by Doctor Science
One of the things that doesn't really get examined enough in discussions of US economic inequality is inherited wealth. It's obvious to me, at least, that inherited wealth can be expected to be an *enormous* problem with any "level playing field" expectation -- after all, historically the rich have been aristocrats, who by definition inherit their positions.
But how much of an effect does it really have in the US? Don't most rich people get that way from money they collect during their careers?
Here's the Wall Street Journal on "The Decline of Inherited Wealth", for instance:
1. According to a study of Federal Reserve data conducted by NYU professor Edward Wolff, for the nation’s richest 1%, inherited wealth accounted for only 9% of their net worth in 2001, down from 23% in 1989. (The 2001 number was the latest available.)Wow, that's really convincing! Especially the multi-millionaires who don't *say* they got their money by inheritance -- totally believable, I'm sure. And that Spectrem Group study, behind its paywall -- also completely convincing. I can't find the Wolff quote.2. According to a study by Prince & Associates, less than 10% of today’s multi-millionaires cited “inheritance” as their source of wealth.
3. A study by Spectrem Group found that among today’s millionaires, inherited wealth accounted for just 2% of their total sources of wealth.
So I did a quick-and-dirty study of my own, starting at the top. I put together a table of the 21 wealthiest Americans, according to Forbes. For each, I listed whether they out-and-out inherited their fortunes, their parents' occupations, and estimated their pre-college social class.
1. 10 out of 21 got their money by inheritance: the Walton family, the Koch family, Abigail Johnson, and the Mars family. The Kochs and Johnson helped their money grow to some degree, but they started out with a *lot* of it.
3. 3 of the remaining 11 IMHO started out as upper class, which I define as "able to pay for an Ivy League college education": Bill Gates, Warren Buffett, and Donald Bren. They all had substantial family resources to fall back on, even though their families were by no means at the Walton/Mars/Koch level of wealth.
4. 5 of the remaining 8 came from families that I would call "upper-middle class", i.e. they would probably need loans for the Ivy League: Sergey Brin, Larry Page, Michael Dell, Steven Ballmer, Paul Allen. These 5 plus George Soros (WWII refugee) had a great deal of "cultural capital": their parents were in "knowledge" and/or technical fields, what I call "upper-middle tech" class.
5. Micheal Bloomberg is from a middle- to upper-middle-class background: he probably needed grants or scholarships as well as loans to go to Johns Hopkins.
6. Larry Ellison is the only one who came from a below-median-income family.
I don't use the same classification system as Born on Third Base, which looked at the sources of wealth of the Forbes 400 from 1997. That report classified Bill Gates as merely "born on first base", because he didn't inherit $1 million; similarly, Warren Buffett -- the son of a 4-term congressman -- would probably count as only "first base". But by the standards of the US as a whole, they definitely counted as upper class from birth, even if the layers and distinctions within that class are foreshortened from my lowly perspective.
If a student is looking for a paper topic, going through the rest of Forbes' list might be quite worthwhile -- especially if you can get the data out of Born on Third Base and compare them. So far, the American myth of "anyone can do it" is looking pretty mythical.
I frankly find it *hilarious* that the Koch brothers are libertarians -- surely nothing is less libertarian than inheriting your money: it's the very definition of unproductive dependence. Even if it really, truly is getting your money the old-fashioned way.
Great post.
I hate you and Jacob for that.
Well, no, not at all.
But: I postponed my big lead-off post, on income inequality, because just as I was putting it together, Jacob posted his, using the exact same Brad deLong post I was leading with.
So I canned that post.
I figured it was no big thing, since the saving grace of income inequality as a topic is that it will always be there.
So I figured I'd just wait for the comments on Jacob's post and the topic of income inequality to die down, and a few days to pass, and I could come back with a revised post on income inequality.
I'm now seeing a tiny flaw in this plan.
Good thing there are other topics I'm interested in. But, arrgh.
Great posts by Jacob and Dr. Science. I feel extremely redundant in having been asked to join Obsidian Wings.
Possibly it might be useful for us to coordinate a bit on topics we'd like to address. Possibly not.
Posted by: Gary Farber | September 22, 2010 at 12:42 AM
Hey! Your post on eggs is great, too!
Coordination is for the weak. Or the paid, anyway.
Posted by: Doctor Science | September 22, 2010 at 12:46 AM
"Hey! Your post on eggs is great, too!"
I've gone all my blogging life waiting to read those words.
Posted by: Gary Farber | September 22, 2010 at 12:57 AM
I join the kudos to you, Doctor Science, on your first few posts. :)
But in regard to the first---and most official sounding---point made in the 2008 Wall Street Journal blog post you cite, namely...
... I think it must be remembered that 1% of Americans represents roughly 1 million households.
As such, I think it behooves us to examine the actual Federal Reserve data and not just make inferences from the inherited wealth of the 21 richest men in America.
The Federal Reserve data in question comes from its "Survey of Consumer Finances" and a good summary can be found in the following 2003 paper by the director of the Survey:
Arthur Kennickell. "A Rolling Tide: Changes in the Distribution of Wealth in the US: 1989-2001"
http://www.federalreserve.gov/pubs/oss/oss2/papers/concentration.2001.10.pdf
There we see from Tables 6 and 10 (pp. 18 and 22 of the PDF):
======
1989
======
Net Worth Cutoff defining 99th percentile
$3.1 million (inflation-adjusted to 2001 dollars)
[Derivation: Taken from the "Min. NW (thou.)" line at the bottom of Table 6]
-------------------
Average Net Worth of Top Percentile
$7.9 million (inflation-adjusted to 2001 dollars)
[Derivation: Divide the $7,307.7 billion net worth of the top percentile listed in the top line of Table 6 by 1% of the 93.0 million total US families found at the bottom left of table 6]
-------------------
And thus if the average family in the top percentile inherited 23% of its wealth as Wolff calculates, then:
Average Inherited Wealth in Top Percentile
$1.8 million (inflation-adjusted to 2001 dollars)
======
2001
======
Net Worth Cutoff defining 99th percentile
$5.9 million (2001 dollars)
[Derivation: Taken from the "Min. NW (thou.)" line at the bottom of Table 10]
-------------------
Average Net Worth of Top Percentile
$13.0 million (2001 dollars)
[Derivation: Divide the $13,885.2 billion net worth of the top percentile listed in the top line of Table 10 by 1% of the 106.5 million total US families found at the bottom left of table 10]
-------------------
And thus if the average family in the top percentile inherited 9% of its wealth as Wolff calculates, then:
Average Inherited Wealth in Top Percentile
$1.2 million (2001 dollars)
==========================
Now what is the deep meaning of this drop of roughly $600,000 between 1989 and 2001 in the average inheritance of the top percentile of households?
I don't know, but I'm inclined to say that this might not signify much, if anything, with respect to the 2001 cohort of the top 1% being more self-made than the 1989 cohort of the top 1%.
To say any more though, I'd first want to see some data about the higher moments, and not just the mean, of inheritances. I'd also want to know the differences in estate tax code and charitable deduction tax code for the prior generations that bequeathed the inheritances to the 1989 and 2001 cohorts. And I'd certainly want to know the differences in stock/bond/real estate/etc. market performance during the lives of those prior generations who bequeathed the inheritances of the 1989 and 2001 cohorts.
In closing, I'd like to express my hope that the above somehow helps some quizzical reader of this fine blog, thus justifying the sleep forgone by me tracking down this info. :)
Posted by: William Kaminsky | September 22, 2010 at 03:42 AM
Hmmmm, on behalf of proletarians of all lands ;), I probably should add the following comment:
It's questionable, if not downright obscene, to use the phrase "self-made" in regard to anyone who makes their first million by inheriting it. And indeed, it seems that that the top percentile of households by wealth in both 1989 and 2001 enjoyed such million-dollar inheritances.
Posted by: William Kaminsky | September 22, 2010 at 03:54 AM
The first comment is deeply ironic, given that Gary's pre-OW track record is one of noticing interesting things and blogging about them two weeks or so before anyone else does. So, Mr Farber, it seems the tables are turned.
Posted by: ajay | September 22, 2010 at 04:42 AM
Really, there's no point in carrying on.
Posted by: Gary Farber | September 22, 2010 at 04:55 AM
No, don't say that, Gary. You totally owned the egg issue. I can honestly say that there is no eggblogger whom I read with more respect.
Posted by: ajay | September 22, 2010 at 06:00 AM
Either that, or Gary has at least occasional use of a time machine that only goes back two weeks or so.
It seems that there would be some investment/betting opportunities to exploit, there, but maybe there are Higher Powers who would notice that kind of thing, but would tend to overlook a bit of blog-preempting.
In these matters, I am only an egg.
Posted by: Slartibartfast | September 22, 2010 at 08:10 AM
Slartibartfast - I love the Heinlein reference.
