Creative Destruction

May 8, 2006

The Paris Hilton fallacy

Filed under: Economics,Politics — bazzer @ 6:34 pm

I normally enjoy reading TNR's Peter Beinart, but his recent piece on the inheritance tax was a huge disappointment. Beinart grossly oversimplifies conservative opposition to the inheritance tax, and then goes on to pronounce that opposing the tax is not only bad policy, but immoral. Then he jumps the shark and invokes Paris Hilton.

I shouldn't be surprised. The ditzy heiress has been a ubiquitous staple of liberal estate tax boilerplate these days, but I assumed the Beinart was capable of making a better argument than that. I guess I was wrong. The subtext of the Paris Hilton "argument" is simple — "That stupid, blonde slut has done nothing to deserve that money. (Why the federal government is a more deserving recipient of the Hilton fortune than Paris or Nikki is not explained.)

It should therefore be confiscated and redistributed to the rest of us."The problems with this line of argument are obvious. To suggest that Paris Hilton is in any way representative of the typical victim of the estate tax is pure crap. Tarring everyone who inherits an estate worth a million bucks with the Paris Hilton brush is every bit as disingenuous (and offensive) as equating every recipient of social services with Ronald Reagan's "welfare queen." They are mirror images of the same, base rhetorical gimmick: eschew logic and rational arguments in favor of a stereotype designed to inflame anger and resentment in the voting populace.

So why would someone as bright as Beinart resort to such cheap demagoguery? Perhaps it's because a compelling, empirical case in favor of the estate tax is difficult to make. Maybe that's why Beinart result to vulgar symbolism and moral absolutism: "Ultimately, the argument against the estate tax, like the argument against social insurance, is moral. It is about right and wrong." When you make such pronouncements with all the authority of religious dogma, you obviate the need to buttress your viewpoint with facts.

Beinart bemoans the unpopularity of the death tax, and seems genuinely mystified that…

…many of the most fervent anti-estate tax crusaders have no monetary interest in its repeal. And, amazingly, most Americans oppose the tax even when told that it applies only to the hyper-rich.

Maybe these people recognize that antipathy for a brain-dead hotel scion is not an acceptable basis of fiscal policy. Perhaps they don't wish to live in a society where people like Beinart decide who gets what on the basis of someone's subjective notion of "worthiness." Maybe, just maybe, they're shrewd enough to recognize the tax for what it is — naked redistributionism fueled by envy and class warfare.

The most pernicious aspect of the inheritance tax is that despite its confiscatory rates (estates are taxed at much, much higher rates than income and capital gains), it accounts for a miniscule fraction of total federal revenue. Government policies whose primary goal is the confiscation and redistribution of private wealth are anathema to many Americans. It smacks of Marxism to most, and rightly so.

The only argument in favor of an estate tax that I can begin to appreciate is that inheritance should be treated as income. Even so, the punitive rates of the current system are impossible to justify, as inheritances are taxed at a much higher rate than ordinary income. Furthermore, even if we were to treat inheritance as income, generous exemptions should be allowed so that inheriting the family home (or farm or small business) would not incur a huge tax liability.

Better yet, consign the damn thing to the dustbin of American history, along with the poll tax and debtors' prison. Taxes should be levied to raise funds for the government, not for the sake of social engineering.

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26 Comments »

  1. 1) Your third paragraph suggests that estates of a million dollars are taxed. That’s not true; estates that small are entirely exempt from federal estate taxes.

    2) You suggest that the estate tax is unpopular. Actually, a recent poll shows that most Americans want the estate tax kept around.

    3) Estates are not taxed at much higher rates than income and capital gains. You’re forgetting to adjust for the fact that the first two million dollars of estates pay a rate of 0%. Once that’s taken into account, the effective estate tax rate is comparable to income and capital gains taxes.

    4) 60 to 70 billion dollars a year – which is the amount of revenue we’ll lose when the estate tax disappears entirely – is a pretty big hunk of money, especially when huge Republican deficits have made it much harder to pay for any programs at all. (Plus, there’s more at issue than just revenue – repealing the estate tax means paying billions more in interest on the debt).

    5) Regarding “generous exemptions should be allowed,” the current exemption is $2 million, or $4 million for a married couple. That seems generous to me.

    I simply don’t see anything unfair about taxing unearned income. Every cent I earn is taxed; but you want rich people to inherit millions tax free. Why should they get millions in untaxed income when ordinary Americans have to pay taxes?

