Unwilling to Inherit the Wind
Unwilling to Inherit the Wind Ifor one, am converted by Irwin Stelz-er's "Inherit Only the Wind" (May 26). In fact, his persuasive logic demands not only that we conservatives support "a Draconian...
...Gee, wouldn't that be great...
...With equal taxation of capital gains, conservatives would be perfectly consistent in opposing affirmative action and inheritance taxes, since both are examples of massive government intervention...
...But does he really believe that, absent family dynasties, we will be left at the mercy of either government or America's corpocracy...
...They have not done one thing more than children who are doubly cursed by losing both parents and then having to pay inheritance taxes...
...As citizens, we should be nervous about leaving all long-term planning in the hands of either state or corporate bureaucracies...
...Post war Germany and Japan saw nearly total wealth confiscation, stunning increases in labor-force participation and effort, and high levels of economic growth...
...In fact, his persuasive logic demands not only that we conservatives support "a Draconian inheritance tax," but that we go a step farther: We should impose pre-death inheritance taxes...
...By taxing financial wealth, we of the "professional" class serve our own interests by diminishing competition from the financial-inheritor class...
...So, taking away wealth to raise take-home pay is a double producer of incentives to work...
...Stelzer sees part of this problem and leaves spousal inheritances intact...
...If the government could assume the $20 trillion of household wealth in the country, it could pay off the national debt and, with a little good investing and some prudence with regard to spending, eliminate all taxes and run a balanced budget forevermore...
...More loopholes aren't the answer...
...As a recipe for equal opportunity, this gets an "F...
...All I have suggested is that it might—only might— be the case that there are real economic benefits to taxing inheritances more severely and income from work less severely...
...A second problem is the random nature of the inheritance tax...
...But if we walk down this road of economic thought experiments, why stop with confiscatory inheritance taxes...
...Every partnership in the country, be it of familial or business nature, would Correspondence have to live with the prospect of a financial assault from Uncle Sam just as it is reeling from the loss of the decedent's human contribution...
...Why work when you don't have to...
...So, what's wrong with doing it just a bit, the way Stelzer suggests...
...Lindsey's economic objections are aimed largely at a proposal I haven't made...
...Those who are particularly well endowed with this kind of wealth hold a disproportionate amount of control over public policy...
...Let's tax that money again and again, two or three times...
...It is our system of property rights that has fueled the engine of capitalism, and individuals should be free to dispose of assets as they choose, whether it be to churches, charities, or children...
...the race might go to the swift, or the wisest, or the brightest, or the hardest working...
...Rather than raise inheritance taxes, which bear no relation to the deceased's tax-free assets, why not collect capital-gains taxes at death and eliminate inheritance taxes entirely...
...Diana Furchtgott-Roth Washington, DC Like most thought experiments gone awry, Irwin Stelzer's case for estate taxes begins with a faulty premise...
...Alex Castellanos Alexandria, VA So Irwin Stelzer says it's okay for children to receive expensive education and annual $10,000 gifts from living parents, but orphans are twice damned—no parents and no means of support...
...I suppose it follows logically that confisca-tory inheritance taxes will mean fewer big-spending liberals...
...Which brings me to the final and most interesting point in the correspondence...
...But some high school grad who starts a mailorder business in his garage, or builds a fleet of taxi medallions, loses half of it to the state...
...Even better, index capital gains for inflation at the same time...
...I suppose that Stelz-er's arguing that confiscatory taxes on financial wealth won't matter much because the really important kinds of inter-generational transfers won't be touched is simply a candid expression of this class interest...
...As conservatives, we should find this a repugnant state of affairs...
...All because I suggested that there might be an inconsistency between opposing the more-equal opportunity supposedly created by affirmative-action programs while at the same time favoring a reduction in taxes on the financial inheritances that by their very nature make opportunity less equal...
...In non-jargon, a rationalperson with inherited wealth is less likely to tumble out of bed on a cold morning to get to his job than is someone living from paycheck to paycheck...
...We would have set the stage for competition based on the varying intrinsic merits of each competitor...
...Why not confiscate all wealth...