One thing about inherited wealth is that it's not just inherited wealth, it's also inherited opportunity (for lack of a better phrase). Whether that's legacy admissions into a prestigious university, access to fast-track or high prestige internships, or being able to "fail upwards" in multiple jobs, or even just the luxury of being able to both choose the best college (not just the one you can afford) and not have to work while in school, one inherits in-group status along with wealth.
Wealth + opportunity is synergistic, not just additive, IMO. However,I'm not sure how I'd break it down to do some analysis i.e. how to deconvolute the impact of inherited wealth vs. inherited opportunity on economic inequality.
Posted by: bluefoot | September 22, 2010 at 09:44 AM
Oh, no, my first non-guest post was a yolk.
Posted by: Gary Farber | September 22, 2010 at 09:47 AM
Expanding on bluefoot's comment, simply growing up among people who know what to do with money and being comfortable with the world of investing is a big advantage that has a multipicative effect on the advantage of simply being given even a moderately sized pile of money, I would think.
Randomly hand a blue-collar 25-year-old a million bucks and see how much good it does him relative to the kid of a wealthy investment banker.
Posted by: hairshirthedonist | September 22, 2010 at 10:27 AM
This is an interesting yet incomplete thought process. It implies the American dream is a single genrational phenomenon.
Yes, Bill Gates and Michael Dell and Paul Allen came from upper middle class families. The interesting analysis would be how their parents, or grandparents, got to be upper middle class.
The American dream my parents taught me was the dream of working hard to provide a better life and more opportunity for your children. In the event that the Gates or Dells succeeded in doing that then we should be using them as icons of how to be successful in America, not begrudging the success of their multigenerational efforts.
Posted by: Marty | September 22, 2010 at 10:36 AM
According to a study of Federal Reserve data conducted by NYU professor Edward Wolff, for the nation’s richest 1%, inherited wealth accounted for only 9% of their net worth in 2001, down from 23% in 1989. (The 2001 number was the latest available.)
I'm not sure what this even means. Aside from the issues raised by bluefoot, how do you determine this? Suppose I inherit a million dollars and just put it into the stock market for 10 years. On average it will more than double over that period. Does that mean that inherited wealth accounts for only 40% or so of my net worth? I don't think so.
Posted by: Bernard Yomtov | September 22, 2010 at 10:49 AM
OT, but there was an SNL skit with a good premise (but not much else) in which Mike Meyers played a man who kept thinking of witty things to say several hours after the appropriate time to say them. So he builds a time machine and becomes a much funnier and more popular guy.
Posted by: Julian | September 22, 2010 at 11:12 AM
"It implies the American dream is a single genrational phenomenon."
Yes, exactly. It's the American dream that, theoretically, you should be able to, no matter where you start, better yourself economically by the time you're raising a family, or at least have finished raising a family.
The American Dream was never "I hope I can become wealthy enough that my children can live off my inherited wealth."
Thomas Jefferson, as well as other Founders, had a lot to say about about the evils of aristocracy.
Posted by: Gary Farber | September 22, 2010 at 11:16 AM
Marty,
The American Dream is such an unhealthy myth. I think it’s a bit weird; that “working hard” and the “American Dream” are used to mean the same thing….or am I missing how this myth is told. Most people work hard and end up where they started or worse off and racked with health problems they cannot support.
The American Dream myth reminds me of the name-it-and-claim-it theology, very popular among American Pentecostals. That is, if you are not materially successful, then you must not have any meaningful faith/work ethic since God/American Dream always favors those who are worthy.
I would never teach my children that “material success” is something to be idealized. I pray you were being flippant and that the icons of your children have more meaning than the ability to turn capital into ever more capital. The Gates and Dells should be noted for turning wealth into more wealth, but as Gates’ father loves to remind parents, in an interview he gave in Fresh Air with Teri Gross, in America turning wealth into more wealth is not hard at all and any idiot can do it. Surviving without wealth is something all the more different.
Posted by: someotherdude | September 22, 2010 at 11:35 AM
Besides coming from stable middle class or better backgrounds, those mostly self-made guys seem to have made their dough in during the PC revolution.
Shoulda listened to Grandpa when he encouraged me to pursue a career in computers.
Posted by: Model 62 | September 22, 2010 at 11:38 AM
"The American Dream was never "I hope I can become wealthy enough that my children can live off my inherited wealth.""
However, if this happens occasionally then we shouldn't decrie the efforts of generations.
Posted by: Marty | September 22, 2010 at 11:53 AM
A great book, on the American Dream, by the way.
Born Losers (A History of Failure in America)
Born Losers (A History of Failure in America), by Scott Sandage, claims that we are "a people of the gerund." Rushing, striving, reaching…the verbs that describe our life are often in the progressive and not the present. These are the descriptors of America-or at least the America that Sandage has evoked, a land where "stagnation, not only collapse," is failure. But the author (and his readers, for that matter) has heard the story of American success, the logical goal of all that "ing"-ing. In Born Losers, he seeks to peer behind that story to expose its missing characters: America's failures. Sandage analyzes failure as identity as opposed to mere outcome, and seeks to understand why so often we equate going broke with "an identity in the red." Recounting the economic crashes of the 1800s, we read the words of unknowns, nobodies, broken men-the masticated refuse of capitalism. We witness the birth of credit reporting, a system that revolutionized commerce as it placed a dollar sign before every man's character. And Sandage finishes with a flourish, noting the necessity of the loser in America-we need him to sort out "our own defeats and dreams." Sandage achieves a considerable measure of success in writing about failure, but not without bumps along the way.
Posted by: someotherdude | September 22, 2010 at 11:58 AM
Which makes sense, given that they were the PC revolution.
Posted by: Slartibartfast | September 22, 2010 at 12:10 PM
However, if this happens occasionally then we shouldn't decrie the efforts of generations.
Marty, I don't think this post is decrying people's individual, successful efforts at getting rich, if that's your concern. I think it's debunking the "anyone can do it" myth and decrying, if anything, the problems with aristocracies, while also pointing out the absurdity of libertarianism among those born into extreme wealth who haven't eschewed their inheritences in favor of building their own fortunes from scratch.
Now, you may find fault with the analysis of the data or the data chosen for analysis in the debunking, but that would be a different criticism. Anyway, the point of the post wasn't "You shouldn't be allowed to get rich if you weren't born poor," I don't think, or even, more mildly, that doing so makes you a bad person.
Posted by: hairshirthedonist | September 22, 2010 at 12:21 PM
The Koch brothers and Richard Mellon Scaife are huge wingnut welfare sugar daddies and they started out on third base. It would be interesting to cross-reference the list of right-wing benefactors with the list of the top 1% who gained their wealth through inheritance.
Posted by: "Fair and Balanced" Dave | September 22, 2010 at 12:27 PM
Which makes sense, given that they were the PC revolution.
With all due respect to Gates, Dell, et al, I think this overstates their contribution, at the expense of lots of other folks who did excellent work and didn't come out of it with billions in the bank.
To the topic at hand:
I have no particular animus towards rich people. It's great to be rich, you can pretty much do whatever the hell you want.
Who wouldn't like that?
I have, however, two observations about the phenomenon of "dynastic" wealth, i.e., large fortunes that are amassed and passed down through the generations.
First, the prevalence of folks from relatively privileged backgrounds among the very, very wealthy argues against the "self-made" individual myth. If you start life on third base, it ain't that hard to get to home plate.
This is relevant because a common theme in any discussion of tax law, etc., is that folks who have lots of money have it as a natural result of their relatively greater productivity, initiative, entreprenurial can-do resourcefulness, whatever.
As it turns out, a lot of them have it because it was handed to them. FWIW.
Second, very large accumulations of private wealth present a hazard to democratic or republican (small r) self-government. That is because the political process and the people who participate in it are highly attuned to and responsive to the siren song of great big piles of Benjamins.
Would that that were not so. But it is so.
If you have lots of money, great. Mazel tov, enjoy your good fortune.
But in terms of public life and public policy, the rest of us owe you precisely nothing above and beyond what is owed to anyone. And, if we're wise, we will keep a sharp eye on how you use the resources you have.
Posted by: russell | September 22, 2010 at 12:35 PM
"However, if this happens occasionally then we shouldn't decrie the efforts of generations."
Sure we should, or at least are free to make that choice, which is found exactly in the American principle of opposing aristocracy and and landed gentry. We're free to decry inherited wealth all we like. There's nothing admirable about inheritance. There's nothing inherently wrong with it, but achieving it is simply a matter of picking the right parents.
Posted by: Gary Farber | September 22, 2010 at 12:44 PM
I knew someone was going to do this, russell, and it shouldn't surprise me that it was you. That's no insult, mind you.
Lots of people, every day, are doing excellent work that doesn't make much of a difference because no one uses it.
I don't idolize Gates or Jobs (even though I think Steve Jobs is pretty near genius). They were the right people at the right time, with intention.
Bad software that makes it to market and sells for want of other products is going to make someone some money. That'd be true with or without Microsoft's predatory marketing tactics, I think.
