Posner on Estate Taxation

I agree with Becker that inheritance taxes are preferable to estate taxes and that consumption taxes are preferable to income taxes. However, I do not share his strong opposition to the federal estate tax. The government needs revenues, and taxation is the principal means of obtaining those revenues. An ideal tax from an economic standpoint is one that generates substantial revenue without distorting the allocation of resources. These turn out to be linked concerns. A narrow-based tax, such as a tax on sports cars, is undesirable from this standpoint because, unless the tax rate is very low, in which event little revenue will be generated, the tax will deflect consumers to close substitutes that are not subject to the tax, and thus little revenue will be generated, because of substitution away from the taxed product. A recent article in the New York Times calls the estate tax �perfect� on the ground that it does not distort the allocation of resources because people can�t escape death. Were this true, the estate tax would be analogous to a �head tax��say a tax of $1,000 a year on every U.S. citizen. Such a tax would be difficult to escape because substituting away from the taxed activity (or rather status) would require expatriation, which is very costly to an individual. The tax would generate almost $300 billion a year in revenue. The estate tax is not nearly so �perfect� as a head tax, because contrary to the Times article it is easily avoidable, as a head tax is not. I emphasize �easily�; for that is the reason the problem with the estate tax is not, as it might seem to be, that it is a tax on savings and can thus be avoided only by consuming all one�s wealth before death and therefore is likely to distort people�s consumption decisions, which would make it an inefficient tax. People who have no bequest motive�that is, who are not interested in having a positive balance when they die�are not greatly affected by estate taxation because they already have every incentive to dissipate their wealth before they die. People who do have a bequest motive are not much affected by the estate tax either, because they can transfer their assets to their children or to other intended heirs before death, reserving the income from the assets for their lifetime (the equivalent of an annuity, which expires on the annuitant�s death, leaving nothing for distribution to heirs). As a result of these incentives and opportunities, the estate tax does not generate much revenue for the government. It collects some, however�and I do not consider 1 percent of total federal tax revenues a trivial amount�and its distortionary effects are probably modest. Becker is correct that it is costly in effort expended by lawyers to minimize the impact of the tax on their clients (though he may exaggerate the cost by attributing the entire income of estate-planning lawyers to tax counseling, when even in the absence of estate taxation legal counseling would be required for the preparation of wills and other documents required for large estates). But in that respect, it is no different from the income tax. Were the estate tax abolished, the revenue it generates would have to be made up by some other tax, which is as likely to be as distortionary as the estate tax and would invite avoidance efforts by tax lawyers. The more interesting question to me, though I have no good answer to it, is whether the estate tax should be stiffened, or other measures used to limit bequests. An article in last Friday�s Wall Street Journal, echoing remarks that President Summers of Harvard made at a conference at the Kennedy School that same day, notes a possible, and possibly troublesome, decline in social mobility in the United States. Wealthy people seem increasingly able to guarantee that their children and even grandchildren will remain in the upper income tier, leaving fewer places for the children and grandchildren of the poor to occupy. Through �legacy� admissions (as at Harvard!), expensive private schooling and tutoring, including tutoring in taking college admission tests, as well as by means of direct transfers of wealth, wealthy people are able to �purchase� a secure place for their children and grandchildren in the upper class. Even if, as Becker argues, social mobility has not actually declined in recent decades, it is lower than it used to be and the conditions for a decline seem in place. But the normative implications are unclear. For example, one concern with declining social mobility is a fear that rich kids won�t work as hard as poor ones, so that economic growth will lag. But if they don�t work as hard, they will lose jobs to the poor. They may continue to live quite well by clipping coupons, but the poor (or rather the former poor) will occupy the high-paying jobs. And because rich kids can take financial risks that the poor cannot, and risk-taking is important to innovation and hence to economic growth, bequests may lead to an increase rather than a reduction in economic growth, though this depends on the balance between the drag on growth from rich kids� working less hard and the spur to growth from their taking more financial risks. Furthermore, the positive correlation between parents� and children�s wealth may conceal the actual causality. It may be that the parents are wealthy in part because of a genetic endowment that they pass on to their children, who because of that favorable endowment would become wealthy even if they didn�t inherit any money. But probably wealth does enhance the advantage in having such an endowment. If lack of social mobility is a problem, nevertheless it is unlikely to be solved by trying to limit bequests, since wealthy people can transfer much of their wealth during their lifetime. To have an impact on the transmission of wealth across generations, therefore, a stiff tax on bequests would have to be complemented by a stiff tax on gifts, and �gift� would have to be broadly defined to include such things as paying $50,000 a year for tuition and expected donations at a fancy private school in New York City. And really stiff estate and gift taxation, even if feasible, would be undesirable because of the disincentive effect on the work effort of those people�and they are numerous�who, to a significant degree, are motivated to become rich by a desire to make their children and grandchildren better off than they would otherwise be. There is a traditional concern with dynastic fortunes�that is, with accumulations of wealth that are so great that they confer disproportionate political power on a family. The founder will usually be too busy making money to participate heavily in public affairs, though there are exceptions, such as Joseph P. Kennedy, President Kennedy�s father; Michael Bloomberg, New York�s mayor; and George Soros, the billionaire backer of the Democratic Party. The next generation, the generation of the inheritors rather than the creators of wealth, may decide to devote full time to public matters, for good or for will. Concern with accumulating political power over generations lies behind the esoteric �rule against perpetuities,� which forbids making a bequest that will not take effect until more than 21 years after the death of currently living persons�this to prevent transmitting wealth to one�s remote unborn descendants. As a curious tandem to the movement of abolish the federal estate tax, many states are allowing the rule against perpetuities (a rule of state rather than federal law) to be undone by the device of the well-named �dynasty trust,� whereby a wealthy person places money in trust with instructions that the trustee invest the money for the benefit of specified beneficiaries, such as the descendants�however remote�of the creator of the trust for as long as there are such descendants. Depending on the amount doled out by the trustee in each generation, the trust might over time accumulate enormous assets simply by the operation of compound interest. The device is quite recent yet already some $100 billion have been placed in dynastic trusts. See the study by law professors Robert Sitkoff and Max Schanzenbach, forthcoming in the Yale Law Journal. Should we worry about the dynastic trust? Probably some degree of wealth inequality is potentially destabilizing politically. But on the other hand the creation of centers of private power acts as an offset to growing governmental power and so may actually serve to preserve liberty. Notice in this connection that abolishing the estate tax would reduce the incentive to make charitable bequests, which are tax exempt. I should note finally two possibly illusory aspects of the proposed abolition of federal estate tax. One is that states may respond by increasing their own estate taxes, which are less efficient than federal estate taxes because it is easier to evade a tax by moving from one state to another than by expatriating oneself, and so such taxes affect locational decisions more than the federal tax. Second, the current estate tax gives heirs a �stepped up� basis in capital that they inherit. That is, should they later sell a capital asset that they inherited, the cost basis for computing how much capital-gains they owe will be the value of the asset at the death of their testator rather than the cost that the testator incurred to acquire it originally. So abolition of the federal estate tax would be offset to an unknown degree by increased capital-gains taxation of heirs, and also by increased administrative expense since it is often difficult to determine the original value of an asset that was acquired many years earlier.

