Asymmetrical Information

A few years ago my father-in-law's estate went over the then relatively low estate tax limit. The tax was substantial. This for a career naval officer with some good sense to hang on to houses accumulated during moves.

While the current limits are more generous, like all such complex taxes (the AMT comes to mind) they grow and grow until they really bite again. More importantly it's the timing of these taxes (at death) that make them particularly grating on the family. Just dealing with the Feds and various state tax agencies is terrible.

This is the first step to comprehensive tax reform by cleaning up the odds and ends of the tax system. It also shows how difficult the process will be.

I had a long conversation at the folks over at The Nation blog on this yesterday. I thought I was making the reasonable point that each piece of income should be only taxed once. That is, since the money used to eventually create capital gains and any inheritance are post-income tax. We should abolish this tax as it is double taxation.

This was not a compelling argument for those folks.

Lanny, it's hard for me to sympathize with that argument when I take the proceeds from my taxed paycheck to the store and buy goods with a sales tax upon them. You could also argue that my income is double-taxed if I take my reduced pay-check and hire someone else to do work for me, and the stream of money I provide to him is then further taxed by the government. And if he hires someone else, that's triple taxation!

There's no double taxation on income here, because the income accrues to two different people in two different taxable events. You may find this offensive on some level, but if you appeal to a universal rejection of "double taxation" you are going to open a can of worms that would invalidate almost every part of a rational tax system.

The income only taxed once argument is a little hard to swallow when you consider that long term owners of very successful companies have never paid tax on the "inside buildup" as their companies (and wealth) grow exponentially over long periods. Bill Gates and Warren Buffett are classic beneficiaries of this phenomenon.

Personally, I would like to see us go back to taxing ordinary income and capital gains at the same 28% maximum rate that was in place after passage of the 1986 Tax Reform Act (for two years). Estates above some reasonable exemption amount (like $5 million) could also be taxed at 28%.

I frankly find it galling that people who favor low tax rates (or none at all) on capital think it is perfectly fine to tax wages every which way to Sunday including the 15.3% payroll tax on the first $94,000 of salary. People who became wealthy as entrepreneurs and now earn most of their income from capital gains and dividends should be subject to at least as high a percentage tax burden as their secretaries. I don't think that is too much to ask of those who have benefitted most from American society.

I also think there needs to be more appreciation for the role of luck (broadly defined) in determining individual life outcomes. In this context, luck means everything from being in the right place at the right time, to receiving an excellent education to having a set of skills that happens to pay off very well in our society.

There's no double taxation on income here, because the income accrues to two different people in two different taxable events.

So if I give my little sister $2 for an ice cream cone, she should pay 40 cents of it to the government on top of the sales tax etc?

How is giving her money to buy something now different than giving it to her when I die? And why should the gov't (and, by extension, everybody else) get a piece of one and not the other?

I am not a rich man, by any means. But with the rate of savings that my wife and I have been maintaining for several years, our double payments on our mortgage, and our recent real-estate purchases, I expect that by the time I fully retire (20 years from now), we will be worth well in excess of $2,000,000. In 2026, that might not seem like very much money (it sure doesn't seem like nearly as much as it was 20 years ago) but it is, what it is.

I can't take it with me. But I have been paying taxes on that wealth (capital gains, income taxes, etc) all the while I was accumulating it. When I'm dead, I want my kid(s) to have all of it, every penny. That is why I work so very hard, to make sure that my children have have a higher standard of living than their parents.

That is the American Way.

I certainly don't want to work that hard and save so fastidiously, if the government plans on coming along and (at the point of a gun) take 28-33% (or more) of my accumulted wealth, away from my children and their children. WTF?!?!? Basicaly, if I leave my kid(s) 3 houses, they get 2 and the government gets 1.

I need to buy 3 houses to give my kid(s) 2 houses.

No I really don't think that is fair.

Jane,

This part I found most compelling.

But America's widening income distribution cannot be blamed on bequests. According to Piketty and Saez, while in 1929 the wealthiest Americans derived more than 70% of their income from invested capital, and only 30% from wages or entrepreneurship, by 1998 the very rich got only 20% of their income from investments.

This is due to our historically low interest rates. You just can't save and live on the interest anymore. The math just doesn't workout right.