Without Microsoft selling semi-useful PC software and OS products back in the late '80s and early '90s, there just wouldn't have been as much of a PC wave for others to surf, I think. And that's not to say that only Gates could have done that, just that whoever did kick that wave off was going to make himself (and lots of his employees) a load of cash.
Posted by: Slartibartfast | September 22, 2010 at 12:44 PM
At this juncture, I cannot resist a somewhat lengthy quote from one of my all-time favorite authors, Henry Miller:
And then by chance one day, when I had been put on the carpet for some wanton piece of negligence, the vice-president let drop a phrase which stuck in my crop. He said he would like to see some one write a book about the messengers; he hinted that perhaps I might be the one to do such a job. I was furious to think what a ninny he was and delighted at the same time because secretly I was itching to get the thing off my chest. I thought to myself - you poor old futzer, you, just wait until I get it off my chest...I'll give you a Horatio Alger book...just you wait! My head was in a whirl leaving his office. I saw the army of men, women, and children that had passed through my hands, saw them weeping, begging, beseeching, imploring, cursing, spitting, fuming, threatening. I saw the tracks they left on the highways, the freight trains lying on the floor, the parents in rags, the coal box empty, the sink running over, the walls sweating and between the cold beads of sweat the cockroaches running like mad; I saw them hobbling along like twisted gnomes or falling backward in the epileptic frenzy, the mouth twitching, the slaver pouring from the lips, the limbs writhing; I saw the walls giving way and the pest pouring out like a winged fluid, and men higher up with their ironclad logic, waiting for it to blow over, waiting for everything to be patched up, waiting contentedly, smugly, with big cigars in their mouths and their feet on the desk, saying things were temporarily out of order. I saw the Horatio Alger hero, the dream of a sick America, mounting higher and higher, first messenger, then operator, then manager, then chief, then superintendent, then vice-president, then president, then trust magnate, then beer baron, then Lord of the Americas, the money god, the god of gods, the clay of clay, nullity on high, zero with ninety-thousand decimals fore and aft. You shits, I said to myself, I will give you the picture of twelve little men, zeros without decimals, ciphers, digits, the twelve uncrushable worms who are hollowing base of your edifice. I will give you Horatio Alger as he looks the day after the Apocalypse, when all the stink has cleared away.
Dramatic, innit?
In all the talk of so-called self-made people, the Horatio Alger hero indeed barely rates a mention, mainly because we know that the rags-to-riches story was usually that - a story.
The real point of what I quoted above is as a comment to all the rich-are-different-than-you-or-me line; the gospel of wealth, as well as the Horatio Alger books, were the rich telling the poor essentially well, why can't you just be like us? Just think it and it'll happen.
But we know it doesn't work that way. The American Dream is, in action, really just something for people to dream about. And Henry Miller beat Scott Sandage by about eighty-odd years with the quote above.
Posted by: sekaijin | September 22, 2010 at 01:06 PM
Lots of people, every day, are doing excellent work that doesn't make much of a difference because no one uses it.
I guess I'm thinking of folks like the guy who actually wrote DOS, or the folks at Xerox PARC who developed the original windows-and-pointing device UIs.
Millions and millions and millions of people use their stuff every day, just under a MS (or Mac, for that matter) brand.
My comment wasn't meant as a complaint about Gates or Jobs or any of those guys. They made technology accessible to users who weren't just gee-whiz gadget-heads, but were people who could actually leverage that stuff to get useful things done.
I think those guys should be rich, they put the technology, in a reasonably accessible form, in the hands of people who could use it to *create value*.
My only objection is to referring to them with language like "they *are* the PC revolution".
There are probably many thousands of essential contributors to the PC revolution. Not all of them got rich, a lot of them probably don't care that they didn't get rich.
But they are / were a necessary part of it nonetheless.
They also serve who only stand and wait.
Posted by: russell | September 22, 2010 at 01:06 PM
Marty:
You're missing my point about Gates. He didn't come from an upper-middle-class family, he came from the *upper* class.
Gates' mother was, by Seattle standards, the Old Money -- meaning it was collected by her father, a banker. She headed major charities, served on important boards, etc. -- and did that before her son became super-wealthy. She was one of the local aristocracy.
Bill Gates, Sr. wasn't just a lawyer, he was in Trusts & Estates -- which means "taking care of inherited wealth". I'd bet that Gates got into T&E via his wife's family, who wanted to make sure that Mary Maxwell's husband (such a nice young man! but not well-connected, you know) worked with the Right Sort of people.
I theorize that the driving force behind The Giving Pledge and similar efforts was Gates Sr.'s experiences as a T&E lawyer, where he would have seen all the ways rich kids can go bad.
Posted by: Doctor Science | September 22, 2010 at 01:25 PM
If you read the Horatio Alger books, you'll find that the Alger hero seldom pulls himself up by his bootstraps via hard work.
Instead, the typical story arc is that Young Male Protagonist is noticed and given his first big opportunity by some Captain of Industry who likes the boy's "pluck" or the cut of his jib.
In these stories, determination, courage, and charisma count for much, because they attract a mentor; actual hard work for protracted periods is not portrayed as the road to success.
Posted by: joel hanes | September 22, 2010 at 01:27 PM
Bluefoot: "One thing about inherited wealth is that it's not just inherited wealth, it's also inherited opportunity (for lack of a better phrase). Whether that's legacy admissions into a prestigious university, access to fast-track or high prestige internships, or being able to "fail upwards" in multiple jobs, or even just the luxury of being able to both choose the best college (not just the one you can afford) and not have to work while in school, one inherits in-group status along with wealth."
Supporting evidence: compare how many people in Forbes' 400 inherited their money compared to how many people won the lottery. (Not an exact comparison because inheritors are typically young and just starting out, while lottery winners are typically older)
Sam Walton did a tremendous thing with how he grew Wal-Mart. But even he started off with help - a $20K loan from family in 1945 ($240K today).
http://en.wikipedia.org/wiki/Sam_Walton
Posted by: Halteclere | September 22, 2010 at 01:28 PM
The cut of his jib, indeed.
http://capecodconfidential.com/cccalger020515.shtml
Goose a young man, and he will go far and climb high.
Posted by: Countme? | September 22, 2010 at 01:40 PM
I think the question is not, or at least not directly, inherited monetary wealth. It is inherited knowledge (or inherited advisors with knowledge, for the monetarily wealthy) of how personal finances work. This may not be the quick part to becoming super righ. But it is definitely the way to move up the chain. And lack of understanding on this topic is a really good way to move down the chain, especially when the economy hits a rough patch.
For example, those of us who were reasonably prudent during the decades when money was flowing freely built up substantial reserves. So, if we got laid off (I raise my hand here), we were able to last a fairly long time without being at risk of losing our homes or having major issues keeping food on the table.
Others, who lived it up while things were good and didn't worry about piling up savings, ended up with huge mortgages, and no reserves. And today, they are really hurting. Yes, they may not have been responsible for the disaster which hit the economy, or even their employer. But they are stuck nonetheless. And, in a lot of cases, moving briskly from middle class to poor.
The difference is not inherited wealth, nice as that might be. It is inherited (in terms of learned in childhood from parents) understanding about money and how to handle it.
Posted by: wj | September 22, 2010 at 01:46 PM
Doc,
Yes, I missed Gates as upper class. I will remove him from my list. I am sure it doesn't change my point.
Just from a personal perspective, I have watched generationally as, in my extended family, my fathers generation had no college graduates, my generation had 1 out of every 4 and my kids generation have 6 of ten.
Each successive generation has moved from poor to lower middle class to firmly middle class. I suspect that one or two of my children/nieces/nephews may achieve upper middle class. One of their kids might actually become wealthy, who knows.
I like to think that the advantages each successive generation has gained equates to achieving the American dream.
And no, even with the same advantages, the people from each of those generations didn't achieve the same level of material success. Nor is that the only definition of success passed through those generations.
My point is that accomplishing the dream of giving our kids a better life is a multigenerational goal shared by almost everyone I know.
I am not inclined to worry a lot about the aristocracy. There are no Rockefellers or Carnegies on the list today. Inheritances get diluted over time, even managed well. A snapshot view of the top 20 in 1970 would be a very different list.
Posted by: Marty | September 22, 2010 at 01:58 PM
I've pointed out here before that few contemporary readers have actually read Horatio Alger.
If they did, they'd know that this idea that he wrote about how hard work will make you rich is a complete crock.
His stories were about characters who got ahead by luck and being saved by beneficient rich people, not perserverance.
Posted by: Gary Farber | September 22, 2010 at 02:14 PM
Instead, the typical story arc is that Young Male Protagonist is noticed and given his first big opportunity by some Captain of Industry who likes the boy's "pluck" or the cut of his jib.
It's not just that the CoI noticed the boy; it's that the boy had the good fortune to be on the scene when the CoI's daughter was almost run over by a runaway horse, or the CoI had a thorn in his paw, or something. According to Alger, pluck is good, but you also need luck.
