Reply on Estate Tax Elimination-BECKER

I enjoyed reading all the comments. As the discussion makes clear, the issue of estate taxation raises many interesting questions that would take more than one posting to cover at all adequately. Let me try to respond to some of the points raised. As some of you indicated, and others denied, the estate tax is not necessary to get a circulation of the very rich since wealthy families did regress over time even before the estate tax became important. Although many of the descendants of John D. Rockefeller are still quite rich, as a family they have fallen greatly in wealth compared to the Gates� and other much newer wealthy families. There is nothing intrinsically regressive about consumption taxes. There can be various rebates, exemptions, and credits that would make the overall system progressive in the usual meaning of that term: that the average tax rate rises with level of consumption, or that marginal rates rise at some consumption levels and do not fall at any others. My preferred way to make a consumption tax progressive is via exemptions. The most efficient way to implement a progressive consumption tax along these lines is to allow all savings to be deducted from income, and then tax the residual (which is consumption), with an exemption at the lower end that should be quite generous. The NYTimes article that referred to my 1987 Presidential address to the American Economic Association badly misstated what I said. I did not claim that children�s income was not much related to the income of their parents. In fact I assumed for the sake of discussion that about 40% of the parents� income advantage was passed on to children. Note that grandchildren would then only have about 16% of the advantages of their grandparents. It is true that some recent work claims the fraction passed on might be as high as 50% rather than 40%, but that is controversial, as Dean Lillard of Cornell and others have argued. I also stand by my claim that there is no credible evidence that the degree of intergenerational mobility has fallen during the past few decades. If consumption were taxed, the basis would automatically be �stepped up� since that true basis would determine consumption spending. Even if one does not like a consumption tax, surely an inheritance tax is much better from any equity standard than the estate tax. I agree that the value of the inheritance for tax purposes should be based on the market value of inheritances, not the purchase price. I do not believe that if the Federal estate tax were eliminated, it would simply be replaced by much higher estate taxes by the states. For it is easy for many rich persons to change their state of residence by moving to states with lower estate taxes. That is certainly a lot easier than changing country of residence, and a considerable number of the very rich even do that.

Comments

[touche]

I can understand why savings is good in theory, but I don�t think it necessarily helps our economy. Savings can just as easily be invested overseas and the best investment opportunities may currently be overseas. There is no shortage of saving worldwide, interest rates are low in the US and American companies certainly have access to inexpensive capital.

A consumption tax will cause the very thing you scorn from the income tax � elaborate schemes to circumvent the tax. Internet commerce thrives, in part, because it lacks a sales tax.

In a global economy, I think there is a dilution of the effects of fiscal and monetary policies on the nations that impose them. Increasingly we need to evaluate these policies in a global content. In this context, I think that eliminating the estate tax will provide little benefit to our economy but will foster family dynasties that may last for centuries.

[Jeffrey Carter]

I agree with Dr. Becker that the elimination of the estate tax is beneficial for the American economy. In Dr. Posner's response, he touches on the mobility of class. I think that it is still possible to be upwardly mobile in our society, but the tax code as it is written contributes to the arduousness of the climb.

If the tax code were written to favor risk taking, instead of focusing on income redistribution, we would have more upward mobility. The income pie is not finite, but I think ever expanding. Risk taking increases innovation in the economy. This in turn creates new ideas and businesses that did not exist before. Bill Gates had the advantage of a large safety net to start his business. His father was a wealthy Seattle attorney. If his idea failed, he could have gone back to school and finished his degree. He incurred little financial risk in starting up his company.

There seems to be a general desire to gain wealth in our society. However, once one gains wealth they are subject to societal scorn for trying to pass their wealth on to their loved ones.
If we assume that the wealth that is passed on makes it easier
for family members to assume a decent standard of living, we can also assume that the government will be less likely to have to take care of them.

In Gates case, he is not only taking care of the future generations of his family, but trying to make the entire world a better place by donating monies to causes he believes in.
In previous generations, Carnigie and others did similar
things. Wealth and wealthy families are not a bad thing.

It is time for the government to rethink the tax code in total. Along with elimination of the estate tax, we ought to institute a flat tax, along with eliminating most if not all write offs. Politically this is impossible.

[Jim S]

First, everyone who yaks about how a consumption tax can be made non-regressive should be booted out of their ivory towers (Be they academic or corporate.) and given what the typical person living with a poverty level income or even an income 200% of poverty level and made to pay the bills out of it and maybe they'll begin to understand that adjustments that aren't instantaneous so that it has its effects within one pay period will still leave it as a regressive tax.

