Rethinking Soaking the Rich 1

Conservatives might want to reconsider estate taxes.

Watching the current crop of Democrat lunatics rant and froth is the political equivalent of riding a dicey roller-coaster.  It feels crazy scary, but its entertaining, and surely there's a grownup in the control room to make sure it doesn't really run off the tracks, crash into a brick wall, and kill us all... right?  America would never really hand power willingly to someone who openly wants to rob them of their hamburgers and Orlando vacations, surely?

Well, people do get killed on roller-coasters.  And America did elect a fellow who openly pledged to get rid of affordable electric power - twice.

Yes, Mr. Obama was not in fact successful in his attempt to destroy affordable American energy.  Instead, we evaded his EPA's fraudulent attempts to strangle fracking in its cradle and are producing more energy than ever before, even exporting liquid natural gas despite his best efforts.  The left views him as a failure or a turncoat; we might view him as malevolent but incompetent.

As we've pointed out, new openly socialist Democrats like Alexandria Ocasio-Cortez have mostly mastered the art of saying appealing things that her base wants to hear - with the occasional spectacular exception like "We set a goal to get to net-zero, rather than zero emissions, in 10 years because we aren't sure that we'll be able to fully get rid of farting cows and airplanes that fast."  Generally, they offer free stuff at the expense of Someone Else, usually the rich.

It's instinctive for conservatives to oppose these efforts for a variety of reasons: because everything else they do is so loathsome, because they're on the Other Side, and because we believe in principle that people have a natural right to keep what they earn without it being stolen from them by a greedy government.  Many of these reasons are legitimate, but we should never react purely by instinct and emotion as the Left does.  When we choose a position, we ought to carefully consider what we believe, on what basis, what evidence, and whose authority.

And when you apply this high standard to one of the Left's economic goals, something shocking appears: they might actually have a point.

A Camouflage of Errors

Rep. Ocasio-Cortez's best-known tax idea is a 70% marginal rate on income over $10 million.  This sort of soak-the-rich approach has failed everywhere it's been tried, including Sweden: the handful of people who are able to earn an income that large either hire the very best attorneys to move the money into some other form of income that's taxed at a lower rate, like capital gains; or, they simply fire up their Learjets and decamp to a more welcoming jurisdiction.  We've talked about the dangers of overtaxing big earners before; no need to belabor it here when even New York's Governor Andrew Cuomo (D) understands it.

Bill Gates doesn't like this idea, so instead he's highlighting something even worse: a tax, not on income, but on wealth.  He truthfully explains that rich people like himself have next to no ordinary income, all the money is elsewhere:

In terms of revenue collection, you wouldn't want to just focus on the ordinary income rate, because people who are wealthy have a rounding error of ordinary income.  They have income that just is the value of their stock, which if they don't sell it, it doesn't show up as income at all, or if it shows up, it shows over in the capital gains side. So the ability of hedge fund people, various people — they aren't paying that ordinary income rate.

How to get government's greedy paws on it?  Mr. Gates suggests taxes on capital - that is, what you already own, regardless of what it earns.

Consider a man who owns an office building and lives off the rent he is paid less the expenses of operating the building.  He's used to paying property taxes, various taxes on his employees, and income taxes on the profits his business makes that he pays to himself.  With this idea, on top of all that, he'd have to pay another tax on the value of the building itself as a capital asset.

This would be aside from, and in addition to, the property taxes he already pays.  Think of it as a national federal property tax, but on every asset with any value, not just real property.

Noted faux-Indian Elizabeth Warren has taken this advice to heart and proposed a similar plan. But think of all the small businesses this would immediately destroy!  At least under our current system, you don't have to pay much income tax if you don't make much income.  Most small businesses, for example family farms, own assets that are worth a great deal on paper.  Add a "wealth tax" to them, and their tax liability will likely exceed the amount of actual cash they are able to make.

So among all the destructive lunacy, where's the gem?  Once again, Bernie Sanders has come forth with a smidgen of sanity:

Sanders' proposed estate tax rates are:

  • $3.5 million to $10 million: 45 percent tax
  • $10 million to $50 million: 50 percent tax
  • $50 million to $1 billion: 55 percent tax
  • more than $1 billion: 77 percent tax

A Horror of Nobility

Has Scragged lost its collective mind?  What on earth are we doing considering a 77% tax rate on anything?