Comments

[Nathan Kaufman]

It is good to see a debate on this.

I might want to discuss further the idea that rich kids take more risks than kids who are not rich. This might be true - I am not sure. Are there studies on behavior of kids from wealthy families?

It should be noted that lots of risk-taking innovation and invention are sparked by necessity as much as by riches. People that inherit lots do not need, so they may be less likely to invent or take risk. People with tons of money become afraid of new things because it might be socially embarassing or risky (they become risk-averse). Risk-takers may have had no choice but to take risk. Companies like "Yahoo" and "Google" were started on the west coast. I am not for certain on the background of the founders, but I do not think they were necessarily rich. I can imagine there has to be at least one wealthy person in the city of Chicago (inherited or earned) that would chuckle if you would have told them 10 years ago there would be billion dollar Internet companies called "Yahoo" and "Google".

People with moderate or limited means may be more likely to go through economically difficult situations and tough times unknown to people with inherited wealth. These difficult situations may prepare them for breakthroughs.

[Corey]

"An ideal tax from an economic standpoint is one that generates substantial revenue without distorting the allocation of resources."

This is only the ideal if you first assume that the initial allocation of resources is fair and correct and therefore does not require a redistribution to stop people from dying on the streets of typhoid whilst the judges and politicians and tycoons party at Harvard.

"But on the other hand the creation of centers of private power acts as an offset to growing governmental power and so may actually serve to preserve liberty."

Ok, honestly Posner, that is the most wacky thing I have ever heard you say. I know the 1890s were a long time ago, but it has NEVER been the experience of history that centers of private, hereditary power have operated to "preserve liberty" for anyone except for members of the dynasty.

The government is getting too powerful so lets give power instead to UNELECTED, unassailable wealthy elites?!? There goes accountability to the People, oops... and the rule of law NOT MEN... I guess it could be said that it is easier to kill the rich than overthrow the government, but you've just hypothetically ceeded police power to the rich, so presumably they become the government. Hail Bush Ceasar!