In the 70's, my Father-In-Law was glad to pay 17% interest on his mortgage of his new home. Now, I can get a loan for a 3rd house, and pay 6.25% (and that would be a high rate with our credit rating.) I would walk out of a bank/lending institution that insulted me with any number of interest nearing 7%.

Because the borrowers are getting such a great deal on the money, the lenders are getting screwed royal. If you opened a Certificate of Deposit 20 years ago, you go 9-10% return each year. Now, you get 2.5 - 3% if you are lucky. And that is tying your money up for a very long time.

Nope, the wealthy still need to work hard (maybe more so than ever) to make the kind of money that they are used to, to live.

Bombadil, if you give her $2, no; if you give her $20,000 in cash to "go buy an ice cream," perhaps so.

All estates aren't equal. Say you have $5mm when you die: if it's because the 100 acres you bought
for $200,000 is now in a hot real estate market,
then you haven't paid income tax on the $4,800,000
gain. But if you have $5mm because you've made some wise mutual fund choices, you've probably paid taxes on the realized capital gains and dividends over all the years, meaning most of the gains have already been taxed. And many small businesses may have built up their equity over many years, but it could be simply profits that were already taxed at 35% but left in the company.
I know plenty of small business owners who, when they have to sell, get very little more than book equity. Any fair tax reform that taxes estates has to look at the nature of the estate not just the amount.

Bombadil, if you give her $2, no; if you give her $20,000 in cash to "go buy an ice cream," perhaps so.

That doesn't seem to establish the needed rule.

How about $20? $200? $2000? At what point is the wealth "filthy" enough that the State gets to seize part of it?

If I give her my mint-condition copy of Spiderman #1 as a birthday gift, does she have to pony up $15,000 tax for the gov't, even though it only cost me $2 and only has collectible (rather than inherent) value? (NOTE: I don't actually have one of these ...)

All estates aren't equal. Say you have $5mm when you die: if it's because the 100 acres you bought for $200,000 is now in a hot real estate market, then you haven't paid income tax on the $4,800,000 gain.

Maybe not, but if this 100 acres isn't in California (and protected by the 3rd rail of California politics, "Proposition 13") then you have paid huge amounts of Property Taxes. A $5,000,000 piece of property on Long Island New York, will cost you over $100,000 a year in Property Taxes. Try to NOT PAY and see what happens. They'll just come and take it from you. I know people in Nassau County who are paying $12,000 a year ($1000/month) in Property taxes on just a split-level ranch on a quarter acre lot. Ouch!

If your real estate asset grows from $200,000 to $5,000,000, you pay your taxes one way or another.

All estates aren't equal. Say you have $5mm when you die: if it's because the 100 acres you bought for $200,000 is now in a hot real estate market, then you haven't paid income tax on the $4,800,000 gain.

You haven't made the gain, either. It's an unrealized profit until you actually sell the land, at which time you pay the tax.

You have, however, paid ever escalating property taxes all those years.

So if you leave land to someone, they pay estate tax on it in proportion to its (currently) appraised value, and then the real estate market tanks before they have a chance to sell - do they get a refund for the tax they paid on the income they never received?

I think the law allows you to give a $20,000 gift to anyone you want, once per year, without paying taxes. So if you are a millionaire and you want to transfer your wealth to your heirs (and not the government), the most efficent way to do is, is $20,000 per year, every year, until you are dead. And that $20,000 can be anything that has a value of $20,000. The IRS doesn't care, as long as you wait another year before you give them something else.

This is how the "medium rich" keeps their kids "medium rich." Although this law certainly doesn't help those who need to transfer whole pieces of property and real estate that are worth much more than $20,000.

Bombadil,

The wonderful thing about tax questions is that they actually have answers sometimes.

Gifts under $11,000 are not taxable to either giver or recipient. Over that amount, and the giver must pay the "gift tax," but it still isn't income to the recipient.

Gifts of appreciated assets benefit from a "carryover basis," which means that the law treats your Spiderman as though it were worth $2 at the time you gave it to your sister--no tax to you or her. (26 USC 1015(a)) If she sells it, she'll owe capital gains on it based on the difference between the sales price and $2.