I like my jib uncut. But that's just me.
Posted by: Hogan | September 22, 2010 at 02:17 PM
I am not sure what the straw man is that is being attacked here. How can anyone be surprised that the very extreme end of the wealth distribution is the result of a multi-generation accumulation process? I am surprised that one of the sample didn't start with substantial resources. Wealth accumulation is difficult and depends on skill, luck, and enough resources to exploit these two. So, what's the point?
Posted by: George McCandless | September 22, 2010 at 02:21 PM
@Slarti: And that's not to say that only Gates could have done that, just that whoever did kick that wave off was going to make himself (and lots of his employees) a load of cash.
But take a deeper look at Microsoft as an example. You point out that there were something like 10,000 Microsoft Millionaires. But Gates and Allen built more wealth in the process than the rest of those 10,000 combined. Yes, Gates and Allen got the company off the ground, and they deserve a lot of credit for that. But most of the money the company made was after the early years, and it was the company as a whole that was earning that money, not just the founders.
Talking about Gates, Jobs, or Page and Brin being the builders of the computer revolution works nicely as metonymy, and it's an accurate description of who got the money, but it doesn't work as a historical description of how the work was really done. Gates and Jobs weren't the PC revolution any more than George Washington and Ben Franklin were the American revolution. Those people were the leaders, but they wouldn't have gotten anywhere without multitudes of followers doing the hard work of turning their plans into actions.
Posted by: Roger Moore | September 22, 2010 at 02:29 PM
I see Joel Hanes got to Alger before I did.
"I am not inclined to worry a lot about the aristocracy. There are no Rockefellers or Carnegies on the list today. Inheritances get diluted over time, even managed well."
Some numbers:
The Center on Wealth and Philanthropy:Posted by: Gary Farber | September 22, 2010 at 02:33 PM
To Bernard Yomtov, who asked:
I haven't found Wolff's paper. However, his calculations are based on the Federal Reserve Survey of Consumer Finances and this Survey uses two very naive updating rules:
1) Simply inflation adjust the values of the inheritances as received (i.e., completely ignore the amount gained by investing it since it has been received)
2) In addition to inflation adjusting, account for investment gains simply by assuming a flat 3% real annual return on inheritances
[Source: See the discussion on bottom of p. 24 and top of p. 25 of this paper by the director of the Fed's Survey:
Arthur Kennickell. "Changes and Undercurrents: Changes in the Distribution of Wealth, 1989-2004" (Jan 2006, corrected Aug 2006) http://www.federalreserve.gov/pubs/oss/oss2/papers/concentration.2004.5.pdf ]
Now, which rule does Wolff use? Again, I haven't been able to find Wolff's paper where he makes the claim that in 2001 only 9% of the net worth of the top percentile of US families was inherited. However, given that his figure is a mere 9%, I'm rather sure he's using rule #1. That is, I'm pretty sure Wolff's calculating off data that's not accounting for investment gains on inheritances at all. I say this because the aforementioned 2006 paper by Kennickell also makes estimates of the portion of people's net worth that's inherited, and all his answers using rule #2 get into the 20+% range (see the "untruncated infl. & growth adj" measure on Table 9 on page 26 of the above linked PDF by Kennickell)
A few more notes, in no particular order:
1) Again, it should be noted we've been talking about the *average* inheritance. Not everyone in the top 1% gets the average inheritance and, heck, not everyone in the top 1% ever received any inheritance. On this note I point to Table 8 on page 24 in Kennickell's PDF. In 1989, only 50.8% of surveyed families in the top percentile by wealth stated they ever received an inheritance or significant gift. In 2001, only 33.3% made such a statement.
2) The Survey is just that, a survey. Granted, it's a very detailed interview (at least 75 minutes) done by trained interviewers that's been performed every three years since 1989. Moreover, the interview data is corroborated by the most recent year's tax return from the interviewee. But a lot of stuff, especially about inheritances in the distant past, is wholly up to the recollection and honesty of the interviewee.
3) The Federal Reserve's Survey of Consumer Finances does *not* include in its inheritance figures any money inherited to pay for your education (e.g., private school and college tuition). [See footnote 22 on page 24 of the above linked PDF by Kennickell]
4) People outside the top percentile of US families generally have an even greater proportion of their net worth due to inheritances than those in the top percentile. It's just that those outside the top percentile have much punier net worths. Indeed, if you're below median in America you probably have *negative* net worth.
5) Finally, remember we're talking about net worth. Many people living very posh lifestyles of course actually have negative net worth, especially in the debt-driven 2000's.
Posted by: William Kaminsky | September 22, 2010 at 02:46 PM
So, what's the point?
The point is that lots of wealthy people aren't wealthy because of their sterling personal attributes, but because mom and dad handed it to them.
Nothing against them personally, but it kind of dilutes the argument that they shouldn't be (frex) taxed more than they are now, because it will discourage them from being so gosh darn productive.
Posted by: russell | September 22, 2010 at 02:55 PM
People outside the top percentile of US families generally have an even greater proportion of their net worth due to inheritances than those in the top percentile. It's just that those outside the top percentile have much punier net worths.
e.g. You're broke and someone drops ten grand in your lap. Do the math.
The flip side of that is something I was thinking about earlier. We know that a greater and greater percentage of our national income is becoming concentrated among a smaller percentage of our population. It would hold that, in that case, it would be very likely that many at the top would accumulate more wealth than their parents, thus making any inheritence smaller on a percentage basis. This makes me wonder what the inflation-adjusted dollar figures, not percentages of net worth, look like for inheritences among the wealthiest between the same years.
Posted by: hairshirthedonist | September 22, 2010 at 03:02 PM
I am not inclined to worry a lot about the aristocracy. There are no Rockefellers or Carnegies on the list today. Inheritances get diluted over time, even managed well. A snapshot view of the top 20 in 1970 would be a very different list.
As noted by Forbes in an article published for the 20th anniversary of the 400 list, the first year that the list was published (1982), Rockefellers, Hunts and Duponts accounted for fully 13% of its members (53 people total). By 2002, 1 Hunt and 3 Rockefellers remained.
Make of that what you will, as it can probably be used to support either argument. If we start from, say, 1870, when Standard Oil was founded -- and when we can assume that John Rockefeller was certainly one of the 400 wealthiest people in America -- that's at least 132 years over which the Rockefeller family remained part of the wealthiest in America.
Of their failure to appear on the list eight years after they were down to three, one cannot say that they still aren't disproportionately wealthy, only that 400 people are richer than they are.
Posted by: Phil | September 22, 2010 at 03:14 PM
Forgot to add: And even if the don't appear on a popular list which is arbitrarily limited to 400 people, can one question whether or not members of the Rockefeller family still carry quite a bit of power in American culture? (To stick with Marty's example.) John IV has been in the Senate for 25 years. Hope Rockefeller Spencer had a successful journalism career and owns the Santa Fe Reporter, and is worth north of $250 million. Nelson Rockefeller was, you know, the vice president of the US. Michael Rockefeller was eaten by cannibals. And so on.
Posted by: Phil | September 22, 2010 at 03:21 PM
"because it will discourage them from being so gosh darn productive"
Are you talking about taxing those with high incomes (via income tax) or those with high productive wealth (via capital gains tax). One should be interested in having a lot of productive wealth in the economy because it raises the salaries of the rest of us. Over the last 200 years or so, average salaries have risen about the same as has real capital. I am not worried that the very rich are going to be productive (in fact, economic theory suggests that they will not work very much and not be very productive in terms of their labor inputs) but that the capital that they own will make the rest of us more productive. That is the economic logic behind lower marginal tax rates on capital gains than on high wage income.
Relatively high marginal tax rates on those who have a lot of wage income is probably not a bad idea since the marginal benefits of an additional dollar for them is probably a lot lower than for those with low income.
It is well known that wealth is a whole lot less evenly distributed than income. Part of the reason for this is that at some point, someone had to consume less than their income to be able to accumulate that wealth. How much gets saved depends a lot on how much it will be taxed in the future. I live in Argentina and the country is a lot poorer than the US because it severely taxes (one way or another) wealth held inside the country and so there is a lot less capital per worker than in the US.
Posted by: George McCandless | September 22, 2010 at 03:23 PM
@Julian:
OT, but there was an SNL skit with a good premise (but not much else) in which Mike Meyers played a man who kept thinking of witty things to say several hours after the appropriate time to say them. So he builds a time machine and becomes a much funnier and more popular guy.
Continuing the off topic digression well beyond the bounds of decency or interest, it was actually Rob Morrow, and he was saying his "witty" comments twenty or thirty seconds after he should have. So at the end of the sketch, he goes to the bathroom of the restaurant where it was taking place, sees a "Time Machine - $1" or somesuch sign on one of the stall doors, and is then shown delivering the jokes he'd botched earlier with perfect comedic timing.