...Stelzer correctly notes that human capital, genetic potential, and all of the non-financial advantages that parents are allowed to impart to their offspring are untaxed...
...The inheritance tax is the IRS's feeble attempt to remedy this ludicrous situation...
...Lindsey also worries that by eliminating "dynasties" we will leave ourselves with only government or "permanent corporate bureaucracies" as instruments of long-term economic development...
...Should a hard-working couple who die at 40 in an airplane crash leave their three young children destitute...
...Those of us with the right educational pedigrees or profitable genetic endowment can enrich our children tax-free...
...While greater wealth makes you lazy, higher hourly take-home pay tends to make you want to work more...
...More formally, the elasticity of labor supply with respect to wealth is negative...
...A third point making inheritance taxes even worse than one-time wealth confiscation has to do with the time-horizon of decisionmaking...
...Nevertheless, Stelzer has identified one glaring tax distortion: Capital-gains taxes can be completely avoided by holding assets until death...
...So there are two key premises on which to rest a conservative case for substituting estate taxes for income taxes...
...But we have never permitted individuals to dispose of assets as they choose—for example, to convert their vacant lots into waste dumps...
...use the proceeds to lower marginal tax rates, and you again increase the supply of labor by making work more profitable, providing what Lindsey accurately describes as "a twofer . . . a double producer of incentives to work...
...Much of our industrial structure (autos and chemicals are two examples) was developed by dynasties...
...So tax away the inheritance and you increase the labor supply from slug-a-beds...
...And think how hard we'd all have to work now that we're suddenly impoverished...
...Death is rarely convenient...
...The budget would be unchanged, since the CBO estimates that the gains from the first ($15 billion annually) would just about equal the loss from the second...
...After all, every hardworking, red-blooded American of any philosophical predisposition moves several degrees toward the political right upon receipt of his or her first paycheck and firsthand exposure to the difference between "gross" and "net...
...He cites studies, which all seem quite sensible, that these things are much more important than mere money when it comes to producing successful children...
...If we were honest about it, we could all advocate high or confiscatory inheritance taxes on financial wealth out of pure class interest...
...But when deputy treasury secretary Lawrence Summers says that those who call for low taxation of financial wealth are motivated by "greed," the fine line between class interest and class arrogance has been crossed...
...Only in Communist utopias does equality of opportunity imply identical circumstances...
...Why give those children a free ride, just because their parents are not pushing up flowers...
...one is economic...
...Wealth makes people lazy...
...Furchtgott-Roth somehow found in my article an attack on property rights, on individuals' freedom "to dispose of assets as they choose...
...as Lindsey correctly summarizes my view, "the elasticity of supply of labor with respect to wealth is negative...
...These changes would allow tax-neutral decisions on sales of houses and stocks...
...History does show some examples of this...
...True fairness, as well as economic efficiency, commends lower, not higher, inheritance taxes...
...Why should the advantages of parents with Ivy League connections escape relatively untaxed...
...But, so what...
...Lindsey says that real property matters less, and knowledge and genetic endowments more and more, in deciding who gets ahead in this world...
...Of course, purity with regard to principle is not a cornerstone of current American tax policy...
...But what should we do about children who benefit from their parents' earnings before those parents have kicked the bucket...
...We must tax our children's inheritances before we leave them the money...
...Parental lifespans differ significantly, with wealthier parents often living longer...
...So, if you care about promoting saving, wealth creation, risk-taking, sound business planning and promoting long-term time-horizons, a confiscatory inheritance tax really is a terrible idea...
...He notes that if you work hard and earn an income of $1.2 million, you must pay $500,000 in income taxes...
...Furchtgott-Roth's proposals for tax reforms sound quite sensible, but for reasons separate from those that might support higher inheritance taxes...
...Yet at this very moment, the children of the living rich are cheating our tax system and getting away with it, riding around in their parents' cars, living in their parents' homes—and paying no taxes on this unearned income...
...Three generations of big government have anesthetized us to the critical visionary and developmental role of families and left us with the perception that only government can accomplish long-term tasks...