If you leave it to her in your will, then the fair market value will be counted towards the possible inheritence tax, but she will benefit from the higher basis when she goes to sell it. 26 USC 1014.

Note that neither gifts or inheritences are included in gross income. 26 USC 102(a)

There's a huge difference between 60% and 0%. Surely some figure in the middle makes more sense than either extreme?

Estate tax should be at least as high as the rate for long term capital gains, because the person inheriting gets the basis of any inherited assets set at the value at the time of inheritence. This actually SIMPLIFIES tax compliance because otherwise who knows what the basis is for all those assets?

Bombadil,

The wonderful thing about tax questions is that they actually have answers sometimes.

Gifts under $11,000 are not taxable to either giver or recipient. Over that amount, and the giver must pay the "gift tax," but it still isn't income to the recipient.

Gifts of appreciated assets benefit from a "carryover basis," which means that the law treats your Spiderman as though it were worth $2 at the time you gave it to your sister--no tax to you or her. 26 USC 1015(a). If she sells it, she'll owe capital gains on it based on the difference between the sales price and $2.

If you leave it to her in your will, then the fair market value will be counted towards the possible inheritence tax, but she will benefit from the higher basis when she goes to sell it. 26 USC 1014.

Note that neither gifts or inheritences are included in gross income. 26 USC 102(a)

Also, for your hypothetical of the tanking real-estate market: you won't get the inheritance tax back because it accurately reflected the value of the land at death. But you WILL benefit from the capital loss when you sell, which can offset gains from other sources and thus shield you partially from those taxes.

(note: this post originally included links to the US Code sections I cite, but that caused it to be held up in moderation, so I'm posting the non-linked version)

Mr. Lyman:

Thanks for the outstanding response. Questions do indeed sometimes have answers.

Half Sigma, the estate tax phaseout also phases out the basis step-up.

And while carryover basis may be complicated, it seems to me to be easy to simply say to people "if you can't provide proof of the original basis, then we'll tax you on the whole sale."

I'd be inclined to regard FMV at death as a more complicated basis scheme than carryover. Carryover requires records from years ago, which for substantial assets (like real estate, big chunks of stock) probably exist. FMV requires a present day assesment, which is easy for liquid securities but tough for land, privately-held equity, or something like a control block of public stock.

Unless you believe that we can continue our policy of "borrow & spend" indefinitely the relevent question is not is an estate tax good or bad. The relevent question is an estate tax worse or better then other taxes.

I see all kinds of arguments that an estate tax hurts savings and investments. but I have been hearing these type of arguments for a quarter a century from republicans and as a consequence we have cut marginal tax rates and passed laws making savings tax exempt. And none of them have worked. The saving rate has plunged and investment has been a smaller share of the pie.

So when we are talking about the estate tax there are two relevant quesions.

One, will it hurt economic growth, investment and/or savings more or less then a comparable alternative --presumably an income -- tax. I have seen plenty of evidence that an estate tax is the least bad tax and none to the contrary.

Second, why should I as a middle class american pay higher income taxes so that the Waldens, Bushs, Kennedys, etc., will never have to work a day in their lives. Ok, so it is just a few hundred dollars. But that few hundred dollars is important to me. And the evidence that encouraging greater income inequality generates greater savings and investment is also almost completely absence.

So will somebody answer my questions and quit making these irrational emotional arguments that are virtually irrelevant.

Brittain33

I actually suggested a bit more. What I offered up was offering a single tax at some point in the income-sales chain. Either when income is earned, spent or at death, whatever. I am rather agnostic when the tax is levied, although from what I have read a single sales tax would be the least distortive to the economy.

So in your instance, after paying income tax you could purchase whatever goods you want and pay no sales tax. The tax on income would simply need to rise to accomadate this.

In the end I believe this would most efficiently be done by removing a lot of the tax deductions currently in place on income.

As for the multiple taxation, since every individual is responsible for the taxation on their income. It is true that if you hired a gardener, then they would pay tax on their income, ad infinitum.

It is rather late in the day, but I believe such a system, when summed together, would equal the total GNP of the nation. This single income tax would then be somewhat equivalent to a single income tax on the whole US economy. But I need to think about that a bit.