First, let's consider what this tax is on.  It is not on income, nor is it on wealth.  It would not disincentive any particular hardworking individual from working even harder to better themselves by growing their businesses and creating jobs, which is a strong argument against excessive income taxes.  Nor does it rob from the elderly who've saved all their lives to accumulate a sizable nest-egg for a retirement that, these days, can last for decades.

No, an estate tax, sometimes called a death tax, is just that: a tax assessed on a deceased person's estate, that is, the wealth left behind after they shuffle off this mortal coil.  It doesn't harm the earner of the money in any way.

It does harm their heirs, obviously - they get a smaller check from the lawyer than they otherwise would have received.  But the heirs didn't earn the money - dad or mom did.  What right do they have to it at all?

At this point, it's time to ask our Founders what they thought of estate taxes.  You might be astounded:

A power to dispose of estates for ever is manifestly absurd. The earth and the fullness of it belongs to every generation, and the preceding one can have no right to bind it up from posterity. Such extension of property is quite unnatural.

 - Thomas Jefferson

Well, that was Thomas Jefferson - a Founding Father, yes, but also considered to be the founder of the Democratic Party.  How about this statement, which aside from the flowery language might have emanated from Bernie Sanders or AOC?

All Property, indeed, except the Savage's temporary Cabin, his Bow, his Matchcoat, and other little Acquisitions, absolutely necessary for his Subsistence, seems to me to be the Creature of public Convention. Hence the Public has the Right of Regulating Descents, and all other Conveyances of Property, and even of limiting the Quantity and the Uses of it. All the Property that is necessary to a Man, for the Conservation of the Individual and the Propagation of the Species, is his natural Right, which none can justly deprive him of: But all Property superfluous to such purposes is the Property of the Publick, who, by their Laws, have created it, and who may therefore by other Laws dispose of it, whenever the Welfare of the Publick shall demand such Disposition. He that does not like civil Society on these Terms, let him retire and live among Savages. He can have no right to the benefits of Society, who will not pay his Club towards the Support of it.

 - Benjamin Franklin

Can this possibly be the great Benjamin Franklin, he of "A penny saved is a penny earned" and Poor Richard's Almanac?  Apparently so - but consider the world in which our Founders lived.  After the desire for religious liberty, the whole second reason there was an America at all was the desire of Englishmen for their own land and the opportunity to earn their own wealth.

Why couldn't they have this things in England?  Because in England, somebody already owned everything - usually a Somebody with a fancy title next to his name, a member of the ruling elite whose property rights were backed by the full force and power of the King's Justice.

Our Founders believed in the natural right of people to keep what they earn.  They also had an abiding horror of hereditary aristocracies - after all, the very King against whom they rebelled amply demonstrated the negative results of generations of royal inbreeding.

Our Founders were huge fans of natural aristocracies - that is, people who personally earned their way to the top by great deeds and great efforts.  They would have had no problem with the 19th century robber barons who created vast fortunes while also turning our nation into an industrial giant.  They would have been fine with Henry Ford, Bill Gates, Steve Jobs, and Jeff Bezos, who changed the world forever through innovation and gave us the miracle of smart phones and near-instant wish fulfillment.

What our Founders did not want, was people like Paris Hilton.  Yes, Conrad Hilton earned his billions through management innovations that made world travel better, safer, and more comfortable - a branded chain of reliable hotels that could be trusted wherever found.  The Founders would agree that he deserved his billions.

His great-granddaughter, in stark contrast, had nothing whatsoever to do with earning any of that; her personal notoriety, aside from her inherited fortune, was earned on her back. Even the reliably leftist Wikipedia describes her this way:

Credited with influencing the revival of the famous for being famous phenomenon during the early and mid 2000s, Hilton exemplifies the "celebutante": a celebrity not through talent or work, but through inherited wealth and lifestyle.