    Comment by Ampersand — May 9, 2006 @ 10:52 am | Reply

  2. Why should they get millions in untaxed income when ordinary Americans have to pay taxes?

    Because the income isn’t untaxed. It was taxed the first time, when the person who earned it, earned it.

    Comment by Robert — May 9, 2006 @ 12:31 pm | Reply

  3. First of all, by that standard, if Adam pays me $200 to mow his lawn for a year, I shouldn’t have to pay taxes on it. After all, that $200 is coming out of Adam’s income, which Adam has already paid taxes on.

    Secondly, even aside from that, it’s not true that all the money taxed by estate taxes is money that taxes were already paid on.

    For example, over the course of time the value of my stock portfolio increases from $10 million to $15 million. Then I die and leave my stock portfolio to Sydney. Sydney sells the stocks a week later, when they’re worth $15 million and three dollars.

    If there’s no estate tax, only $3 of the $15,000,003 Sydney pockets will be taxed, because the capital gain during the time she owned the stocks was $3. And I never paid capital gains on the $5 million capital gain, because capital gain taxes don’t happen until the stocks are sold. So five million dollars in capital gains are never taxed.

    Comment by Ampersand — May 9, 2006 @ 12:57 pm | Reply

  4. After all, that $200 is coming out of Adam’s income, which Adam has already paid taxes on.

    You and Adam aren’t in the same family. You guys made an economic contract for service performed – classic employment, which we choose to tax in our society.

    So five million dollars in capital gains are never taxed.

    Hooray!

    Where the hell did you get a $10 million stock portfolio, anyway?

    OK, your point is valid. We can redefine the law so that there is a continuance of the capital gains tax across generations, so that Sidney has to pay capital gains if you didn’t.

    There, now the income has been taxed appropriately, and it shouldn’t get taxed a second time.

    Comment by Robert — May 9, 2006 @ 1:28 pm | Reply

  5. The key thing to understand about the estate tax is that it is a tax on the people who earned the money in name only and for convenience purposes only. If gifts and inheritances were income for tax purposes (they are excluded by Internal Revenue Code Section 102), the administrative burden would be immense, and excluding de minimus gifts and inheritances keeps administrative costs down while keeping much of the revenue from the tax in place.

    In practice, it is a tax in lieu of an income tax on someone who has done nothing to earn it. Likewise, the charitable deduction makes sense because if the distribution had been treated as income rather than a gift, it wouldn’t have been taxed anyway. The only people who pay estate taxes are dead people, and they are very rarely (and never of necessity) paid by surviving spouses.

    The gift and estate tax does protect transfers that remain within the family unit. Neither transfers to a spouse (with an exception for non-citizen spouses and certain elaborate types of transfers), nor transfers to minor children for support, are taxable gifts. But, when you have adult children (as is the case 99.5% of the time in taxable estates), with their own households, the “this has already been taxed” argument doesn’t hold water.

    Why should someone who receives $40,000,000 from an uncle as an inheritance (which would be tax free if the estate tax is abolished) be treated any differently from someone who wins a $40,000,000 Powerball jackpot, or that same person who worked for 40 years in the uncle’s business and received $40,000,000 of stock options or deferred compensation? These heirs, by definition, have done nothing to earn a multi-million dollar inheritance. They may be personally nicer people than Paris Hilton, but the incidence of the tax is born almost entirely by members of her social class — major inheritors. The Paris Hilton example reminds us that other heirs, like her, have done nothing to deserve their inheritance other than winning the DNA lottery.

    The government deserves these funds because the money received by people who luck into large inheritances should not be treated more favorably taxwise than funds of people who actually earn their money. It is a matter of tax equity.

    You can reasonably argue that the current top rate should be harmonized with the current top income tax rate (this discrepency is largely a historical accident as top rates for ordinary income were amended without changing estate tax rates). But, it is also true that the top estate tax rate is somewhat deceptive.

    The estate tax rate is 46% on amounts in excess of $2,000,000 of net worth at death (reduced by taxable gifts made during life, the estate and gift tax are partially unified). But, any capital gains taxes which have accured but not been paid in a decedent’s property because an asset has not yet been sold are forgiven at death. Thus, the net estate tax rate on capital gains which are part of an estate at death is really 31% (the capital gains tax rate tops out at 15%).