Although as I stated earlier, I would be fine with removing the income tax and replacing it with the sales tax. What I think is a bit irrational is our current system of taxation, which as I understand it is.

1) Tax Income

2) Tax Spending (through sales tax, property tax, etc...)

3) Tax Investments

and if any wealth remains at the end of life

4) Tax remaining estates

I simply think it would be far simpler, and would require far fewer lawyers, accountants, paperwork, etc... to simply levy all of societies taxes at a single point. Wherever that point maybe.

This would have the secondary benefit of reducing a lot of the costs associated with tax collection. Professor Becker had a good blog about this.

BC

If by "inside buildup" you are referring to the unrealized capital gains that say Bill Gates has accrued as the primary owner of Berkshire Hathaway, that is certainly something to be concerned with.

Although I might suggest that large amounts of unrealized capital gains can only arise when investments/firms are succesful. Succesful investments and firms also tend to employ a large number of employees who would pay income tax.

I am not sure how many people Berkshire and it's associated affiliates employes, and what their annual tax burden is, but given the large number of firms he owns it must be quite large. And I am quite certain that Microsoft employs a huge number of high salaried workers who pay an enormous income tax annually.

Although my main argument wasn't one around equity, but simplicity. I simply think far too time and money is centered on tax avoidance, and a simpler system would be better for everyone (except lawyers and accountants that is).

My apologies that should be Warren Buffett as primary owner of Berkshire Hathaway

Brittain33

Sorry for the long post but I have re-thought my position. I think what any sensible tax strategy should seek to do is for a given level of tax receipts

T

minimize the total cost for collecting that tax. This cost would be composed of

D = Deadweight loss to the economy imposed by the tax

C = Direct costs of collecting the Tax

I = Penalty for Inequality caused by the taxation.

The strategy, or set of strategies, S, that accomplishes this goal would be the one that I think is most easily justified.

The question would then be does the death tax belong in such a strategy. Without serious analysis, my gut reaction would be no. Because of the large costs imposed on the economy (through lawyers, accountants, etc...). Although I could be convinced otherwise.

Saw an interesting proposal in a NYT op-ed a couple of years ago. The writers, whose names I forget, proposed replacing the regulations on gifts and the estate tax with single system. You can give each kid up to a million tax free during your life, or at your death, or in some combination. After the million, a gift or a bequest gets taxed at the usual rates. The idea seemed reasonable to me, though I'll admit that I haven't seen a good critique of it.

One of the reasons I favor some sort of estate tax, though probably not the current one, is that trusts or bequests, if large enough, seem to have much the same effect on people as welfare. Think of Patrick Kennedy, or Paris Hilton, if you need examples. (BTW, a Paris Hilton immitator can be heard on the local classical music station (King-FM) thanking the Senate for trying to give her lots of bucks.)

"we have cut marginal tax rates and passed laws making savings tax exempt. And none of them have worked. The saving rate has plunged and investment has been a smaller share of the pie."

I wrote about this at my blog and concluded that this is an example of bad data gathering. The savings rate is not really that low.

Jane,

It's great news to me that the proposed elimination of the estate tax also eliminates the step-up in tax basis. The two measures together make great economic sense.

lannychiu's single tax is a swell idea. A decade ago - when "flat tax" talk was all the rage - I devised a concept for a single tax that I thought was unique and had merit. For a non-blogger like me, is there any place in the blogosphere where it would be worthwhile to post a 600-900 word essay outlining this idea?

Ken

Lannychiu,

As it happens, both Warren Buffett and Bill Gates are strong opponents of eliminating the estate tax. Indeed, Bill Gates Sr. (father of the Microsoft CEO) is a prominent activist on this issue.

The Bill and Melinda Gates Foundation is already the largest foundation in the country by far and is likely destined to receive most of his remaining wealth when he dies. Warren Buffett also plans to leave the bulk of his wealth to his foundation so that the money, as he puts it, can be returned to society in a hopefully useful and impactful way.

While giving one's money away to either a personal foundation or other established charities avoids the estate tax, it's fine by me. I happen to view all legitimate charitable giving as, in effect, a voluntary tax that allows the donor to choose who will benefit from his resources.