Posted by: envy | September 22, 2010 at 03:34 PM
William Kaminsky,
Thank you for the information. The point about education expenses is important, and no doubt there are other non-obvious items as well.
The WSJ editorial page is always suspect, of course.
Posted by: Bernard Yomtov | September 22, 2010 at 03:34 PM
So what's our statistical universe to justify hefty estate taxes? The top 21 richest people in America?
Suppose Russell earns 10mm year end bonus, i.e. ordinary income, net of deductions and pays 3.5mm in taxes, leaving 6.5mm to save/spend/invest. At the time of his death, his estate has grown to 9mm, of which growth, taxes were paid on 80%, leaving 20% of his estate's appreciation in some form of unrealized and untaxed gains. All but less than 10% of Russell's estate are dollars that have been taxed once. What justification can there be, other than Russell died with a lot of money and we sure could use a bunch of it, for taxing those dollars again? Not the unrealized gains, by all means, tax those. But, taxing the same dollar twice, how is that right?
Now, if we are talking about taxing someone's lazy ass kids who've been living off of mommy's or daddy's hard work and business savvy, that's another thing. But we aren't.
Posted by: McKinneyTexas | September 22, 2010 at 03:41 PM
But, taxing the same dollar twice, how is that right?
And yet we do it all the time. I pay income taxes on my earnings, and then when I spend my earnings, I pay sales and other taxes. The money I'm using to pay for my house got taxed as income, and then the house itself is taxed as property. It makes much more sense to think of anything other than property tax in terms of taxing monetary transactions rather than in terms of taxing individual dollars. Inheriting an estate is simply an unusually large (and rare) transaction.
Posted by: Hogan | September 22, 2010 at 03:49 PM
What justification can there be, other than Russell died with a lot of money and we sure could use a bunch of it, for taxing those dollars again? Not the unrealized gains, by all means, tax those. But, taxing the same dollar twice, how is that right?
What more justification does there need to be? My income is taxed. When I spend what's left, I pay, among other taxes like state sales tax, federal gas tax. I need my income more than some dead guy.
I'm not sure about your point regarding the lazy kids. Are you talking about the next generation's inheritence tax, that it's okay to tax the same money again with the kids who inherited it the first time die?
Posted by: hairshirthedonist | September 22, 2010 at 03:59 PM
I meant "...tax the same money again when the kids who inherited it the first time die."
Posted by: hairshirthedonist | September 22, 2010 at 04:01 PM
McKinneyTexas: Because the concentration of inherited wealth is bad for the economy, democracy, freedom, and apple pie?
Or how about because it's then income to the people who inherit the wealth, so we can get rid of the estate tax and then just tax it as income?
Or because the dead guy doesn't have any use for it, their children didn't "earn" it in any sense, so what right do they have to it?
Seriously, the whole "double taxation" thing in regards to the estate tax is pretty weak.
Posted by: Nate | September 22, 2010 at 04:06 PM
Posted by: JustMe | September 22, 2010 at 04:09 PM
McKinneyTexas: Because the concentration of inherited wealth is bad for the economy, democracy, freedom, and apple pie?
Lots of good answers. Here's another. Except for extreme cases it's impossible to evaluate a single tax in isolation from other taxes. You have to look at the tax system as a whole.
When I buy a book at the book store I pay sales tax. What's that all about? You want to discourage me from reading? You want to hurt the small business by taxing its sales? No, you don't.
But taxes have to come from somewhere, and sales tax, for better or worse, is one of the places we've chosen. So are estate taxes. Also, all taxes affect the way our society looks. Taxing book sales has an effect, just like taxing estates.
Are estate taxes unreasonable in context? Well, I don't think the concentration you talk about is a great thing. When you cut estate taxes dramatically, as well as taxes on dividends and capital gains, you're doing a lot to create a wealthy hereditary aristocracy. I don't think a society run by such an aristocracy is a good idea. I'm not setting up any guillotines, but I do sort of favor a more meritocratic world.
Posted by: Bernard Yomtov | September 22, 2010 at 04:38 PM
"What justification can there be, other than Russell died with a lot of money and we sure could use a bunch of it, for taxing those dollars again? Not the unrealized gains, by all means, tax those. But, taxing the same dollar twice, how is that right?"
And what about when that money is spent again? How is it right to tax it a third time? How about a fourth? The twenty-fifth? The hundred and thirty-third?
Are you suggesting that individual dollars can only be taxed once?
If not, what's the wrong in the fact that money, as it flows, ends up being partially taken as a tax each time it passes a taxable threshold? Money is fungible: how could it be otherwise?
"What justification can there be, other than Russell died with a lot of money and we sure could use a bunch of it, for taxing those dollars again?"
For one thing, it's not Russell's money any more, and he's beyond caring about it. So we're talking about social policy, not the ability of dead people to enjoy their money.
The only people affected by estate taxes are the inheriters, not the dead, and it isn't their money. They didn't earn it. They didn't have a thing to do with producing the money, or adding value to anything.
So they don't get to be exempted from taxes on inherited estates, if they're over, well, the proposed figures keep varying: $500,000, a million, two million, five million, take your pick.
But if someone *only* gets to inherit $500,000, I have a very tiny violin standing by.
Posted by: Gary Farber | September 22, 2010 at 04:56 PM
A gift to a young couple of the 20% down payment on a house, looked at 20 years later, doesn't look like a very large percentage of the couple's net worth.
But the reality is that the community in which they purchased that home has created for them a lot of home equity, and most people would treat that "capital" gain as if the young couple had produced it themselves!
The 20% of the 20-years-ago purchase price looks small now, but it made all the difference. It put them on the community-provided escalator.
And we're so blind we don't even see the escalator.
We call that young couple bright young things, and fail to notice that a parental gift and tax laws which leave that community-created value in their own pockets, to be taxed only lightly if at all, were responsible for a significant share of their net worth, and for their having disposable income for other things they might want to buy.
And even provided them a low-interest ATM machine for quite a while.
We delude ourselves.
If you'd like to know what society would be like if we stopped, you might look to the ideas associated with Henry George, author of "Progress and Poverty," still the bestselling book ever on political economy.
The old fashioned way. Privatizing what the community creates!
Posted by: LVTfan | September 22, 2010 at 05:08 PM
Those who are troubled by taxes which discourage productive activity might take a careful look at Land Value Taxation, which at one time was known as the Single Tax.
Those who are troubled by multiple taxation of the same dollar might take a look at the Single Tax.
Search on Henry George (b. 1839, Philadelphia; d. 1897, NYC).
He didn't think it right to tax labor, or tax sales. But the value of land, which is created not by the landholder but by the community, and the value of natural resources -- oil, water, natural gas, minerals, etc. -- are different, and are the natural source for public revenue.
We could solve a lot of our most serious problems by using this tax more and other taxes less, a lot less.
Posted by: LVTfan | September 22, 2010 at 05:14 PM
I've changed my thinking in the matter of inheritance tax.
First, inheritance should be taxed the same as any other gift. Because a gift is what it actually is. In kind, gifts should be taxed as regular income, because they are income.
Associated with that, capital gains should be taxed as regular income. If you want to shelter your gains, do it inside a 401k or other tax-sheltered investment plan.
Posted by: Slartibartfast | September 22, 2010 at 05:39 PM
I think Gates is an utter angel. I remember returning as an adult student, using carbon paper and a typewriter in 1997 to a PC and Word, later that year. It changed the way I could do college over night. It was incredible. Prior to Windows 95/98, my only experience with computers were those lines of code I was taught in high school, which was a nightmare! I love Gates for that, but that doesn’t mean he and his social class should have our economic life rearranged to make him and his legacy comfortable.
Posted by: someotherdude | September 22, 2010 at 05:43 PM
But, taxing the same dollar twice, how is that right?
I replied to this, but I think it got lost. Apologies if it shows up twice.
The basic idea here is that in general in this country we don't tax wealth. We tax transactions.
Stuff a million bucks of after-tax cash in your mattress and you'll never pay taxes on it again.
Spend some and you will.
If we had a wealth tax model, the issue of "taxing the same dollar twice" might be a more relevant question, but that's not how we're set up.
Associated with that, capital gains should be taxed as regular income.
See, now you're talking.
I'm sure somebody here will explain why what I'm about to say is a terrible idea, but if capital gains and other investment income were taxed as regular income, I'd be open to eliminating corporate income taxes.
Income flows to people, and income -- any kind of income -- is income.
Posted by: russell | September 22, 2010 at 05:58 PM
Taxes on transactions are nuisances and reduce transactions. I don't want someone to be charged more than I receive for my labor; that dampens the demand for my labor. (Maybe I'd mind a tiny bit less if it was your labor being taxed -- but wouldn't you object?)
Having said that, perhaps certain kinds of transactions SHOULD be taxed. I think of those which are designed to skim the cream off the economy. Day trading on 1/8s of a share. Tax those transactions! They don't create value; they merely collect it, putting a premium on speedy computers and connections.