Our Founders would have been disgusted - and as we see, at least a few of them would be asking, why the heck didn't we tax that gargantuan fortune so as to put at least some of it to public use, after the man who truly earned it had no further use for it?

As we see it, anyone who grew up in proximity to Conrad Hilton and couldn't get rich for him or herself through the training and contacts which abound in such a gilded environment is clearly not intelligent enough to be trusted with vast sums of money and the power that comes with it.

This doesn't mean we desire to tax everybody into equality in poverty as with Communism, though.  James Madison considered the existence of a hopeless underclass to be a deadly threat against democracy and private property:

The proportion being without property, or the hope of acquiring it, cannot be expected to sympathize sufficiently with its rights to be safe depositories of power over them.

Indeed, he specifically thought that our modern principle of "one man, one vote" regardless of wealth was doomed to failure:

It would be happy if a state of society could be found or framed in which an equal voice in making the laws might be allowed to every individual bound to obey them. But this is a theory which, like most theories, confessedly requires limitations and modifications.

He didn't think that limiting the vote to people with money would work either:

What is to be done with this unfavored class of the community? If it be, on the one hand, unsafe to admit them to a full share of political power, it must be recollected, on the other, that it cannot be expedient to rest a republican government on a portion of the society having a numerical and physical force excluded from, and liable to be turned against it, and which would lead to a standing military force, dangerous to all parties and to liberty itself.

His solution? Well... with all his genius, he didn't really have one.  He did the math and figured that America would be pretty much full up in a century or so, after which there would be no more free land for anybody willing to work on it, and we'd be right back to the problem of Europe's hopeless masses.

Even the Father of his Country Himself occasionally uttered words that sound direct from Karl Marx:

It is also believed that it will not be less advantageous to the happiness of the lowest class of people because of the equal distribution of property...

Now, the rest of George Washington's letter goes on to explain what he meant: not larcenous Marxian redistribution of wealth already belonging to somebody who had earned it, but the blessing of "the great plenty of unoccupied lands, and the facility of procuring the means of subsistence."  In other words, America was a land of infinite opportunity because it had vast empty reaches anybody could go make a life on, inconvenient only by virtue of the present occupants "the Savages" to use his politically incorrect description.

Our Founders obviously recognized that a mass of hopeless people is ripe for violent revolution and wouldn't have favored government policies that lead such people to multiply, but they thought much more deeply than that.  They understood that it wasn't enough for Americans to have the means of simple subsistence - like a government welfare check, or the "right to employment" in a make-work dead-end job that our current batch of socialists want to create as part of the guaranteed income.  No, they understood that people want to be able to own something - in their day land, in our day perhaps a house or a stock portfolio.  In a word, wealth.

It's an undeniable a fact that our great modern fortunes have made accumulating low-grade middle-class wealth rather more complex.  Once upon a time, America was filled with family farms that both provided for the families that farmed them and also represented wealth for their owners.  That's mostly gone now, starting with the Dust Bowl and coming down to modern agribusinesses.

Similarly, America was once full of small mom-and-pop stores of all descriptions, from insurance agents to general storekeepers to doctors and dentists.  Now, more and more of those industries are populated entirely by giant corporations whose vast economies of scale may lead to cheaper consumer prices, but also destroy much opportunity for ordinary people to build a viable, small, but independent and sustainable life and business.

The difficulties of starting or running a small business have been compounded by a growing mesh of government regulations which, although proclaimed to be put in place to "protect the public," have the effect of making it very difficult to start a new business to compete with giant incumbents.  These forces lend a significant degree of truth to AOC's and Bernie's declarations that "The system is rigged."

It's not that it is impossible to create a new business and rise to fame and fortune: that's what Mr. Gates, Mr. Bezos, Mr. Jobs, and their ilk did.  The problem is that the combination of very large businesses and government regulation has made building a business so much harder than in the past that it's not totally unrealistic to claim that the system is rigged against the little guy - since for 99% of them, it pretty much is.

It Wasn't Nobility, It Was Inherited Power

Our Founders explicitly banned all titles of nobility in our Constitution, but it wasn't really the words "Earl" or "Duke" that worried them.  They wanted to avoid having families that acted like Earls and Dukes down through the generations without regard to the personal characteristics of the current controller of the wealth.