Of course the dynasty trust should be opposed! It is just the latest loophole in the idea that dead-hand control is inferior to living judgment and that genetics do not convey either moral or intellectual authority to govern.

Do you, after all these years of trying cases, reading history, hearing news... do you actually now believe in the benevolence of the rich? We may differ on the economic utility of wealth accumulation, but can't we agree that much of the industrial activity of the rich pollutes, oppresses, and ultimately works the poor to death? Even if you believe that government power leads to tyranny, what possible justification is there for trusting the wealthy with the power to check that tyranny. Private power also leads to tyranny.

Ideally, Paul Allen has one vote, Posner has one vote, and I have one vote. I can stop either Posner or Paul from oppressing anyone simply by siding against the oppressor. Paul Allen has Billions, Posner (I assume) millions, and I have hundreds. Economically, Paul can oppress either of us, and either Paul or Posner can oppress me, and there is not a single non-revolutionary thing I can do about it.

"But if they don�t work as hard, they will lose jobs to the poor."

That is also unlikely, no one born rich has ever worked hard in the sense that the poor do. What a decline in social mobility MEANS is that despite the sloth of the born-rich, favorable legal status has been granted to their fortunes, and they are immunized from losing their jobs to the poor even if their approval rating is at a record low.

It amazes me that the Wall Street Journal would be publishing on the decline in social mobility as if it was a suprise. The top tax rate has been lowered from 70% in 1967 to 31% now, and income inequality has risen to the highest level since the 1880s and 1920s. In fact it may be higher by now, as expresed in share of wealth controled by the top 1% of people. As wealth becomes more concentrated, mobility decreases... duh... what do they teach in business school anyway?

I apologise for the acrid tone, but come on, just once lets hear about something like homelessness or public school funding or labor relations.

[Larry]

Corey, as usual, is wrong in almost every particular. I won't bother to comment on his self-refuting nonsense. Rather, let's look at the facts. The successful in America almost all got there by working harder and having more ingenuity than their competitors--this hard work and ingenuity helps create more opportunity for others, but let's ignore that. Throughout their lives, this group is generally taxed at a higher rate than anyone else, and pay, as a whole, easily more than half of all income taxes. But that's not enough for some. They wish to ghoulishly hound these people for their money after they die--half again everything they've made throughout their heavily-taxed life.

It's hard enough to justify a graduated tax. Those who think because their one vote equals Paul Allen's one vote that it's a great thing to vote other peoples' money for themselves have gone beyond the bounds of decency.

[Forrest]

Let's not forget a major reason people try to do well is to provide for their family. If you take away that incentive, or force them to spend their later years figuring how to avoid being taxed, you greatly cut into efficiency.

Dumb dynasties will dissolve soon enough. Who cares. Rich people shouldn't fill anyone with greed or envy in a land of opportunity. After all, what's happening here is the fulfillment of the wishes of the original moneymaker, who worked hard and helped society in doing so--his wishes should be respected, not the government's greed.

If you want a perfectly efficient way of breaking up dynasties of wealth and power, randomly shuffle newborns in hospitals. Otherwise, all the time and energy spent in this useless hatred actually makes our society less wealthy.

[David]

Interesting post; I'm sure this will start an avid discussion.

In my opinion, to objectively discuss the estate tax, we should largely divorce the question of the estate tax from the larger question of wealth distribution in society. The estate tax will not dramatically alter the distribution of wealth from the rich to the poor, because most rich parents will pass on the bulk of their wealth during life (as Judge Posner notes). But it might have a small redistributing affect, which can only be good, if the threshhold for the estate tax is high enough.

Still, that is not the true issue here. The true issue is whether the estate tax is an efficient way for the government to raise money. If it provides 1% of our revenues and is as easy (or easier) to collect as other taxes, then why not have it? In fact, in a "libertarian" sense, it is better to tax the dead than to tax the living. And no matter how entitled they may feel, the children of the rich have no "right" to their parents' money.

If the estate tax is not an efficient means of collecting money, a progressive income tax, or perhaps a "wealth" tax, might be superior and might have a more profound redistributive effect. The bottom line is that the government needs to pay its bills, and the money needs to come from somewhere. Taxes cause the least pain to the fewest people if the government collects the bulk of the money from those who have plenty to spare, with the caveat that taxes should not be so high that they discourage innovation or productivity. The fact is, if we want to balance the budget, we have to tax the rich. It's just a question of how.