Capital generally doesn't appreciate. Cars depreciate. Machinery, even with the best of care, depreciates. Houses depreciate, at 1.5% per year.
What appreciates is land and natural resources. As I've said above, those things don't rise in value for reasons which have anything to do with the landholder (except perhaps when he has a monopoly -- and then that isn't really about him, but about privilege. Eschew privilege! -- Bless you.)
Corporations should be required to pay their communities for the value of land they own, which is often very well located land, served by community-provided infrastructure or convenient to taxpayer-financed ports and transportation systems. Those who remove scarce natural resources from our finite supply -- emphasis on OUR! -- ought to be required to compensate the community for that value they've privatized. And once they've done that, what they create from it ought to be theirs, for good or for ill. If they refine the oil, the value added by their contribution should be theirs to sell. If in the process they pollute the air or the water, that also ought to be theirs to pay for; it should not be socialized any more than they should be able to privatize the value of OUR natural resources.
We shouldn't be taxing profits, or sales. But we should be collecting the economic rent and compensation for what they're taking from our well-but-finitely-provisioned ship.
And, by the way, collecting the rental value of urban land will cause it to be used far more effectively than it is when we permit the patient-money to treat that value as their own. Surface parking lots will give way to parking garages; low-rise buildings to mid-rise; mid-rise to high-rise, close to the center of activity. More people will be able to find worksites and living places close to the center of things, if they want that. This will create jobs, short commutes, less expensive housing, and little or no windfall for landholders. Sounds healthy and just and efficient to me.
Posted by: LVTfan | September 22, 2010 at 06:15 PM
Marty:
That's kind of odd, coming from an American.The fact is, even though the Walton family inheritance will doubtless get diluted in time, now and for the next generation many important decisions in this country will be made for the advantage of a very small group of people who did absolutely nothing to earn their position.
How can this *not* be important? Do you really think the chances of your children's success is the same, whether they live under an aristocracy or not?
Posted by: Doctor Science | September 23, 2010 at 07:36 AM
I know others have addressed this already, but I thought perhaps McK would lend more of an ear to this coming from someone who's more on his ideological quarters than the rest of y'all.
Which supposes a lot, possibly, but I think the general sentiment is not horribly off-target.
So, this idea of taxing the same dollar multiple times is a problem for you? You get paid, you pay your taxes, the government takes those tax dollars and spends them on certain things; for example: your national defense. Those dollars, which were obtained from tax revenues, get spent on things like, well, ME. And the pay of soldiers. And soldier medical and retirement pay. And hardware. That kind of thing. Now, that tax dollar you paid to the government is now (for the sake of argument) headed back out to me. But wait! I have to pay income tax on that dollar, plus a whole lot more others just like it.
Our government, with the occasional, tacit, sometimes grudging permission from the electorate, has decided that what works is to tax cash flow to pay for its assorted rather expensive undertakings. That's just the way things work. And inheritance is just one way cash moves from one person to another. Short of doing something like incorporating your family and having family-owned assets (which, sorry, I am woefully ignorant of how such a thing might work), you don't get to give your wealth away, pre- or postmortem, and not have it be a gift. The major difference between the gifts is a premortem gift tax is paid by the giver, whereas the postmortem gift tax is paid by the (I think this is correct) recipient. A truly consistent state of affairs would have the gift tax paid by the executor, but our tax laws are nothing if not byzantine.
"But what about family businesses?" you might ask. Is it really a good thing to force them to liquidate to pay inheritance/estate taxes?
Others have noted that there's an exclusion to the amount taxed. I'm not sure to what extent family farms are forced to liquidate by estate taxes, but if you really want to have a family-corporate (for want of a better term) farm, it's best to do some estate planning so that your estate has a decent chance of surviving relatively intact rather than be subject to whatever default rules guide the probate system.
Here's the problem with treating different kinds of income differently from regular income: if you do that, some (most, I'd think) people will tend to seek out the form of money transfer that minimizes their exposure to tax. Also: having so MANY categories of wealth transfer complicates the tax code horribly.
I do believe I've argued myself all the way around this issue, so I'll let the more consistent folks pick it up from here.
Posted by: Slartibartfast | September 23, 2010 at 08:30 AM
Oh, one more thing:
If we decided that, hey, taxing cash flow is not such a smart idea, then what would be needed would be a better method of raising money to fund the government. So we could look at wealth tax, or real property tax, or some other scheme.
The problem with this (the question of how such a scheme would be selected and agreed to aside) is that any such changes would radically shift people's incentives. For instance, if you tax real property, the people who are already IN real property would be thinking about getting out, to some extent, while the people thinking about getting in would be less enthusiastic about that. This is a completely hipshot assessment of the economic impact, but I think property values would respond in some significant way.
Point being, I think there would likely be some kind of shock to the economy if we were to move to other means of taxation.
Posted by: Slartibartfast | September 23, 2010 at 08:37 AM
I have that not very original theory of capital flows working essentially like http://en.wikipedia.org/wiki/Ostwald_ripening>Ostwald Ripening. Above a critical value, capital more or less automatically attracts more ('money begets money') while below it it takes effort to maintain the status quo. => aggregation is the preferred status/direcdtion. If one wants to maintain a distribution that gets not too unequal, one has to either siphon disproportionately from the top or set an artificial lower limit (e.g. negative tax rates). The actual policy has gone in the opposite direction for decades.
There was once the rule of thumb that the first generations gains, the second maintains and the third squanders. But with the superrich the automatic gain due to money's gravitational pull seems to exceed the ability of the 3rd gen.'s to spoil (let's see what Dubya's daughters will do with Prescott's ill-gotten gains).
Posted by: Hartmut | September 23, 2010 at 08:39 AM
And yet we do it all the time. I pay income taxes on my earnings, and then when I spend my earnings, I pay sales and other taxes.
You are paying a tax on a purchase or on an asset, real property, which requires local services directly and indirectly to support your use and enjoyment of your realty.
Estate tax is the same entity taxing the same dollar twice: as it is earned, and as it is passed on. I understand the gov't taxes pretty much every economic activity: but why is it right, fair etc. to tax the same dollar twice?
What more justification does there need to be?
HSH, the people need your home and your services. They cannot afford to pay you whayt you want. You'll have to take whatever the people say they are willing to put up.
The basic idea here is that in general in this country we don't tax wealth. We tax transactions.
Death isn't a transaction. It is a certainty, an unavoidable event.
So, this idea of taxing the same dollar multiple times is a problem for you? You get paid, you pay your taxes, the government takes those tax dollars and spends them on certain things; for example: your national defense. Those dollars, which were obtained from tax revenues, get spent on things like, well, ME. And the pay of soldiers. And soldier medical and retirement pay. And hardware. That kind of thing. Now, that tax dollar you paid to the government is now (for the sake of argument) headed back out to me. But wait! I have to pay income tax on that dollar, plus a whole lot more others just like it.
Sorry Slarti, you are describing new income to the tax payer. The dollar coming back was one he/she no longer had.
The answer to my "is it right" question is: we aren't here to talk about right or wrong. We need the money, Russell (in my example) has it, we are taking X percent. Have a nice day.
Posted by: McKinneyTexas | September 23, 2010 at 11:17 AM
McKinney: Ah, I see one of the problems here. No, death isn't a transaction.
HOWEVER, the money going from the now-deceased person to their heirs IS a transaction, and in what fundamental way is it different than if the person gave the heirs the money while they were alive?
Posted by: Nate | September 23, 2010 at 11:31 AM
Death isn't a transaction.
No, but the transfer of money from the decedent's estate to his or her heirs is.
The answer to my "is it right" question is: we aren't here to talk about right or wrong. We need the money, Russell (in my example) has it, we are taking X percent.
I think that's about right.
To steal a page from Brett, taxes are always kind of obnoxious. Somebody's taking your money and doing stuff with it that you may or may not agree with.
The choice of who to tax, what to tax, in what amount, and what to spend it on are all important questions, but they don't take away from the basic fact that somebody's taking your stuff.
Somebody's ox is always gored.
Posted by: russell | September 23, 2010 at 11:34 AM
HSH, the people need your home and your services. They cannot afford to pay you whayt you want. You'll have to take whatever the people say they are willing to put up.
Is HSH dead in this scenario? Because if he isn't, you're just blabbering here.
Posted by: Phil | September 23, 2010 at 11:35 AM
HSH, the people need your home and your services. They cannot afford to pay you whayt you want. You'll have to take whatever the people say they are willing to put up.
How is this at all relevant? For one thing, I'm not dead. For another thing, the question was specifically about the notion of double taxation, not simply taxation or the taking of whatever might be taken. The question implies that some justification above and beyond that required simply for taxation is necessary because of the double aspect.
The fact is, the estate tax has no effect on the deceased. They're no longer in the game of life. It affects the inheritors of the estate, who are receiving a bunch of money or property in a transaction. Death is not a transaction in that sense (but who knows what it really is in it's totality?), but the inheritence most certainly is.