    Calculated on a comparable basis (income and estate taxes are “tax inclusive” while gift taxes are “tax exclusive”, i.e. taxed only on the after tax amount of the gift) the top gift tax rate is about 32%, but does not involve capital gains tax forgiveness (gifts have a “carryover basis”, causing the recipient to remain liable on any accured capital gains taxes).

    The top ordinary income tax rate, of course, is 35%. So, capital gains present in an estate, net of the income tax forgiveness involved, are actually taxed at less than ordinary income tax rates. And, capital gains make up a disproportionately large share of estate taxable estates (particularly if you view the first $2,000,000 as coming first from property value not derived from capital gains). Many large estates, if not most, consist largely of appreciation in real estate and business ownership interests like corporate stock. It is very hard to get an estate heavily exposed to the estate tax from interest income and earned income alone — CEOs typically spend the bulk of their salary (typically little more than $1,000,000) and perks and live primarily off appreciation in stock and stock options which can be tax free if held until death.

    In smaller estates, as noted above, the $2,000,000 of tax free transfers reduces the effective rates. A married couple with an $8,000,000 net worth and only the very most basic estate plan (an revocable trust with a credit shelter trust provision) would be taxed at an effective rate of 23% on that estate, for example. The same couple, with a $12,000,000 net worth, would be taxed at an effective rate of less than 31%. The effective tax rate exceed the top ordinary income tax rate of 35% only for married couples with a net worth in excess of $16.7 million after only the most basic estate planning (the proper documents cost about $2,000).

    Also, in larger estates containing closely held businesses, almost anyone with reasonable tax counsel can obtain a quite artificial 35% or more minority interest valuation discount (even if the heir ultimately obtains a majority interest) due to a lack of a consistency requirement between the gift tax and estate tax. This produces a roughly 31% tax rate on the portion of that asset that is not due to appreciation, and a roughly 20% tax rate on the portion of that asset that is due to a capital gain, net of the capital gains taxes that would otherwise be due.

    Basically, the heirs who actually end up paying a tax rate (net of income taxes which accrued during the decedent’s life but were not paid) in excess of the 35% ordinary income tax rate are those who inherit very large pensions or 401(k)s. But it is rare that these make up a large share of the large taxable estates facing more than a 35% effective tax rate after the $2,000,000 exemption, because even with very good stock picks, historical limits of about $15,000 of contributions to those accounts per year typically leave the largest in the single digit millions in value. Those whose wealth exists primarily in the form of publicly held stocks and bonds also have a hard time avoiding paying estate taxes (valuation discounts are not available to them), but typically these assets are in the form of stock inherited from founders of publicly held corporatioons and are typically predominantly made up of never taxed capital gains appreciation (discussed above). Also, the arguments for preserving closely held businesses from estate tax bites don’t follow when a business is publicly held. In a publicly held business, it doesn’t really matter who owns the shares, which have almost exclusively economic value, rather than control value.

    Generous exemptions, typically $4,000,000 per married couple, plus $12,000 per person per year of gifts, plus discounts for closely held businesses and further discounts for real estate owned by a closely held business worth more for development than for use in an active business, protect all family homes worth less than Michael Jackson’s compound, and any business meaningfully taxed by this regime is stretching the definition of “small business” and is in any case entitled to long term favorable interest rate financing from the IRS on the estate tax bill. Estate tax critics have yet to identify a single family farm lost to the estate tax. The typical case where it is even an issue is a multi-thousand dollar ranching operation next to a ski resort that has caused real estate values in the area to surge from almost worthless to Aspen and Vail like heights.

    The revenues are significant, comparable to the entire excise tax collections or customs duty collections of the U.S. government, and contrary to critics claims, the tax isn’t terribly expensive to collect and could be made far cheaper to collect if the law remained stable. A few of the loopholes that make possible some of the most expensive estate planning options were eliminated.

    The death tax people should really be concerned about is the Medicaid estate recovery program. It impacts only elderly people who couldn’t afford nursing home care in their final years without liquidating their homes and cars and spouse’s businesses, and results in many more farm and small business liquidations than the estate tax. About 400,000 estates of Medicaid nursing home beneficiaries face estate recovery actions each year, while only 62,000 estate tax returns were filed in 2004 (of which fewer than 30,300 were taxable) and that number will be smaller, due to increased exemptions, in 2006. Yet, the estate recovery system produces far less revenue. Nationwide, the estate recovery program recovers only about $362 million a year (about 1% of the collections of the estate tax and only about 0.8% of Medicaid nursing home spending).