They full well understood the problems for society when ditzes like Paris Hilton or King George III fell, by the lottery of being gestated in a high-status uterus, into positions of undue influence.  Would "Chappaquiddick Ted" have gotten away with vehicular manslaughter if he hadn't been the wealthy, politically-connected son of a wealthy bootlegger?  George W. Bush was a decent and humane man, but is there the slightest chance he would have ended up in the Oval Office had his "Poppy" not already dwelt there?

As conservatives, we ignore the wisdom of our Founders at our peril.  But there's another solid evidential reason why we ought to reconsider opposition to the "death tax."  We'll explore that in the next article in this series.

Petrarch is a contributing editor for Scragged.  Read other articles by Petrarch or other articles on Economics.
Reader Comments

Could not disagree more. Your whole premise is based on the idea that assets in the hands of the government somehow are magically more productive than when they are managed privately. To believe that is stupid.

Private enterprise has competition. When it presents a bad product, the enterprise fails. When government presents a bad product, they double the budget.

You may not like Paris Hilton, but her wealth bothers me not in the least. If she spends her fortune profligately, then there will be jobs at the Ferarri factory and the high end Jeweler will send his kids to medical school.

If she has sound advisors, they will invest her inheritance in assets they deem to have potential for growth and income. Companies like Apple or Tesla, for example. Their advice and those investments will sink or swim on their own merits and will be quickly redeployed should they not keep up in the competition of ideas and marketplace innovation.

This positive feedback mechanism, which drives innovation and productivity, widely raises living standards and simply does not exist in the real world of government spending on a broad basis.

And, by the way, you would never have heard of Paris Hilton had not millions of Americans (and others) not been keen to follow her every move. So, don't blame Paris. She is just a reflection of the shallow interests of the broader audience.

March 14, 2019 12:03 AM

You're asking the right question - and we'll get to that in further articles in this series. :-)

March 14, 2019 6:58 AM

Consider that if I earn any money I can either save it or spend it. Consider also that ALL capital goods come from saving, so savings are required for ALL economic growth. In fact, some saving is necessary simply to maintain economic activity because capital goods do wear out and become obsolete.

Now if I have savings, why should I plan to leave anything behind as an estate, and not spend it all, if it is just going to be taxed away? My children will not benefit either way, but I get the benefit of 'extra' money to spend, so why not consume it?

From society's viewpoint this value is consumed, decreasing the amount of capital available. Yes it will produce some economic activity, but it will decrease the amount of capital available, and thus decrease the total economic activity possible.

However, it is also true that we do not want dynasties based on inherited wealth. So my proposal is that the creator of wealth gets to pass it to their heirs tax free, but the heirs only get to pass on to their heirs any increase in value without tax.

Look at it this way, if someone inherits some capital, and increases it, then they have created value. That is good for society because the total wealth of society has been increased. They should be able to pass that increase to their heirs without tax. However the value of the capital they inherited is not value they created, and it should be taxed at some reasonable rate. This would continue to allow productive families to retain the capital newly created, but would stop the snowballing of "old" money over multiple generations.

Contrast this with some one inherits some capital, and does not manage to increase it; they have created no value. In this case all of the money passed on would be taxable. It would also cause non-productive families to face the reality that they are, in fact, not productive. This is important because a non-productive but powerful (because they are wealthy) dynasty is not good for society.

To be reasonable the inheritance tax would have to be phased in over decades to allow for adequate time for the capital to be increased, and of course be adjusted for inflation and other costs imposed by government.

March 14, 2019 4:42 PM

I would hope that any musings on the concept of dynasties of inherited wealth, would focus as well on the tendencies of heirs to NOT PRESERVE it for their own descendants. I believe this principle is strong, and that dynasties are indeed the exception rather than the rule.

By what moral principles, does any government have the right to attempt social engineering of this type? Can they demonstrate it is for the common good? Do they think assets can be more productive after they are confiscated from the original owner or his heirs? Is the government really fighting an evil?

March 15, 2019 11:12 PM
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