And we double tax all the time. You do buy gasoline, don't you? How is the estate tax any different from taxing dividends? Dividends are paid out of after-tax corporate profits. They tax the corporation, who gives the shareholder some bit of what's left, and then they tax the shareholder. Substitute dead guy for corporation (corpse-oration? ha!) and substitute heir for shareholder. What's the dif, grif?
Posted by: hairshirthedonist | September 23, 2010 at 11:41 AM
You are paying a tax on a purchase or on an asset, real property, which requires local services directly and indirectly to support your use and enjoyment of your realty.
I also pay a local wage tax and a state income tax, so there are many entities taxing my income.
Estate tax is the same entity taxing the same dollar twice: as it is earned, and as it is passed on. I understand the gov't taxes pretty much every economic activity: but why is it right, fair etc. to tax the same dollar twice?
I don't understand the theory behind "tax each dollar only once." Does each dollar have a unique individual history, by which we can trace how often it's been taxed? Does the once-taxed limit apply in perpetuity? Do dollars ever die, or become transmuted into other dollars? In either case, when and how does that happen?
I understand the intuitive appeal. I just don't think it makes a lot of sense. In which case the question of whether it's right, fair etc. doesn't really arise, any more than it does in the case of slithy toves gyring and gimbling in the wabe.
Posted by: Hogan | September 23, 2010 at 11:43 AM
It is weird, this thing with double taxation. It strikes me as being highly abstract and metaphysical, like there's some unknown natural law being violated or that it's offensive to God or something. I don't get it at all from a practical standpoint. In the case of the estate tax, it's just another way to raise revenue and it helps to prevent potentially problematic, dynastic accumulations of wealth.
Posted by: hairshirthedonist | September 23, 2010 at 11:55 AM
I swear to G-D, this is what pisses me off when they talk about 'death taxes'. The only way I can think that we are taxing the dead person's money is if we are taking some of the money away from them, and then putting the rest of the money in the coffin (or urn) with them.
Posted by: rdldot | September 23, 2010 at 12:16 PM
You are paying tax on cash flow.
Who is responsible for paying sales tax? Tell me that, and you'll see what I'm getting at.
Happens all the time. Literally. Why be outraged at this one instance?
Let's say I make a whole pile of money, and I decide to employ a nanny (I know, this sounds like a familiar line, but bear with me). When I pay that nanny, someone has to pay income tax and payroll tax on that income. Does it matter, in a dollar-taxed-twice sense, who paid the tax?
Note that the nanny's income comes from my net, which is gross less taxes paid. So, tax paid twice!
Probating a will is, arguably, the carrying-out of instructions left before death. Looks like a transaction to me, albeit one that's dictated by a sort of contract (implied or explicit, depending on whether you have drawn up and filed a will).
I have no idea what you mean by this. Isn't it the same dollar, or pool of dollars?
Regarding who pays the tax, I say that it doesn't much matter who pays it. The transfer of wealth is, regardless of who pays tax on it, taxable.
Isn't it true that any time you give someone a gift, or pay them for services, you have to pay tax? Why should inheritance be different?
Posted by: Slartibartfast | September 23, 2010 at 12:19 PM
'The fact is, even though the Walton family inheritance will doubtless get diluted in time, now and for the next generation many important decisions in this country will be made for the advantage of a very small group of people who did absolutely nothing to earn their position.'
Marty's position is very American since the assets inherited by the Waltons (and any other members of the moneyed aristocracy) are private property. If that aristocracy has undue and undesirable influence on politicians such that they benefit from legislative actions to the detriment of the general population of Americans, that can be changed at the ballot box. I think we are seeing some manifestations of this remedy now.
I'm considered anti-tax here, but that is not the case. I have no objection to federal taxes to carry out federal responsibilities enumerated in the Constitution. I don't object to heavy taxation on high income earners and the wealthy aristocracy to fund the federal government for these purposes. But to advocate confiscatory taxation of the wealthy (because they have wealth and didn't earn it) in order to redistribute wealth through entitlement payments is what is surprising to hear from Americans.
Posted by: GoodOleBoy | September 23, 2010 at 12:30 PM
Confiscatory, huh?
Pretty much everything the government does redistributes wealth in some way, so it must be the entitlement payments, specifically, that bother you, GOB. Am I right? Do you think SS, which is funded through payroll taxes that stop after the first hundred-and-whatever-thousand dollars of earned income, is a matter of confiscatory taxation of the wealthy?
Posted by: hairshirthedonist | September 23, 2010 at 12:45 PM
I thought we were talking about income tax, here.
Posted by: Slartibartfast | September 23, 2010 at 12:49 PM
Your complaint is that the inheritee doesn't get all the inherited money because if it's more than $500,000, or $5 million, or whatever the threshold is at a given time, because the government taxes the transaction of money changing hands from one person, who is no longer living, to another or others who are.
What's more wrong, immoral, or unfair, with that than any other tax, I don't know.
So far as I can see it's one of the most fair and justifiable taxes. The dead person, after all, doesn't care about the money. And the money the inheritor gets is a pure gift: they didn't earn it, it isn't "theirs" by any definition I understand, so who is it "unfair" to? The dead person, or the person whose money it isn't, but which they'd like to have gifted to them?
Is receiving a gift a right? I'd like to see where it says that in the Constitution.
Lastly, to repeat what Hogan aptly wrote:
I'm similarly baffled.GOB: " If that aristocracy has undue and undesirable influence on politicians such that they benefit from legislative actions to the detriment of the general population of Americans, that can be changed at the ballot box. I think we are seeing some manifestations of this remedy now."
What would happen if the aristocracy decided to fund and organize as many of the little people as they can to vote at the ballot box to support the interests of the aristocracy? Is it possible that members of the aristocracy might have more power to do this than individual poor and middle-class people? Especially since, you know, money is speech?
Posted by: Gary Farber | September 23, 2010 at 12:51 PM
Does "confiscatory" describe what the penalties are for noncompliance, or just the level of taxation? If the former, why aren't all taxse "confiscatory"? If the latter, at what level does a tax rise from being annoying or onerous (like, you know, all of them) to being "confiscatory"?
Posted by: Hogan | September 23, 2010 at 01:02 PM
Posted by: Gary Farber | September 23, 2010 at 01:11 PM
Marty's position is very American since the assets inherited by the Waltons (and any other members of the moneyed aristocracy) are private property.
Lots of things are American, including a strong aversion to politcal privilege based on property ownership.
But to advocate confiscatory taxation of the wealthy (because they have wealth and didn't earn it) in order to redistribute wealth through entitlement payments is what is surprising to hear from Americans.
The big entitlements are Social Security, Medicare, and Medicaid.
SS is funded through a dedicated payroll tax, which the Waltons likely do not contribute to at all.
Medicare is funded through a combination of the same dedicated payroll tax, plus (in some cases and for some programs) subscriber premiums. Again, the Waltons are probably not involved.
Unlike SS and Medicare, Medicaid is in fact a social welfare program. You will be pleased to know that it is neither funded nor run completely by the federal government, but includes signficant state funding and adminstration. Federalism lives.
All of the other non-discretionary "entitlement" programs come to about 16% of the federal budget. That includes not just programs like welfare and food stamps, but also unemployment, military and civilian federal retirement, and veterans' benefits. And you'll be pleased to know that's down about 15% from last year.
Of that, food stamps is about $73B, or about 2% of the budget. TANF is about $17B, not quite one half of one percent.
And it's something of a misnomer to call those programs redistributed "wealth", because ain't nobody getting wealthy on food stamps or TANF.
Seriously, the facts are not on your side here.
Do you want to know what would really make me happy? If everyone would stop claiming that their personal political preferences were the Real American Tradition.
There are a number of political traditions in this country. They are often in conflict, but are all of long standing and are all legitimate.
The one you prefer is merely one among them, nothing more or less.
Posted by: russell | September 23, 2010 at 01:47 PM
'Confiscatory, huh?
Pretty much everything the government does redistributes wealth in some way, so it must be the entitlement payments, specifically, that bother you, GOB. Am I right? Do you think SS, which is funded through payroll taxes that stop after the first hundred-and-whatever-thousand dollars of earned income, is a matter of confiscatory taxation of the wealthy?'
Much of what the federal government does, in my view, is unconstitutional, and those are the expenditures the taxes for which I would label 'confiscatory'. The 'general welfare' clause and the 'commerce' clause have been used as authority for the federal government to do most anything, and I think this is wrong. If the authorities were construed more narrowly (national defense, facilitating international and interstate commerce, some environment protections, protecting citizens' constitutionally guaranteed individual rights (including what are generally termed civil rights), and a few others) then federal spending would be lower, federal taxes would be lower, and federal officials would have a manageable array of duties that they might even be able to accomplish effectively.
The federal government has no responsibility for such things as individual healthcare delivery, public education, feeding the hungry, housing the homeless, and retirement programs for the elderly. When federal income taxation and federal estate taxes are used to initiate or expand such programs, those taxes are what I term confiscatory.