Finally, I do not believe a reasonable estate tax does any undue harm to the general willingness of entrepreneurs to invest and take risk. I define reasonable as equal to or less than the top income tax rate (currently 35%) after a sizeable exemption of, perhaps, $5 million ($10 million for couples). There could also be an optional alternative maximum tax of 25% of the gross estate (after debts and funeral expenses) with no exemptions.

One of the reasons I favor some sort of estate tax, though probably not the current one, is that trusts or bequests, if large enough, seem to have much the same effect on people as welfare. Think of Patrick Kennedy, or Paris Hilton, if you need examples.

Hmmmmm. No. No, I don't think that argument holds water.

Welfare creates multi-generational dependancy upon government entitlements and subsidies. It rots the foundation of society by creating an entitlement class of people who only take from government, but never contribute. They have no self-respect.

Paris Hilton (who ALSO has no self-respect) getting huge lump sum wealth transfers from daddy to get breast implants, lypo-suction, perfect teeth, a perfect @ss, a People Magazine body, and a sense of entitlement that shocks the bejesus out of the rest of us, costs society nothing (financially) even if it costs her, her dignity and credibility as a person. Daddy subsidizes her, not you or I. We don't have to buy People Magazine or watch "The Simple Life." We can turn the VCR off if someone puts her "Sex Tape" in the machine. Paris Hilton and her needless antics, do not have to be part of any society that you or I live.

The same can not be said about welfare. We are paying for it (and paying for those people who get it) whether we like it or not. It is compulsory for each of us to chip in and give them what they think they need.

It's different.

As it happens, both Warren Buffett and Bill Gates are strong opponents of eliminating the estate tax.
...
Warren Buffett also plans to leave the bulk of his wealth to his foundation so that the money, as he puts it, can be returned to society in a hopefully useful and impactful way.

BC,

Buffet's children, Peter and Susan, are on the board of this foundation. Well prepared wealthy people have many ways to pass their wealth on to their children without the government getting any of it. Some can even get a PR benefit from it. Not saying that is what is happening here but it can be done easily. The only people who will pay this estate tax that Bill and Warren support are those whose wealth is tied up in assets and can't afford good estate planning (family farmers, small business owners).

Estate tax: a tax on the unprepared or corporate welfare for the estate planning industry?

Why is Paris Hilton the poster child for the estate tax? Her parents aren't dead. And it looks as though she has made, and will continue to make, plenty of money through her entertainment ventures, so even if she gets not one penny of inheritance, she'll still be richer than any of us.

The other reason I am a supporter of the repeal of the estate tax, is my experience with very wealth people (which is rather limited) leads me to believe that their children spend much more money then is accounted for by interest on assets bequethed to them and can destory their trust funds with great rapidity.

If you think about the list of families you are worried about having gigantic fortunes

Gates
Buffett
Walton
Cox
Hilton

All of these families have generated their wealth in the current century. Which leads to the question what happened to the fortunes from the prior century. I don't know this to be true, but I believe a lot of that wealth was destroyed by lazy generations that were brought up in luxury.

Paris Hilton is a good example, she certainly does earn some money with her media ventures, but do you believe she earns more than she spends?

Wealth that was destroyed by lazy generations that were brought up in luxury is another argument that supporters of the estate tax make in favor of it. That is, being the beneficiary of substantial inherited wealth increases the probability of leading an unproductive life. Warren Buffett has also spoken to this point by commenting that he wanted his children to "have enough money to do anything but not enough to do nothing." In this context, he means a few million dollars each which is, of course, a pittance compared to his $35 billion or so fortune.

If there were no estate tax, I suspect considerably less wealth would find its way to charity via foundations or otherwise. I think the same would be true if the charitable deduction were eliminated in favor of lower marginal income tax rates.

With respect to family farms, ranches and small business having to be sold off to pay estate taxes, there is very little evidence of it happening very often, and there would be even less with an exemption of $5 million vs today's $2 million. When there are no family members that express an interest in entering the business, which is often the case, many of these get sold to public companies to improve the liquidity of the asset. That is probably a good thing even in the absence of the need for estate planning.

Warren Buffett has also spoken to this point by commenting that he wanted his children to "have enough money to do anything but not enough to do nothing." In this context, he means a few million dollars each which is, of course, a pittance compared to his $35 billion or so fortune.