[Corey]

"Rather, let's look at the facts. The successful in America almost all got there by working harder and having more ingenuity than their competitors"

Oh, that's a fact now is it? Well gee. That's right, and VHS was a better technology than Beta, and MSDOS was the best most bug-free software available to IBM at the time... and the railroad tycoons didn't benefit at all from massive land grants from the government. It was all the time spent pounding spikes into the ground that made JP Morgan rich. Those college kids that started yahoo were the only college kids in the world with the insight to play with this thing called the internet! Oh what were the rest of us thinking! They didn't win because Yahoo! is more fun to say than Lycos or Excite... no, they were more hardworking and ingenious!

Thanks for clearing up the facts for us. I had forgotten that in America, the rich are our gods.
I hear that if you are really nice to them, sometimes you can get a small research grant or a bonus so you can buy a used Lexus. Neat!

The rich are heavily taxed because they are heavily rewarded. I'm sorry that they stuck Horatio Alger so far up your... nose. Does it hurt when you think?

I have patents, or rather, companies I used to work for have patents on stuff I helped invent. I was so busy putting in 80 hour weeks that I barely noticed the appropriation. So it is a fact that since I am hard-working and ingenious I am rich right?... Thanks for straightening me out.

[Corey]

"Rich people shouldn't fill anyone with greed or envy in a land of opportunity."

The point is, if social mobility declines, (which it is) then it becomes actually no longer a land of opportunity except in myth and song. I submit that it never was in the sense that people believe it to be.

If you people truly believe in the deservedness and benevolence of the rich then nothing I can say will make sense to you. I am aware that it makes you very angry to have core myths about America called into question.

[RWS]

Corey�s not going to like what I have to say, but I would contend that the rich can in fact sometimes be inefficiently too benevolent. My experience has been that large amounts of wealth tend to create cycles: (1) hard-working person instills in his child a strong work ethic, (2) child works hard and makes a lot of money, and if he is lucky and works hard to use his luck well makes a very large amount of money, (3) grandchildren grow up wealthy and they and/or the ones after them either turn to a life of luxury and spend down their inheritance or become very idealistic and start foundations and endowments to further their idealism. In my experience, that last stage happens more often than not�if not the third generation than the fourth or so. For example, I know a number of Duke grandchildren (of Duke University fame, after the billionaire tobacconist), and a good number of them are very idealistic and work on behalf of the university and the family endowment. Other examples include the Fords and the Carnegies, etc. Ray Kroc�s wife recently gave an enormous amount to NPR, to state another example.

The consequence of the abatement of the Rule Against Perpetuities, see the article Judge Posner linked, is the establishment of this sort of �private nobility� that has lots of wealth preserved in charitable and academic endowments. This private nobility lives off of these endowments, a quasi-nobility which includes academics and graduate student legions (which I used to be). Anyway, I think that NPR will probably become more like this elitist group, now that can engage in unfettered idealism, unhooked from market realities. I think these �private alternatives� to government largesse, which is inefficient and wasteful enough, have their own big problems, whether they be academic, journalistic, or humanitarian ventures.

The greatest liberation of the poor is the free market and the opportunity to create a little nest egg, own a home, and create value that has property rights. A lot of this estate tax debate is mainly over principles, not actual dollars (I agree with Prf. Becker there).

[Corey]

You can cite examples of rich people acting benevolent, in fact you could even say the estate tax is an incentive for benevolence. There are however, plenty of counter examples. The Waltons give away a tiny percentage, the Bushes have concentrated money within the family with remarkable success.

Interesting that Posner mentions the Kennedys and Soros but does not mention the Bush family, certainly our best most recent example of hereditary money elevating people who would not have got there alone. How many businesses did W run into the ground before he switched to politics? (Where _other_ people have to pay for one's mistakes.)

I find it amazing that someone could look at the story of W and find hard work or entitlement. I see the gentleman's C and more failures than anyone should be able to make in such a short time. We should remember here that we are talking about estates, so that we must not only believe that large sums of money are originally earned in a meritorious way, but that this merit somehow passes genetically to offspring. In other words, you have to fuse the "land of opportunity for all" with eugenics.

"The greatest liberation of the poor is the free market and the opportunity to create a little nest egg, own a home, and create value that has property rights."

If only that were true. Those points in history when the economy was least regulated correspond to the times when the poor were the worst off. We had something approaching lassiez-faire in the 1880s and 1920s, followed in each case by a decade of horrendous deprivation.

Poor people are not interested in liberation, they are interested in obtaining power, and that means money in the free market. Liberty is irrelevant without the resources to exploit it. Go tell a homeless person that they have the opportunity to become the next Bill Gates if they would only start saving a nest egg. I am sure they will be encouraged by your message of hope.