...Surely, too, our economy is sufficiently fluid not to have to rely solely on "dynasties" to develop and introduce new technologies and products that existing corporate organizations shun...
...After all, many greedy rich people are known to evade inheritance taxes by spending money to benefit their children while they, the parents, are still alive...
...We are in the process of saying farewell to an era in which financial wealth dominates society's stored riches...
...I share his antipathy to assigning such a role to government...
...And that those benefits should be compared with the social costs of such a policy...
...I am prepared to take his word for it, especially since Charles Murray says his own analysis of a large body of data leads him to a similar conclusion...
...This is true...
...A close look at the details shows that, from an economic point of view, confiscatory inheritance taxes are even worse than simply confiscating all wealth...
...Lawrence Lindsey Washington, dc Irwin Stelzer responds: Hell hath no fury like a conservative challenged, especially if that conservative is a colleague, eager to distance himself from a thought experiment...
...The socio-political case is that big inheritances tend to make the heirs big-spending liberals...
...One could make the case that the conservative virtue of work is therefore aided by the presence of inheritance taxes...
...Surely, Mike Milken's gift to America is the restructuring of capital markets to make possible challenges to corporate bureaucrats who wildly underperform shareholder expectations...
...Since I see no connection between such confiscation and anything I suggested we might want to think about, I leave him to wrestle with that particular nightmare...
...But what of orphans...
...Perhaps...
...The same goes for star athletes who trade on their brawn or movie stars who trade on their beauty...
...Castellanos offers in response pictures of tykes and orphans...
...One is socio-political...
...A modest proposal, one about which I am sure I shall hear more in the ecumenical corridors of AEI...
...A confisca-tory inheritance tax guarantees this effect, because death and taxes become equally certain events—and happen again and again and again...
...But if you simply inherit $1.2 million, you pay nothing under the plan now being advanced in Congress...
...What have the little tykes done to earn these riches...
...I nowhere argued, because I do not believe, that inherited wealth "corrupts" its recipients...
...The hard question is which restrictions are reasonable and which are not...
...Gone is the age when the inheritance of real property mattered much...
...The concept of hitting wealth hard by confiscating inheritances and then using the revenue to reduce income-tax rates is a twofer from this maximizing perspective...
...It would not automatically go to those who had the best-heeled and most generous parents...
...Knowledge, acculturation, and genetic endowments that make one a "professional" are, on average, the best way to be among the best off in today's society...
...The inheritance tax says that the producer of wealth must pay an income tax and then may be taxed a second time...
...We'll all be better off if we confiscate previously taxed income before it benefits an undeserving generation and corrupts it...
...Nothing in my article takes the next step of suggesting that we confiscate all wealth, a non-proposal that Lindsey then spends considerable time attacking, with considerable force...
...What a loophole...
...Blue-blooded inheritors never have this experience and are therefore more predisposed to the government spending other people's money...
...Let me start with Castellanos's wry response...
...One of the key principles of good tax policy is that income should be taxed once and only once...
...Without a doubt, economic growth would take off...
...Nuff said...
...The first natural problem with democratic wealth confiscation by legislation, as opposed to its destruction by conquest and wartime, is that the public tends to think that if the government did it once, they'll do it again...
...Multigenerational efforts are important for economic development...
...Turn a one-time economically efficient wealth confiscation into a fear that it could happen tomorrow, and you have all the disincentives of a capital income tax: no incentive to save, build a business, or take risks...
...Nothing...
...Real-estate development and preservation, from farm land to Rockefeller Center, requires a time-horizon that spans generations...
...You don't know when the government is going to take it all away, and consequently planning becomes rather difficult...
...I am variously accused of wanting to "confiscate all wealth" (Lindsey, an AEI colleague), bring about the starvation of orphans (Castellanos), and convert our great nation into a "Communist utopia" (Furchtgott-Roth, another AEI colleague...
...But he ignores the fact that for someone to inherit $1.2 million, some benefactor had to earn $2.2 million and pay $1 million in income taxes in order to leave the estate...
...The economic case is similar...
Vol. 2 • June 1997 • No. 38