    There is a death tax which should be abolished in this country, but it is not the federal estate tax, it is the Medicaid estate recovery program.

    Comment by ohwilleke — May 9, 2006 @ 3:14 pm | Reply

  6. You guys made an economic contract for service performed – classic employment, which we choose to tax in our society.

    You also choose to tax inherited wealth in your society. I find it a very strange argument to justify on tax one the basis that it’s what society chooses to do while criticising another.

    Comment by Daran — May 9, 2006 @ 3:26 pm | Reply

  7. Daran, my argument is that it isn’t fair to tax the income twice. When Adam hires Barry, they’re jointly creating income together. Since we’ve decided to tax income once, Barry gotta pay the tax.

    When Barry leaves his niece money, no income is created and no goods change hands. Barry already paid tax on his money (capital gains evasions aside) and so Sydney ought not to have to pay anything. The government already got its cut of the transactions that created Barry’s wealth.

    As noted, I do agree that capital gains represents a hole in the model I’m using, and suggest patching it with a tax on inherited capital stock which has not been previously assessed.

    Comment by Robert — May 9, 2006 @ 3:33 pm | Reply

  8. Robert: my argument is that it isn’t fair to tax the income twice. When Adam hires Barry, they’re jointly creating income together. Since we’ve decided to tax income once, Barry gotta pay the tax.

    Not to complicate things too much further, but taxes on self-employment activities and self-owned businesses are further areas of double jeopardy.

    To weigh in the issue of inheritance tax, an exemption on the first $2 million per person seems to me fairly generous (easy to live nicely on that amount), though if you are in the position to inherit $200 million, I’m sure it looks paltry. The larger amounts are where you pay your financial advisors to figger ways to exploit loopholes and hide asset transfers to maximize inheretance. I’m sure it goes on all the time, just like with tax evasion on mammoth salaries.

    Comment by Brutus — May 9, 2006 @ 3:43 pm | Reply

  9. The larger amounts are where you pay your financial advisors to figger ways to exploit loopholes and hide asset transfers to maximize inheretance.

    Yes. It’s worth reflecting that our system creates incentives for the people who are most adept at creating wealth to spend their time avoiding a regulatory regime, instead of creating wealth.

    Comment by Robert — May 9, 2006 @ 3:48 pm | Reply

  10. Taxes should be levied to raise funds for the government….

    Agreed. And so…?

    Who would like to name a means for funding government that creates fewer pernicious effects than an inheritance tax? Who thinks that the burden of creating incentives for estate tax havens is greater than the burden of taxing income or sales or wages or imports or exports or …?

    Churchill allegedly remarked that democracy was the worst form of government – except for all the others. I feel the same way about the estate tax. Long may it reign.

    Comment by nobody.really — May 9, 2006 @ 4:42 pm | Reply

  11. Who would like to name a means for funding government that creates fewer pernicious effects than an inheritance tax?

    Easy-peasy: taxes on actions which create negative fiscal effects for government without some offsetting positive. Off-hand:

    taxes on cigarettes
    taxes on alcohol consumption
    taxes on access to public lands
    taxes on vehicles which create excessive road wear
    taxes on income derived from litigation

    And so forth.

    Comment by Robert — May 9, 2006 @ 4:54 pm | Reply

  12. Great idea. And we already do most of those, right?

    What else you got?

    Comment by nobody.really — May 9, 2006 @ 5:02 pm | Reply

  13. Well, it’ll cost me my bathroom pass at the Cato Institute, but how about putting a 100% reverse payroll tax on US companies that hire knowledge workers outside the US?

    Comment by Robert — May 9, 2006 @ 6:45 pm | Reply

  14. Jeez, and I forgot –

    Legalize weed and tax the shit out of it.

    Comment by Robert — May 9, 2006 @ 7:02 pm | Reply

  15. Daran, my argument is that it isn’t fair to tax the income twice. When Adam hires Barry, they’re jointly creating income together. Since we’ve decided to tax income once, Barry gotta pay the tax.

    They’re not ‘jointly creating income’. They’re jointly creating wealth. Specifically Adam is paying Barry to create wealth (a mowed lawn) for Adam. The income part of the deal is zero sum (before taxes). Barry’s gain is Adam’s loss.