[Corey]

Incidentally, I have no quarrel with philanthropy. While I would not have made some of the funding choices that the Bill and Melinda Gates foundation has, I am happy to see 20-some billion dedicated to social causes.

I view the estate tax as a establishing a norm for philanthropy rather than hereditary dynasties. Certainly people who are not generous by nature will attempt to subvert the tax and pass on their divine right of wealth, but they can be only partially successful in the current system.

I would be for lowering the tax on non-family gifts and closing the loopholes on the death tax. This would please all those people who think private charities are more efficient than government run social insurance, and it would respect the right of the rich to decide how to redistribute their good fortune, with only one limit on the (I say socially undesirable) tie of wealth to genetics.

[RWS]

Certainly, I would not tell a homeless or even poor person that they just need to work hard and then be the next Bill Gates. That is a facially absurd insinuation. I would tell that person that, as long as they are not infirm of limb, they can work themselves to an established residence, good food on the table, and the ability to save for the future.

One thing I think is being missed here is that if a bunch of money is in a wealthy person�s hands, that does not mean that this �value,� which is essentially stored rights arising from prior value generation, does nothing. Either two things happen: the wealthy person spends it, which then obviously employs people usually much less wealthy than he, or he invests it, such that less wealthy people can have access to capital for buying a home or investing in their small business or buy a car or something. Both of those things benefit the poor, and probably are more beneficial than charitable handouts in the long run. So, it is plausible to argue that capital, in the long run, is better left in the capital markets and in commerce rather than socked away in a perpetual trust fund or funneled through inefficient government. If, for example, a wealthy person builds a large house, that is (1) architecturally beautiful, (2) a great place to live, and (3) employs a whole lot of people in the process.

[TheWinfieldEffect]

"If you want a perfectly efficient way of breaking up dynasties of wealth and power, randomly shuffle newborns in hospitals."

Though that is a good start, it would take more than that.

1. Confiscate several sperm/ova samples from each citizen. Then sterilize him/her.
2. Randomly pair sperm with ova.
3. Give out randomly selected embryos to only those couples approved and licensed by the state as likely to rear good citizens. (They'd have to pass whatever tests/meet whatever criteria, including IQ tests.)
4. Eliminate all inheritance, but provide each baby with a grant of $x (untouchable until the age of 18; part stocks, part government treasury bills, part annuities, part cash).
5. Universally free education from k-Ph.d, including tutoring, and the absence of non-standardized methods of grading, with confidential scorekeeping. (In other words, pure merit, without the ability to blackball someone who took ten times to pass a test instead of once.)
6. Removal of children from private households from age 12-18 for education in a massive state-run school. In other words, k-6 grade would take place in local neighborhood elementary schools, and 6-12 would take place in one well-funded state school/community (with a population in the millions).
7. Limit admission to the teaching profession to doctorates with exceptional math-test scores and abnormally high IQ.
8. Mandatory military service between ages 18-21 prior to admission to college/university.
9. Elimination of non-profit status for all organizations, including churches and charities.
10. Link income taxation to age. The older you are, the higher your taxes.

[Corey]

"If, for example, a wealthy person builds a large house, that is (1) architecturally beautiful, (2) a great place to live, and (3) employs a whole lot of people in the process."

Thanks! And here I thought trickle down was discredited.

You forgot to mention the jobs said wealthy person creates in their fields picking cotton.

The fundamental question should not be, "what is the most economically efficient allocation?" Rather, the question is "what minimum guarantee of social well being will we make for everyone in our society?"

By your argument, efficiency might be maximized by a fascist tyrant controlling all macro-decisions about production and distribution. If trickle down works then it would work better under a Franco.

Democracy is inefficient in the sense that it requires deliberation and consent in order to exercise power. This "inefficiency" has tremendous value in preventing arbitrary tyrannies because it is often difficult to get people to agree to oppress. Many people here, in your technocratic quest for efficiency, risk optimizing out good/valuable checks on power along with the bad impediments to progress.

Also, it is wrong to assert that direct charity in inferior to investment targeted to grow the economy. Those two things serve different moral purposes. Direct charity gives autonomy and choice to those who would not have it otherwise because of their circumstances. Investment hopes to benefit all in proportion to what share they already have in the economic system. A preference for trickle-down over direct gifts merely expresses distrust for the poor. Its the same logic that leads people to be willing to give a hamburger to a homeless person but not $5 becausee "he might spend it on booze." This is a paternalistic approach, ill suited to people who profess to be interested in autonomy. I've watched many people walk out of Habitat for Humanity orientation when they learn that people for whom the houses are built are not prevented from selling them. Why shouldn't they sell them? The people walking out could sell their house at any time. Why is charitible intent often conditioned on desire to control the choices of the beneficiary. This is a key issue when talking about the estates.

