a nation of ultra-haves and have nots, does it matter how the super-rich became super rich? BTW I suspect you'd be fairly surprised to learn how many of those claiming to have succeeded without preferential government policy have benefited from market distorting government intervention.

Upward mobility is one goal, as you say, Americans value, however the other concern dictated by the stats of the last three decades is that of those below median income making no progress at all; a situation that causes many of the "problems" that will be front and center during this, long, election cycle. SS, access to health care, all too few having any discretionary income as energy costs consume what little they had before, and, of course the related slowing of the housing market and lackluster retail sales. It's not only an economy that can not fly on one wing but democracy itself.

Jim: Again the "devil's in the details"

Sorry, I meant to suggest sales tax. So, you get to keep your federal income tax, and then you pay some national sales tax when you actually buy something.

.............. Fine if you favor sharply regressive taxation, as the higher one's income the lower the percentage of purchases, which given anything like our current economy would finish it off promptly.

I am sure there are unintended consequences, but this would encourage savings,

......... Probably not, as median income is now so low that all those at, near or below median income have so many unmet needs they'd still be broke all the time.

........... As an aside, while US savings probably are too low, there are times when an economy needs higher savings so as to have the liquidity to build new plant and equipment. Today our utilization rate is quite low (70% is the number I see) and is one reason interest on bonds and returns from the market are low. Especially since housing (about the last leg this economy had) is tanking we in an era of low demand and were someone to create a policy that actually did constrain spending, our, and most of the world economies would go into deep recession.

simplify federal taxes,

........... probably not. More below.

and certainly not be regressive (like state lotteries, for example).

.......... Gee, now THERE's a comparison!! As if paying for education or state government via gambling proceeds was wise policy!

Maybe it creates a stronger incentive for black markets,

.......... indeed! and games. Today the Federal budget takes some 20% of GDP so a sales tax would have to be higher than that as many do not spend all their money on items that might be taxable. Try 25% or more? So how do we duck paying $25k in sales taxes on a new Mercedes? Leasing? Or a cheaper used car? Wouldn't private parties agree to split the fed donations? On a new room addition? Barter?

and I guess you need to not tax the first $40,000 or so (so send all households a check for the tax rate*$40,000).

.......... Well, it IS hard to get blood out of a turnip by any means. But! of course those under $40K (and those who'd like to be under $40K) are again back in the business of filing an income report replete with "allowable deductions" and that is most of the people.

I guess my milk will cost $5.00 instead of $4.00, but having an extra $1,500 every month will help out.

.......... Indeed. And if you were Steve Forbes you'd be helped out many times more which is why he and some rich folk less honest than Buffet try to sell you this scheme.