    When Barry leaves his niece money, no income is created and no goods change hands. Barry already paid tax on his money (capital gains evasions aside) and so Sydney ought not to have to pay anything. The government already got its cut of the transactions that created Barry’s wealth.

    In fact, the transaction is identical to the “Adam pays Barry” half of the deal. In other words, there is a wealth transfer, but no wealth creation.

    Yes. It’s worth reflecting that our system creates incentives for the people who are most adept at creating wealth to spend their time avoiding a regulatory regime, instead of creating wealth.

    Yet you are defending a tax on wealth creation, while attacking a tax on wealth transfers which don’t create wealth.

    Comment by Daran Finkelstein — May 9, 2006 @ 7:46 pm | Reply

  16. Thanks for the correction – yes, they’re creating wealth.

    I don’t defend the taxes we have on wealth creation; in fact, in the past I’ve called for a zero-tax regimen, at least in theory. I’m not expressing myself well, here. Let me start over.

    We’ve decided conceptually to tax wealth creation. Pretty much any private exchange that increases the economy’s total wealth is taxed. Therefore, any particular tax on wealth creation can be defended on at least that ground – that it’s something that, democratically, we’ve elected to do.

    We have not decided conceptually to tax wealth transfers that don’t involve an exchange. In fact, by and large, we have created privileged structures for such wealth transfers. If you give money to a church, you can take a tax writeoff. Personal gifts, even those that seem very large to most of us, are specifically exempted from being considered income. And so on. So it’s perfectly legitimate, in my view, to attack the estate tax as being aberrant to the Will of the People ™.

    In terms of economic impact, both taxes on wealth transfer and taxes on wealth creation are, to use the technical lingo, stupid. I don’t know which is stupider, but they’re both destructive to economic growth. Neither concept can be defended as economically productive.

    This ties into Amp’s class-warfare rhetoric, in that he opined that it’s unfair that earned income gets taxed, whereas unearned income doesn’t get taxed. My point – badly made – is that the “unearned” income was in fact taxed when it was earned, or should have been – and that thus the discrepancy in fairness doesn’t, in fact, exist.

    Comment by Robert — May 9, 2006 @ 8:33 pm | Reply

  17. Why should someone who receives $40,000,000 from an uncle as an inheritance (which would be tax free if the estate tax is abolished) be treated any differently from someone who wins a $40,000,000 Powerball jackpot, or that same person who worked for 40 years in the uncle’s business and received $40,000,000 of stock options or deferred compensation?

    Because of the fact that people respond to incentives.

    In the process of accumulating his $40 million estate, the uncle employed a lot of people. He built a business, bought and sold, provided liquidity to markets, and was just in general a big fat capitalist hero of the market.

    Part of his motivation for doing that was the transmission of wealth to his family. In many cases, a LARGE part of the motivation is the transmission of wealth to his family. The uncle was probably more than wealthy enough for his own needs long before he stopped working. If the government is going to take it away anyhow, what’s the point of getting rich past a certain point? You might as well just buy a yacht, get addicted to some fun drug or another, and retire at 45.

    Being able to make provision for one’s kin, in other words, serves as a powerful incentive to some of our most economically productive citizens to continue toiling in the fields – and thus benefiting all of us – past the point where there is a rational need for them to do so in terms of their own immediate interests.

    The visible result of this is ugly – Paris Hilton gets bunches of money. The invisible result is beautiful – Conrad Hilton worked his ass off. We can try to kill off the visible ugliness, but we will end up extinguishing far more beauty, unbeknownst.

    Comment by Robert — May 9, 2006 @ 8:43 pm | Reply

  18. Yeah, no one likes discouraging Conrad from working his ass off. But no one likes discouraging his staff from working their asses off, either, but that’s precisely what we do when we shift our tax code from taxing estates to taxing income (or wages or darn near anything else). When the US strikes geysers of molten gold in each of its national parks, I’d be happy to repeal all kinds of taxes. But I gotta think that the estate tax would be at the bottom of the list of taxes to repeal (ok, Robert, except for excise taxes).

    Alternatively, we shift to a consumption tax. In that case, Paris could earn or inherit all she wanted tax-free. She’d only get taxed when she consumed her wealth. Allegedly the X Tax can be made as progressive as you like, although I can’t say that I understand the details.

    Comment by nobody.really — May 9, 2006 @ 10:36 pm | Reply

  19. Great geysers of gold wouldn’t do much for our wealth. Gold is more money than it is resource, and money is just a convenient score. It’d be like the national parks spouting dollar bills. Nice for the people who found the first bales, perhaps, worthless thereafter.