Trickle-down occurs in a market that is structured and controlled by the haves for the presumed benefit of the have nots. Direct charity (at least when not coupled to religious pre-conditions) is undertaken to equalize participation in the setting of market structure.
I say that for this reason direct charity is STRONGLY prefered.

[Kyle Hasselbacher]

Commenters here have touched on, without really stating, what I think is the best part of the estate tax: it encourages the wealthy to give to charity. An about-to-die millionare has a choice: (1) anoymously pay the feds gobs of money, or (2) buy fame and gratitude from the unwashed masses. A few opt for (3) pay lawyers to figure out how to swindle We The People. I've seen it suggested that the estate tax is part of why the United States has led the world in charitable giving.An ideal tax from an economic standpoint is one that generates substantial revenue without distorting the allocation of resources.Sometimes we want to distort behavior (whether that translates to "allocation of resources" or not), as in the case of heavy taxes on cigarettes (to discourage smoking). I think the estate tax discourages another kind of bad behavior: hoarding. Society as a whole does not benefit from extreme wealth concentration.

[RWS]

Kyle, I don't want to come off as someone who is oblivious to the concern you're stating, but just for the sake of argument, what in fact *is* the wrong that comes from wealth concentration? Take a world in which there are no estate taxes at all. That means some people get major bequests and others do not. That may have some unfairness to it, but honestly, we all know that a market economy will usually end up with more and less wealthy people, given that people differentiate themselves with respect to work ethic at the least.

So what? Unless one postulates some sort of "hate-the-rich" complex, there should be no problem with one person being employed by another person whose parents may have worked extra hard and maybe had a streak of luck that they used wisely. In the end, the poor person has a job that is probably better than the opportunity cost. The alternative is either locking the money up into a perpetual charity trust, which has problems of its own, or government largesse given to that person. Such programs reduce the incentive for the parent to work in order to benefit his children. Those that get the super-bequest will either (1) save it, which benefits capital markets, (2) spend it down, which then puts the money back into the economy through consumption, or (3) give it away (hopefully not to a perpetuity).

I just don't see a problem with it, absent some ressentiment issue. And in the end, it engenders greater efficiency, which benefits everyone through lower prices and greater access to goods and services.

[Corey]

The question was not directed to me but... The harm is that concentrations of wealth, as they get more extreme, become concentrations of power.

Concentrations of power are undemocratic. Full stop.

To the extent that anyone in this country still believes in democracy, they should be concerned about the extent that concentrations of wealth distort political and economic equalities.

As I said in my lengthier post above, efficiency is not necessarily the best original postulate on which to base a system of control.

One might counter that our system is not a democracy but a representiational republic, and we have always collectively ceeded power to a father figure in the political or economic or celebrity realm.

That is all well and good, but totalitarian states are also representational in the sense that the tyrant claims to represent the will of the entire people. The system needs populism to pull back towards finer granularities of representation.

Wealth Inequality is the result of the tendency of power systems to concentrate into strong central control. Egalitarianism derives its moral authority from countering that trend.

[Kyle Hasselbacher]

Imagine a town with one Bill Gates and a thousand people below the poverty line. How many can Bill employ before he thinks he's wasting his money? What incentive does he have to share anything with any of them? He has bread on the table and enough money to keep it there for 100 years after he's dead.The real world is more complex than that, and real rich people don't just sit on a pile of money and refuse to spend any more than necessary, it's true. Nevertheless, the way I see it, a man with more bread than he can possibly eat is a problem especially when there are men with no bread to eat at all. If everyone meets some minimum standard of living, if there are no starving, no untreated sick, then it doesn't matter to me who has the biggest pile of money or how much larger it is than the smallest pile. Until that day, however, there's something wrong, and it's more wrong when there are folks who are very able to do something about it, but don't.The "rich employ the poor" line is all well and good, but at some point Bill has so much wealth that it's difficult to spend on anything worthwhile. The only way "trickle down" keeps working is if he's giving some pointless makework to everyone in town to justify feeding them.I know that wealth is created daily, but it's still a zero sum game at any given time. Those bajillions in someone's vault are absent someone else's dinner table. More wealth in fewer hands means more hands with less wealth. That translates directly to people who can't afford to care for themselves as well, live less, suffer more.As I said, I understand providing an incentive for people to work. Wealthy people spending their money into the economy is good for everyone. I don't think we should force them to do it, but I do think we should correct their behavior when they're done misbehaving.