Okay so this means that Warren can leave each of his kids $5 Million. Very nice that he is doing this voluntarily but of course they could also be getting $200,000 a year plus expenses from the foundation which might just have an annual meeting in Cancun or Venice. The point is the government has no say in it. But Warren thinks its just dandy that the government can have half of another successful businessman's measley $25 million dollar estate. Doesn't he get to leave "enough" to his offspring too?

The current exemptions to the tax are on the whole estate too, not on the inheritors (I think). So if our hypothetical "not quite as rich as Warren" person has 5 or 6 kids they lose out just becuase they have siblings.

With respect to family farms, ranches and small business having to be sold off to pay estate taxes, there is very little evidence of it

Every farmer I know with a reasonable estate is employing estate planning to reduce his estate and maximize his predeath transfers. Please justify this wealth transfer to the estate planning industry. A pity the poor farmer who dies sooner than he plans to or fails to plan at all.

Again, the very rich, whose wealth we all seem to think is fair game, don't pay this tax. After all they didn't get rich because they were financial foolish.

If there were no estate tax, I suspect considerably less wealth would find its way to charity via foundations or otherwise.

I believe that a charitable foundation need only spend 5 or 10% of its revenues on real charity to qualify. The Buffet Foundation may be wonderful (I don't know), but again that is a choice that only the very wealthy get to make.

Paris Hilton's a good example because her parents are inheritors who spoiled their kids rotten and trained them to be the overindulged attention whores they are.

Lanny Chiu, thank you for the thoughtful reply. I appreciate the sentiment about dead weight loss and efficiency--I just don't share your gut feeling that the estate tax isn't part of it. But the discussion of an ideal tax system merits further thought than what I can supply.

Paris Hilton's a good example because her parents are inheritors who spoiled their kids rotten and trained them to be the overindulged attention whores they are.

If that's the case, then the estate tax is apparently not having the salutory effects that its backers claim: the big Hilton estate has not been "broken up." If it's a failure at its intended purpose, why keep it?

Besides, poor people can be bad parents, too, but that doesn't mean we should tax them more.

My understanding is that charitable foundations are required to spend a minimum of 5% of their assets per year on grants consistent with the foundation's mission. The intent of the law, I believe, is to allow the foundation to sustain itself and continue to fund its charitable mission over the long term.

Believe it or not, there are now approximately 25,000 family foundations in the U.S. They are not simple to set up and there are significant legal fees, but some have assets as low as $5-$10 million. I don't have a problem with holding the annual foundation meeting in a nice locale or paying a family member a good salary to administer it. I do have a problem with huge fortunes being able to pass to heirs tax free forever. One of the last things we need in this country is a permanent aristocracy based on inherited wealth, no productive work, and very low taxes (compared to tax rates on wages) on dividend and capital gains income.

"This convoluted design was meant to keep the projected cost of the tax down when it was passed in 2001, with the intention of making it permanent later."

Not precisely. There's a law (or a rule, really, since it only impacts Congressional business) that says that any revenue-changing bill has to pass through a particular super-majority, or else it reverts after ten years. The Republican majority tried to have the estate tax repeal be permanent when it was first passed, but they couldn't get the requisite super-majority. They could a majority for repeal, since the main appropriation bills do have to be passed and cannot be filibustered since reforms that the Democrats took when in power to prevent Republicans from filibustering them at the time.

One of the last things we need in this country is a permanent aristocracy based on inherited wealth, no productive work, and very low taxes (compared to tax rates on wages) on dividend and capital gains income.
But that is exactly what you get with these foundations. Put your tax free $5M (or whatever "enough" is) in the bank. Draw $200 or $300k to sit on a board a hand out Dad's money ("administrative" costs count towards the 5% distribution requirement). That brings just the sort of power and connections that get you on a corporate board or a great investment opportunity. Sure sounds like aristocracy to me. But now the only people who get to take advantage of it are those saavy enough and with enough liquidity to pay the expensive legal fees noted. Good for the estate management business but I don't conisder that a "productive" business.