    Actually, a deluge of gold would reduce the cost of computing considerably, but since that’s already on a hysterically downward slide, it’d be like giving a free sandwich to Bill Gates. Nice, but not really a contribution in a meaningful sense. In fact, it would be counterproductive, because one of the things pushing the development of optical and nano computing is that there’s only so much gold in the world, and it isn’t enough for all the computers we’d like to have.

    Alternatively, we shift to a consumption tax.

    Bingo!

    The details of making it progressive are pretty easy – you can even combine it with a NIT. Make the tax apply to all expenditures for goods and services, and just give everybody a whacking great rebate every year that totals up to the consumption tax actually paid by people at whatever level of poverty you want to subsidize.

    (So if Joe makes $20k a year, and spends all of it, and the tax rate is 30%, Joe will pay $6k in consumption taxes. Make the annual rebate a flat $6k, and Joe is revenue-neutral in the system; Alice, who makes $10k, nets $3k a year in NIT.)

    A high consumption tax rate plus a high consumption tax rebate would be so fair it would even be attractive to someone like me, who doesn’t care much about fairness. Plus, it would really soak the rich, and it would REALLY hammer the worthless parasites who go around buying fur-lined limos.

    Comment by Robert — May 9, 2006 @ 10:51 pm | Reply

  20. The tax system doesn’t fundamentally tax wealth creation. We don’t look into where the income comes from. For example, lottery winnings, which don’t create wealth, are taxed the same as earned income, which generally does create wealth.

    What our tax system really taxes is disposable income, which is closely correlated with ability to pay.

    When Barry leaves his niece money, goods do change hands from him to his niece, and she her ability to pay for things (disposable income), which is what income is, goes up in that year.

    Now, the issue of incentives is certainly a relevant one. But, the claim that estate taxes are an important factor in motivating the wealthy to create wealth is doubtful.

    My high net worth estate planning clients, more often than not, are leaving their great net worth to their children my by default and out of custom, than out of an intense, productivity increasing desire to make their children more wealthy. In truth, most of them were self-made and are often ambivalent, and not infrequently genuinely uncomfortable with leaving a great fortune to their children, but do so because it is “the thing to do.” Despite intense tax incentives within the existing system to make gifts during life rather than at death, the vast majority of clients strongly resist those incentives and defer wealth transfers to children until as late as possible. Frequently this means that their death in their 80s or 90s, at a time when their children are in their 60s or older, and their grandchildren are themselves married with children and in their 30s and 40s. More often than not, moreover, those children have made economic lives for themselves long before receiving any substantial inheritance.

    Also, as you get people who have earned above something like $5 million to $10,000,000 in net worth, whether or not they are working, it starts to get pretty hard to spend away your wealth unless you are really driven to fritter it away. These are late middle aged or elderly individuals, who have life long habits of living below their means, and a lot of the major purchases you make in that tax bracket, like vacation real estate or valuable art and antiques, tend to increase in value over time rather than depreciating. You can only go on so many expensive vacations and have so many expensive meals.

    More often than not, the habit of saving is driven by a personal sense of economic insecurity (what if I lost my job or my business went bust?), and more often than not, the wealth is acquired before people are really thinking about passing money onto the next generation at all. Not many people get an orientation towards providing for the next generation until their late 50s or sometime in their 60s. Usually, by the time people realize that they are economically secure personally, and shift their focus to their children, their wealth acquisition path has already been set and they are nearing retirement.

    The issue is not so much creating an incentive to work harder. The time for working, or at least generating substantial wealth from work, is usually over by the time people are thinking seriously about estate taxes. It is simply a choice of “do I want to continue making good investments” or should I intentionally make bad investments? Interia has a powerful effect.

    Today’s multi-millionaires, by and large, made their millions in a far less favorable tax environment than the one we have today. Almost all of that wealth was generated when the unquestioned conventional wisdom was that the estate tax would be 55% plus a 5% bubble rate forever. Almost all of that wealth was generated when the capital gains tax rate was much higher than 15% (it was 28% after the 1986 tax reform and was 35% for a significant period of time in the 1970s). Almost all of that wealth was generated when ordinary income tax rates were higher than 35%.

