How is private wealth bad for democracy? Tom Smith

I wish people would quit saying this, especially Warren Buffet.  Someone should write a book addressed to him and call it "Shut Up and Invest."  (I concede I am lumping together Buffet with all the other annoying defenders of the estate tax.  This is a rant, not a law review article.) Is there any evidence that having very wealthy families around undermines democracy?  Has it ever actually happened?  Canned histories culminating in the blinding illumination that was the New Deal, don't count.  Rich people being able to protect their property does not IMO count as "undermining democracy" at least not in a bad way.  I suppose if democracy means the greater number being able to plunder the wealth of the fewer, then letting people keep the money they have earned and already paid taxes on once, is undermining democracy, but then it's in a way it ought to be undermined.  I think rich families and other aglomerations of private wealth are bulwarks against the state, which is always looking for ways to take things and give it to its allies, something I prophesy we are going to be seeing a lot more of.  This nonsense of, it's unfair that some people are born rich, presupposes that if the state takes that money, it will somehow be redistributed to the deserving, which is a complete joke.  This notion that those who have done extra well in America have a moral obligation to give back (to the state and its friends of course) baffles me.  You make fine widgets and people buy them.  You make money.  You pay taxes.  You are rich because you made fine widgets. It's a miracle you did, given the maze of tax and regulatory law you had to navigate to even get there.  How does that translate into, now give 45% what's left to the government so that can give it to the managerie of sycophants clustered about it.

But I digress.  What I really don't believe is this vulgar populist notion that we are somehow freer and more democratic (in a good way) if nobody gets too rich.  That notion gets trotted out as if it is somehow self-evident.  Children of rich people will squander wealth quickly enough (and so support race car manufacturers, wine vendors etc.) quickly enough without the state confiscating their wealth.  The whole idea of an estate tax is offensive to property rights.

Allow me to point out that Buffet has so much money he doesn't care (though apparently he does in fact) how much the government takes.  He also is said to be, or so I have read, a pretty indifferent father.  He's the last person we should be listening to about the death tax.  Instead, talk to some businessman who has built a $25 million business over a lifetime and wants to use that value to offer his kids opportunities he never had himself.  Oh no, instead let's use that money to create a pilot project to investigate modalities of how to organize community awareness meetings regarding how to organize local groups in grass roots awareness structures in underserved areas (Phase 1).  It's a good thing I don't have any money, or I'd really be annoyed.

Comments

[y81]

If the Rockefellers and the Kennedys are "bulwarks against the state," that had rather escaped me. I think agglomerations of wealth enhance the risk Ross Douthat described, of an alliance of aristocrats and peasants against the yeomen and petty bourgeoisie, which has in fact been the role of the Rockefellers and Kennedys.

[J. Bogart]

There is evidence on the question of whether large hereditary wealth undermines democractic and republican political schemes. Look at the history of Florence as an example.

[Jonathan]

Really rich people aren't much affected by inheritance taxes. They set up foundations that they and their heirs control. They buy life insurance. They can afford good tax advice. The people who are most affected are the heirs to successful family businesses that are worth a few million bucks. These people usually don't have millions in cash lying around to pay the tax when dad dies -- the money is tied up in the business where it is generating income and jobs and more wealth. These people get absolutely destroyed by inheritance taxes, because they often have no way to pay the tax bill other than by selling the business, the work of someone's lifetime. And the people who buy such business, like Warren Buffet, know that the heirs have to generate cash quickly, so it becomes a fire sale. That's what the inheritance tax does. But by all means let's keep the inheritance tax because somebody has a vague theory that "concentrations of wealth" are bad (except of course when they're held by the government or swanky non-profits). And let's always justify the tax by talking about hypothetical plutocrats rather than the family of someone who owned a farm or a few dry-cleaning stores. The intellectual dishonesty on this topic by people who should know better is astonishing.

[Marek]

There are usually a number of reasons why people succeed and get rich. Much of success comes from hard work, ingenuity, sacrifice. But let's not forget society factors: rule of law, infrastructure, education, to name a few. Go ahead and drop the successful widget-maker into Pakistan, and let's see how well he does there.

So when a wealthy person dies, it doesn’t seem that unfair to have some of his wealth (but not all, or even most) go back to society. Charity is always an option (thanks, Warren Buffett). Sure, we need a higher threshold before the estate tax kicks in so that non-wealthy small businesses don't get busted up, but that's an easy problem to fix.