Under the $5 million dollar exemption a man with a $10 million dollar estate (hardly Buffet territory) and five kids gets to leave them each with a million. Not bad I suppose but he worked hard and would like to do better them - sadly he died before the estate planning was completed. Bill has one, Warren has three, they're free to give their money to charity or the government if they wish. Why do they want to have a say in what the mere millionaires do with theirs?

Sorry - confiscatory taxes that rich don't actually pay - pet peeve.

BC: "I also think there needs to be more appreciation for the role of luck (broadly defined) in determining individual life outcomes. In this context, luck means everything from being in the right place at the right time, to receiving an excellent education to having a set of skills that happens to pay off very well in our society."

What you call "Luck," I call "Good Life Choices." People choose the skills they develop...People also choose to take risks they hope will pay off. Where would Bill Gates be today if he'd chosen to work at IBM after graduating with honors from Harvard?

Even if you're born with the combination of genetics that gives you phenomenal hand-eye coordination, fast twitch muscles and 7 feet of height, reaching (and staying) in the NBA requires making a lot of correct choices and hard work over the years. The same is true of physicians, traders, entrepreneurs, etc.

"Luck" is what failures use to try to make themselves feel better.

I think the two primary determinants of a life outcome are luck and effort. Both are important. Effort includes responsible behavior, sound choices, willingness to take risks, hard work, etc. Luck, which I've said I think is underappreciated when debating tax policy, includes being in the right place at the right time. For example, someone graduates from college in the mid to late 1980's, goes to work for Microsoft as a programmer, and receives a bunch of stock options as part of his or her compensation. The company does great and the options make the programmer at least moderately wealthy. Fast forward 15-20 years, young college graduate goes to work for Microsoft. Works just as hard and is just as smart. Also receives stock options but does not become rich. Others take risks and go to work for startups that may be soundly conceived but still fail for whatever reason.

Buffett has commented that he and partner Charlie Munger have brains wired to help them make good investment decisions, a skill set that pays off enormously in our society. Of course they work hard at it, but they also credit their natural talents and attributes (brain wiring in this case) for a good part of their success.

One of the last things we need in this country is a permanent aristocracy based on inherited wealth, no productive work, and very low taxes (compared to tax rates on wages) on dividend and capital gains income.

Precisely the thing we don't have, except possibly within the context of some charitable foundations as another poster has elaborated. People who inherit wealth and don't show a gift for productive work are the best positioned to destroy a fortune, rapidly.

Luck, which I've said I think is underappreciated when debating tax policy, includes being in the right place at the right time.

If it is "underappreciated," it may be that it is underappreciated by persons who think it can be codified into a coherent tax policy apart from some fairly heavy-handed socialism. Or perhaps is is very correctly appreciated by persons who recognize that such an appreciation, in practice, cannot be readily separated from envy politics in the lower classes and ehanced avoidance schemes by the wealthy.

Most "luck" is defined tautologically; someone who capitalizes on a good idea can only be identified BECAUSE he capitalized on it. Meanwhile, someone else confronted with the exact same set of circumstances, might well decide that s/he is content with his or her present lot, and not bother to put in the effort.

Question: Why should the wealthier of these two parties be identified as the "luckier" one (since all the external observer can see was the result) and taxed more heavily, with the taxes then redistributed to both?

I don't dispute that some people do start out with a better lot in life than others; and yet poor people become rich through hard work and rich people become poor through profligacy, and such has been the case from time immemorial. Focusing on eliminating public obstacles to success (uneven quality of public education, crime and urban decay, etc.) would be a far more productive use of time and money, methinks.

Max Sawicky tells us that you have ignored him for years but pay attention to his review of the Piketty & Saez data. It does not say what you think it says.

The Sawicky piece is interesting, thanks for bringing it up. He says:

It is true that as things stand, the impact of the tax on distribution is negligible. That's no reason to repeal it. There isn't much in the way of alternatives if you want to reduce wealth inequality, which we suspect is not high on the list of goals for Mankiw and Galt. It's not like M&G have some superior method of redistribution in mind.

So, is he accurate? Do any of the opponents of an estate tax here have a suggestion for a better way to reduce inequality, or is it the case that you are trying to bring up things like the inaccurate comparison to the 1929 statistics because that sounds better than "I want to to get rid of the estate tax because I think increased inequality is a good thing"?

Comments are Closed.