Posted by: GoodOleBoy | September 23, 2010 at 01:54 PM
It's funny...
There was some discussion of certain things feeling/smelling wrong in the servant thread.
Here is something that feels/smells icky to me. An entire class of people who had every conceiveable advantage... who are apparently utterly blind to it. Or expect others to be. ICK.
At least recognize the advantages you had, damn. Don't freaking whine so much.
The idea that people who inherited vast fortunes style themselves as John Galts is... just sickening to me.
Posted by: Rob in CT | September 23, 2010 at 01:56 PM
Just to make Marty's position clear, I support a wealth tax. Not an inheritance tax nor any other transfer tax (I don't like gift taxes). However, a tax on wealth at 1% is a fairly big number that is consistent year to year (unlike the single stroke of an inheritance tax) and if any of the predictions on wealth accumulation are true (40 trillion inherited by 2052) it would be better to get it as we go.
Posted by: Marty | September 23, 2010 at 02:01 PM
All the things mentioned in my earlier comment as not authorized for the federal government to exercise were reserved to the states and the people.
I have not commented here on income or other taxation issues at the state level. If so many things had not been usurped by the federal government (and state governing officials bought off through revenue sharing), we might be having an interesting discussion of how different states were dealing with various issues.
Posted by: GoodOleBoy | September 23, 2010 at 02:08 PM
'Just to make Marty's position clear, I support a wealth tax. Not an inheritance tax nor any other transfer tax (I don't like gift taxes). However, a tax on wealth at 1% is a fairly big number that is consistent year to year (unlike the single stroke of an inheritance tax) and if any of the predictions on wealth accumulation are true (40 trillion inherited by 2052) it would be better to get it as we go.'
I support this concept. And, if the federal government were more limited in the powers it exercises, we probably could balance the federal budget by taxing only the top half of income earners, along with a wealth tax, since the bottom half would not push for increasing taxes on the wealthy to pay for their entitlements, which would not exist.
Posted by: GoodOleBoy | September 23, 2010 at 02:15 PM
"The federal government has no responsibility for such things as individual healthcare delivery, public education, feeding the hungry, housing the homeless, and retirement programs for the elderly. When federal income taxation and federal estate taxes are used to initiate or expand such programs, those taxes are what I term confiscatory."
Confiscatory:
All taxes are confiscatory.Confiscation:
What tax isn't confiscatory, according to the general meaning of the word, rather than some idiosyncratic personal usage?Presumably you're not proposing that "confiscatory taxes" are only taxes that collect money which is spent in ways you disagree with?
If so, then, again, all taxes are confiscatory from everyone's subjective view.
Posted by: Gary Farber | September 23, 2010 at 02:16 PM
I should have mentioned that adjectives are not, in fact, arguments.
Posted by: Gary Farber | September 23, 2010 at 02:17 PM
I think it perfectly OK to tax the wealthy to pay for federal functions enumerated in the Constitution, but not for any program a modern legislature decides is useful for its members' 'political careers'.
Posted by: GoodOleBoy | September 23, 2010 at 02:20 PM
Of that, food stamps is about $73B, or about 2% of the budget. TANF is about $17B, not quite one half of one percent.
But you're leaving out the ACORN slush fund and the "pay poor people to vote for Democrats" program. That's, like, another trillion right there.
Posted by: Hogan | September 23, 2010 at 02:21 PM
'Presumably you're not proposing that "confiscatory taxes" are only taxes that collect money which is spent in ways you disagree with?'
That is not what I am proposing.
The Constitution when written had a certain meaning and intent. That is not subjective. In this discussion, only one view is correct in the context of the meaning of the words the founders wrote. I do believe that I have a correct understanding of what the original words meant. It's not exactly that I am disagreeing because I have my own subjective viewpoint. Someone here is wrong.
Confiscatory taxes are those taxes collected to exercise unconstitutional powers.
Posted by: GoodOleBoy | September 23, 2010 at 02:30 PM
national defense, facilitating international and interstate commerce, some environment protections, protecting citizens' constitutionally guaranteed individual rights (including what are generally termed civil rights)
Of these four, two are explicitly enumerated power of Congress.
And for "facilitiating", please read "regulating". Original intent and all that.
There is absolutely, and I do mean absolutely, nothing in the document about environmental protections or protecting individual civil rights. Nor in the powers given to the executive or judiciary.
Not there. Not a word about them.
Those are just things that you think are good things to have.
Posted by: russell | September 23, 2010 at 02:32 PM
"I think it perfectly OK to tax the wealthy to pay for federal functions enumerated in the Constitution"
What do you think we should do about funding the Air Force?
Section 8 - Powers of Congress:
I don't see any mention of an Air Force there, do you?How about an Air Traffic Control system? National highways? The CDC? Your view is we must cut these from the federal budget?
You write that "some environment protections" is a proper endeavor of the federal government: where is that mentioned in the Constitution?
Posted by: Gary Farber | September 23, 2010 at 02:36 PM
I have to say that's a novel and unconventional definition for "confiscatory".
That said, the IRS doesn't look to see what its collected tax revenues are being put to use for, so it can hardly be accused of collecting "to exercise unconstitutional powers".
Posted by: Slartibartfast | September 23, 2010 at 02:39 PM
Doc,
I think the aristocracy that people fear is not in place and the one that is in place has been here since the founding, quoting Jefferson on the challenges of the aristocracy creates some level of cognitive dissonance for me.
I don't worry about it because of, well, the Tea Party, the Bull Moose party, whatever. At the apprpriate time in our history there has always been some group of people to remind the dueling aristocracies that if they go too far, limit opportunity too much, or take too much direct control our system allows for consequences.
Those consequences are typically losing control to the other aristocracy but it all but ensures a benign ruling class, just as envisioned by the founding fathers.
Posted by: Marty | September 23, 2010 at 02:40 PM
"There is absolutely, and I do mean absolutely, nothing in the document about [...] protecting individual civil rights."
There's what we call the Bill Of Rights, the first ten Amendments that were part of the original constitution, plus the 13th, 14th, 15th, 19th and 24th Amendments. These all protect individual civil rights.
Posted by: Gary Farber | September 23, 2010 at 02:46 PM
The Constitution when written had a certain meaning and intent. That is not subjective.
Well, it kind of is. When written, the Constitution contained certain words agreed on by people who couldn't agree on lots of things. (Slavery: permit or forbid? Can't decide--don't mention directly, use vague words. Strong or weak federal government? Somewhere in between, can't agree exactly where--enumerate powers, but also add general welfare clause in case we forgot something.) Immediately after the ratification, arguments broke out among the drafters themselves about what the words meant and what the drafters intended; Adams, Hamilton and Jefferson were on very different pages. The argument continue to this day, and in the last seventy-five years or so your side has pretty consistently lost. Not saying you shouldn't keep making your case, just that making it based on the objective plain meaning of the Constitution isn't likely to persuade, and not all of the reasons for that are bad.
Posted by: Hogan | September 23, 2010 at 02:47 PM
GOB,
I see your point, but I think you have things backwards. If you believe that certain government programs are unconstitutional the answer is to work through the courts and legislature to stop them. It's not to attack the taxes used to fund them.
Besides, suppose you are right, and manage to convince lots of people, so that the Federal Government is vastly pared back. It will still need to collect taxes to fund its more limited functions, so the argument won't really change, since it's fundamentally about how the tax burden is to be divided up. Suppose, for example, the estate tax were left in place, or even increased, but income taxes were drastically reduced. Would that be OK?
Going further, I wonder how much of the Federal budget is really spent on items you consider unconstitutional? Surely defense and debt repayment are constitutional, as is some amount of economic regulation, operating at least the major cabinet departments, etc.
And remember, the states will pick up many of the programs the feds drop, so there will be an increase in state level taxes, which will engender the same sort of debate.
Posted by: Bernard Yomtov | September 23, 2010 at 02:51 PM
If he can't, I'd have to say that he's objectively making up a personal definition, which I'd have to observe isn't terribly useful when attempting to communicate with others.
It's also simply a rhetorical technique, unconscious or conscious, as I implied above, to substitute an adjective for an argument. One might just as well substitute "baleful" or "maleficent" or "thuggish" or any other pejorative adjective, with exactly equal accuracy, since "confiscatory" simply doesn't mean to anyone beyond GOB and doubtless some other handful of people, "taxes collected to exercise unconstitutional powers."
Marty: "Those consequences are typically losing control to the other aristocracy but it all but ensures a benign ruling class, just as envisioned by the founding fathers."
Clearly, views differ on how benign our ruling class is for the rest of us.
Posted by: Gary Farber | September 23, 2010 at 02:56 PM
"Clearly, views differ on how benign our ruling class is for the rest of us."
Yes, perspective on this is always personal.
Posted by: Marty | September 23, 2010 at 02:59 PM