[RWS]

Kyle, your answer misses a fundamental and unavoidable point in both of my previous posts--that saving money, whether in a bank or in a riskier investment, loans that capital out and attempts to find the most efficient uses of others' labor to maximize returns. Those 1000 poor people are going to borrow from Gates, who will be happy to loan them money, and they will then produce goods and services for each other through trade. It's almost as if you think that humans were helpless before charity and government. Even if Gates lent them zero money, they'd find an alternative currency out there and start trading and doing productive things to make a living with. This much is basic economics, as I see it.

That also shows why this zero sum proposition is completely baseless. Even if Gates has every last penny in your scenario, that does not mean that the other 1000 people are doomed to starvation.

I would also challenge Corey to give me a reason why wealth inequality is inherently undemocratic. Everyone has one vote, rich and poor alike. The rich have more money, but the poor have more votes. It's a balancing act that has existed since classical Greek times. It's worth discussing, but calling capitalism inherently undemocratic will require a good deal of quality analysis that I haven't yet seen.

[N.E.Hatfield]

Somewhere along the line I messed up and posted on the wrong blog. Oh well, as other for the other comment - ignore it. ... here goes again:
Has Thorstein Veblen become relevant again (The Theory of the Leisure Class)? I thought his works had been burned at Linnea's statue years ago. There appears to be only one true road to wealth conservation/accumulation, holding on to what one's got and not letting it slip away. Hence the constant political battles, not to mention the creation of loop-holes in legislation. Tax cuts; income, estate or otherwise; Hmmm, who what and where is the lobby and who truly benefits?

I've lost track, what's the budget deficit running at now; local, state and federal? And I won't even mention the trade deficit. Greenspan must be sweating bullets.

[Kyle Hasselbacher]

Even if Gates lent them zero money, they'd find an alternative currency out there and start trading and doing productive things to make a living with.My hypothetical "wealth" is meant to emcompass all currencies, so what you're saying sounds to me like, "when Gates has all the bread, they'll just eat dirt."Even if Gates has every last penny in your scenario, that does not mean that the other 1000 people are doomed to starvation.In my scenario, it does. If you pretend, on the other hand, that there's untapped wealth (like farm land) somewhere that Gates doesn't have, then, sure, the poor can haul themselves up by their bootstraps (unless, of course, they're paying heavy taxes for a government that mostly benefits Gates).Those 1000 poor people are going to borrow from Gates, who will be happy to loan them money, and they will then produce goods and services for each other through trade.This is the same as "Gates pays for work" except with a middleman. Gates needs nothing. The poor have nothing. Why risk?I like the "it just gets invested anyway" idea, but I don't believe it. To me, when Gates buys stock in a company, that's not much different from buying gold coins. His wealth hasn't gone anywhere; it's just transmuted. Only through buying perishables (food) or services (gardening) does wealth really change hands because wealth is only really created through work, not trade. Loaning money only "creates" wealth in that it induces the guy in debt to do more work than the lender did to get the money lent. It's accounting mumbo jumbo that hides the real work.And frankly, all this talk about economics seems off-topic to me, believe it or not. The fact remains that an estate tax encourages charitable giving, and that's good.I would also challenge Corey to give me a reason why wealth inequality is inherently undemocratic. Everyone has one vote, rich and poor alike.Campaigns cost money.

[TheWinfieldEffect]

The original topic was the estate tax, yet now we are discussing campaign finance reform? They are analogous, but not how Corey thinks.

THE ESTATE TAX

The estate tax is favored by cynical politicians who know that heirs of multimillion dollar estates are outnumbered by non-heirs. Thus, more voters benefit from the estate tax than lose out.

These cynical politicians are usually populists, and so are on the Left. Their campaign and fundraising rhetoric slurs heirs as greedy and undeserving. After all, heirs didn't earn their inheritance.

CAMPAIGN FINANCE REFORM

The campaign finance reform upheld by the Supreme Court was primarily funded by non-union tax-exempt liberal activist groups that wanted corporate money out of elections. (It is true that some conservatives supported campaign finance reform, but that is because they sought to restrict unions.) Campaign finance reform was promoted with the same populist rhetoric: the little guy loses out if the greedy rich are able to spend their dollars how they choose.