But if we still don't like the "death tax", I suppose we could eliminate it and make up the revenue in higher income taxes. Oh, or we could cut taxes, say we're going to cut government and then chicken out and run up big deficits instead. That could work.

[Dan Simon]

This argument against the inheritance tax makes no sense. Put aside for a moment all that rhetoric about class warfare and taxation being theft spurred on by jealousy. The tax isn't actually a property tax on the deceased, but rather a form of income tax on the inheritor(s). Warren Buffet was never going to pay the tax--he'll be dead, and normally his inheritors would get the tax bill. The reason the Gates Foundation doesn't pay tax on the inheritance is that it gets a tax break for being a charity, not that Buffet gets one for being a clever money manager.

Now, we can discuss whether charities should be exempt from income tax, but why should an ordinary inheritor get that kind of tax break? What makes his or her inheritance income more sacrosanct than the income he or she or anyone else makes by working for it?

It's true that an inheritance is a kind of windfall (i.e., large one-time income) for the inheritor, and that the tax system in general doesn't deal with windfalls very well at all. (Hence the problem mentioned by a previous commenter of inheritors having to liquidate a business when it changes hands, just to pay the tax on it.) But there are solutions to that problem that don't turn inheritance into a huge income tax loophole, which is what you seem to want it to be. Loopholes are generally bad--remember?

[Tom Smith]

Maybe the best argument against the death tax is that usually income coincides with liquidity. So for example stock that cannot be liquidated or does not have a market value is usually not income. But the death tax treats often enough the passing of illiquid assets from one generation to the next as if it were a liquidity event, which it's not. It's just stupid because it does not conform to the inevitable process by which wealth passes from generation to generation, as if it's done by handing over greenbacks instead of working assets.

[Matt]

Usually those that arent opposed to the inheritance tax are those that will not be affected by it much like those not paying the top marginal rate. Since so few people are affected by it they create a majority of people that find ways to justify the inheritance tax. Then you have ultra-rich like Buffet on their high horses with their holier than thou attitudes about taxing the inheritance at a higher rate than now.

Why doesnt Warren get off his ass in Lincoln and travel to some farms in the great state of Nebraska (as an example)and maybe he will find out that the inheritance tax has some lingering effects on those that would like to continue a family business.

Who can afford the life insurance policies to cover the taxes? Who has millions in cash reserves laying around? You can only pass down 12k per year tax free that isnt enough to eat at the estate value.

The problem for me is that many people are refusing to look at the other side of the argument because either it hasnt or it wont happen to them. Along the lines of those for limiting some personal freedoms and liberties because they are not partaking in them anyway at the time...

[Matt]

Sorry, I meant Omaha not Lincoln.

[PaulD]

I am opposed to the inheritance tax in general and would be happy to see it eliminated. Given that the tax exists, however, it is disturbing to me that many similarly situated estates are taxed very differently based on estate planning gimmicks. Many people can avoid the tax altogether (or at least save hundreds of thousands of dollars) by hiring an estate planning attorney who helps them use legally acceptable methods to avoid the tax. Many estates pay far more taxes than required as a penalty for not hiring an attorney and setting up some silly trusts or closely held family corporations.

[Jonathan]

The tax persists in part because it generates large profits for the estate-planning industry.

[larry]

It annoys me as well to hear Warren Buffet saying the country ought to raise taxes. It almost makes me want a net wealth tax that would confiscate all wealth over a certain amount, say one billion dollars.

I have to agree with y81's remark about the Kennedys and Rockefellers not being bulwarks against the state. They are the opposite of a bulwark against the state. They want to make the state more powerful and take more of the taxpayers' money. They have more than enough money to live the lifestyle they prefer, and all the money their children will need. It doesn't matter if the top income tax rate is 35% or 70%.

But it's tough to build wealth if your income is taxed at 55% or 60%. The government makes more off you than you get to keep. And that's taking only income taxes into account. Government at every level rakes in lots more money on various other taxes.

Tom is exactly right: property and wealth can serve as bulwarks against state power. You can hire first-rate lawyers and accountants to fight the IRS and state tax authorities (see the recent Nevada Supreme Court decision in Hyatt v. Cal. Franchise Tax Board as an example). With money you can more easily resist local government's attempts to take your home by emminent domain. I could go on and on with examples.

[josil]

Warren Buffett wants you to pay higher taxes while he hides his wealth in a foundation. Why doesn't he contribute to the commonweal is it's such a grand idea?