    The bigger incentive effect of the estate tax is in convincing people who are on the fence about leaving great wealth to their children or giving it to charity, to give a big chunk of its to charity, rather than in guiding how much someone actually earns.

    Comment by ohwilleke — May 10, 2006 @ 5:47 pm | Reply

  21. The tax system doesn’t fundamentally tax wealth creation. We don’t look into where the income comes from. For example, lottery winnings, which don’t create wealth, are taxed the same as earned income, which generally does create wealth.

    The lottery is entertainment, which is a form of wealth for the purpose of this discussion.

    Comment by Daran — May 12, 2006 @ 10:12 am | Reply

  22. I sense ohwilleke’s point is that the income tax code tends to distinguish between liquid (“actualized and realized”) income vs. illiquid (“actualized but not realized”) income, not between income from productive activities vs. income from unproductive activities.

    But since you bring it up, is winning the lottery a “productive activity”? As Daran observes, lotteries provide recreation, no different than Shakespeare productions or national parks or professional sports or Harry Potter. But in lotteries, the PLAYING provides the recreation, in the form of fantasies about wealth and fame; the PAYING is almost incidental. Sure, lotteries pay their winners, but this looks a lot like a simple wealth transfer, producing neither gain nor loss. (Indeed, if you believe that the marginal utility of money declines as you get richer, the lottery pay-out is anti-productive because it has a reverse-Robin-Hood effect: taking from the relatively poor to give to the newly rich. Moreover, actual reports about the lives of lottery winners suggest that the experience of winning proves to be less rewarding than anticipated.) Where lotteries really produce social benefit is in producing enjoyable fantasies experienced by ticket-holders prior to the winner being announced. Thus, while playing a lottery is arguably productive, winning (and losing) arguably is not.

    Does it make sense to regard enjoyable fantasies as “productive,” even if we cannot demonstrate the accuracy of the fantasies? Is it productive to tell people that a toothpaste will make them sexier, even if there is no evidence to support this view? Is it productive to tell people that certain brands of jeans will make them more popular than others, or certain brand of cigarettes will make them cooler than others, or a certain type of racial group makes them superior to others, or a certain type of behavior will get them into heaven? So long as people believe it and derive satisfaction from the belief, I guess so.

    Comment by nobody.really — May 12, 2006 @ 11:25 am | Reply

  23. Income, or wealth is the possession of a first person. You work, you play and you get wealth, that is how our culture works. With this money, some get apartments, wives, dogs, cars, but others wish their children to benefit from a nice lifestyle. Who are we to judge. If we place an inheritance tax, we are saying: “Your money is yours, no one else, so spend it while you are alive, how long that might be since after your death, the state gets it back.”

    Solialist and Communist cultures do not view wealth as private possession as we do. The british have no problem with knowing the queen owns their houses, I have a problem with that.

    Comment by Vilon — May 12, 2006 @ 1:03 pm | Reply

  24. In U.S. law, the state does own your house, to all extents and purposes, and is almost always also the ultimate source of your own rights in the property. Not only does it own your house, it makes you pay rent. The rent is called property tax. The rules and regulations on the lease are called zoning codes and municipal ordinances. Just as tenants are rarely permitted to make improvements without landlord permission, owners are rarely permitted to make improvements without a building permit. The state is also the remainder interest owner of last resort (eschat) when property is abandoned with no heir, and can buy you out of your lease if it wishes (condemnation). And, in the better part of the United States, the government owns both the mineral rights to the ground upon which your home is built, and the air rights, to control navigation and erections of tall structures upon it.

    Also, most of the developed world does have a mixed economy. Lassiez-faire capitalism is not the economic system of the United States, and never has been (the state share of the economy since the Civil War has steadily increased; before the Civil War, the main non-lassiez-faire capitalism issue was protectionism).

    Comment by ohwilleke — May 12, 2006 @ 1:24 pm | Reply

  25. The british have no problem with knowing the queen owns their houses,

    I’m British, and I don’t “know” that.

    Twice now, I’ve seen you make unsubstantiated and highly dubious claims. I suggest you start supporting them, lest your credibility go down the toilet.

    Comment by Daran — May 13, 2006 @ 2:17 am | Reply

  26. i think that there should be no tax because the money has already been taxed by the government once, why have them tax again on the same money? the money that is going to be inherited is a gift, not a salary or bonus from a business that would make it taxable.

    Comment by Swimboy0192 — June 28, 2007 @ 1:40 pm | Reply


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