CYNICISM: BRINGING DEMOCRATS TOGETHER

In both cases, the Left benefits politically by restricting the use of capital by rich private persons, natural or state-created. First, corporations and rich individuals have less money to spend on elections and lobbying for free market policies. Second, the extremist rhetoric keeps Leftist politicians well-financed and in office, because extremist rhetoric energizes the far Left, which maximizes the number of small "hard money" donations incoming to tax-exempt liberal groups and the coffers of liberal loudmouths like Chuck Schumer.

The problem with these cynical pro-Democrat policies is that Democrats are corporate too. One of the Leftist critiques of Kerry was that he was beholden to corporate interests. For example, his brother brokered deals with the telecommunications industry, which has to be the most oligopolistic industry there is. If you don't like the cost of your cell phone bill, and can't find a competitor with a substantially different contract, or you remember when cable didn't have commericials, you know what I mean.

As I think someone on here already tried to point out, what assists poor people is -- lo and behold -- cash. Cold hard cash. An infusion of capital. Restricting capital and restricting credit in place of capital does not help poor people. Making it harder for poor people to invest in the stock market does not help poor people. Making it harder for poor people to purchase bonds or secure mortgages with low interest rates does not help poor people. Raising prices at the market does not help poor people. Raising the taxes of poor people does not help poor people. Can you guess from this paragraph what the effect of restricting capital, increasing government regulation and maximizing federal litigation against corporations is? Now can you guess what the agenda of the Left is?

HOW TO HELP THE POOR, WITHOUT HYPOCRISY

The way to improve the lot of poor people is to grow the economy. Don't take my word for it, take the word of Professor Bhagwati of Columbia University, who used that very strategy while an economist on the Indian Planning Commission to raise the minimum income of India's poor (defined as the bottom 30% of India's wage-earners). He is quite explicit in "In Defense of Globalization" that:

"[G]rowth was not a passive, trickle-down strategy for helping the poor. It was an active, pull-up strategy instead." p.54
...
"[G]rowth had to the principal (but, as I argue below, not the only) strategy for raising the incomes, and hence consumption and living standards of, the poor." p.54
...
"A suitable growth policy can always nip the immiserating growth paradox in the bud, ensuring that growth does amount to an increase in the size of the pie." p.55
...
"We must also improve the poor's access to investment by making sure that bureaucrats are replaced by markets wherever possible. As I remarked earlier, the anti-market protesters do not adequately appreciate that, as has been documented by numerous development economists who have studied both the working of controls and the rise of corruption in developing countries, far too many bureaucrats impose senseless restrictions just to collect bribes or exercise power. Letting markets function is therefore often an egalitarian allocation mechanism." p.58

I ask you this, my friends. Do campaign finance reform and the estate tax "let the market function"? If not, why is Corey opposed to an egalitarian allocation mechanism? Isn't he supposed to be an egalitarian? Or is he just an elitist in populist clothing?

[TheWinfieldEffect]

POSNER: "Were the estate tax abolished, the revenue it generates would have to be made up by some other tax, which is as likely to be as distortionary as the estate tax and would invite avoidance efforts by tax lawyers."

Not if we cut spending and reduce the size of government to let the private markets fill in the void.

[TheWinfieldEffect]

POSNER: "There is a traditional concern with dynastic fortunes�that is, with accumulations of wealth that are so great that they confer disproportionate political power on a family."

How is a dynasty different from a church, a corporation, a political party, a non-profit, an NGO, a union, a public interest litigation firm, or a movie studio? They are all immortal, can amass great wealth, avoid taxation, and influence public policy by targeted expenditure of that wealth. Collective power is collective power, isn't it?

[TheWinfieldEffect]

KYLE: "If everyone meets some minimum standard of living, if there are no starving, no untreated sick, then it doesn't matter to me who has the biggest pile of money or how much larger it is than the smallest pile."

Doesn't it depend? What if you're starving because you gambled away all your hard-earned cash? What if you're sick because you refused to purchase health insurance you could have afforded? What if you're sick because you ate lots of lobster and steak and refused to exercise and now you have heart trouble? What if you're starving because you spend all your cash on expensive sneakers and cars? Can someone really claim to be starving and sick when he has cable and over a hundred compact discs at twenty bucks a pop? It seems that everyone in the United States lives at a minimum standard of living that is much better than that of most people in the world. Is your minimum relative to? Or is it objective? Does the line keep changing as the economy keeps growing? Why aren't basic public utilities like electricity and sewage and indoor plumbing considered a "minimum standard"? I can tell that you have never worked for Peace Corps!

[TheWinfieldEffect]

COREY:"Concentrations of power are undemocratic. Full stop."

Then our Congress must be undemocratic, because it has all the legislative power, according to Article 1.