It is not the tax code that limits social mobility. It is social structure and economic dipsarity so great that it limits previous methods of upward mobility. What is the path to upward mobility in a world where the best professions are completely mobile across national barriers and can be filled by someone making an income which is poverty level in this country? I have never heard a decent explanation for that one.

[TheWinfieldEffect]

BECKER: "There is nothing intrinsically regressive about consumption taxes. There can be various rebates, exemptions, and credits that would make the overall system progressive in the usual meaning of that term: that the average tax rate rises with level of consumption, or that marginal rates rise at some consumption levels and do not fall at any others."

If one reads carefully above, one will see that Becker himself just proved that consumption taxes are regressive: if they weren't regressive, we wouldn't need rebates, exemptions, or credits to eliminate their regressivity.

[save_the_rustbelt]

This group is way over my humble head, but allow a couple of thoughts.

1. Is an "estate tax" really a tax or a seizure of private property for the general fund use of the government?

2. Is there an inherent legal or moral obligation to prevent or mitigate the intergenerational transfer of wealth, or just a political desire?

3. And from way out in left field, what interesting impacts will a total repeal have on the life insurance industry and, of course, lawyers? (many in both camps are still advising clients to assume the estate tax will be back into effect, a sales tool no doubt)

Tom, humble CPA

[Mike Petrik, tax lawyer]

Actually, Professor Becker is correct that a consumption tax is not inherently regressive insomuch as we could, as the professor suggests, simply adjust our present tax base to (i) exempt current additions to savings and (ii) include current withdrawals from savings. Assuming a continuation of graduated rates, a progressive consumption tax would be the result. In my view gifts and bequests, except to charities as in our current tax, should be viewed as part of the consumption tax base thereby obviating the need for an estate and gift tax. Such a levy would basically tax one on his lifetime income but would impose the obligation only as he spends such income. In so doing it would eliminate the current income tax's distortive bias against savings, which artificially deprives US and world markets of much needed capital.

[Tino]

Q. What's the difference between a Liberal and a leech?

A. The leech quits sucking your blood after you die.

1. The estate tax is fundamentally immoral and economically inefficient. It reduces the incentive for productive and thrifty individuals to save for the sake of their children and destroys family firms in order to give the State a measly 0.2% of GDP.

More importantly, envious losers (i.e Liberals) simply do not have to right to rob the rich, even if they commit the crime of being more successful than they are.

If you spend your money on trips to Tahiti your are not taxed, but if you want to leave some of the money you have earned or the firms you have built to your kids the socialists think they should have the right confiscate 55% of it?

2. To the people in the previous thread: I don�t care what your Marxists teachers told you in college, only a small fraction of wealth in the US is inherited. Quoting Hendricks�

�aggregate inheritances amount to between 1.2% and 2% of GNP.�

http://www.lhendricks.org/Research/bequdata_paper.pdf

3. The facts that your parent�s income correlated highly with your own DESPITE little monetary inheritance is exactly Beckers point. Parents pass on good genes, intellectual stimulants and most importantly norms and values (Heckman shows that non-cognitive skills are as important as IQ in explaining education success,). There is no conflict between this meta-inequality and the economy being essentially meritrocratic, i.e rewarding created value.

Wealth in the US economy is created, not stolen (excluding the 35% the state takes of course). Do you people honestly believe companies are willing to give 150 K a year to people who do not produce as much? Or that millions of consumers buy Gates, Dells or Walton�s products if they do not add any value? Or that the guy who puts groceries in a bag is creating nearly as much value as an engineer or entrepreneur?

For the record, the rich do not have to work several times harder or have multiple of times higher IQ in order to earn several times more. Just be more productive.

Even socialist Sweden abolished the estate tax last year, time for America to remove the Envy Tax.

[Jeff]

I don't see how consumption taxes could work.

Dennis Kozlowski had the $2mm birthday party for his wife in Sardinia (with the famous vodka-peeing statue) - 50% on a company tab (a company based in Bermuda specifically to avoid taxes) - and it was obviously not there because the Peoria Holiday Inn was booked. How exactly would the US government verify that consumption in a non-crook case?

The fun of being truly rich is that you can spend money in exotic places - on a business tab - and thus preserve your personal wealth intact.

Remember, CEO's often don't pay for their mortgages (if they can get the company to relocate), or their financial planning, or their attorneys. They don't have to save for unemployment or time between jobs (golden parachutes). Hotels and meals are T&E. Rounds of golf - paid.

And if anyone thinks CEO's are disciplined by the market - well they clearly aren't paying attention to their proxy statement. Most proxy vote results resemble Stalinist vote counts (98% love me and want to increase my pay and pay all my expenses).

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