Questions for conservatives

[Gustaf]

The estate tax is a tricky issue. Taxing it highly incentivizes distortionary stuff to be done to avoid it. It disincentivizes people to be successful. And of course, it tends to lack political legitimacy (which is not an intellectual argument, just an observation).

In the long run free trade doesn't lead to unemployment. If you look at the industrial history of most countries this is pretty obvious. Also, by definition everyone always has a comparative advantage somewhere, so you can't really be left behind. There can be short-term problems with adjusting but these should typically be possible to fix. 

[Gustaf]

I'll give an example of what I meant. 200 years ago the vast, vast majority (I think something like 90%) of Swedes were employed as farmers. Now, hardly anyone is, partly due to technological change, partly due to trade now meaning that we import most of our farming produce.

However, this has not caused a 90% unemployment rate, because most people in Sweden now work with other things where marginal productivity is higher.

In the 50s the Swedish textile industry got knocked out by low-wage competition from Germany. It was a rather large industry at that. Yet, it hardly affected unemployment at all - economy was booming in the 50s and those people simply found new jobs elsewhere.

Otherwise, I mostly agree with Ag's points on this.

[Gustaf]

It disincentivizes people to be successful.

That is a lie.

Reporter:  Hey Mr. Gates are you going to start Microsoft?

Bill Gates:  No.

Reporter:  Why not?

Bill Gates:  Estate Tax.

Reporter:  I don't get it.

Bill Gates:  (sighs)  If I start Microsoft and have to pay estate tax decades from now when I'm dead my heirs will only get $30 billion instead of $60 billion.  What kind of person would relegate their children to living on $30 billion?!  I simply can't do that to them.

Reporter:  But I thought you were going to give most of it away anyway?

Bill Gates:  That's irrelevant.

Reporter:  But if you don't start Microsoft your children will have to live on a lot less than $30 billion.

Bill Gates:  Again that is irrelevant.  You must be a dumb ass Democrat liberal that doesn't understand economics.

The End.

I'm afraid this is too stupid to be worth my time in responding. I suggest you take a basic course in economics (or maybe just try thinking a little) and you might get how this actually works.

[Gustaf]

I'm afraid this is too stupid to be worth my time in responding. I suggest you take a basic course in economics (or maybe just try thinking a little) and you might get how this actually works.

It's NOT stupid at all. It's an empirical issue, not a theoretical one, and the empirical evidence is still mixed, as far as I understand. Do people really care about their kids and, if they do, how much and in which sense is very much an open issue. I wouldn't make categorical statements either way.

That there would be no effect on the margin goes against pretty basic theory, I'd say. I never quantified my statement. To take one example and think that it proves that there is no effect indicates having no understanding of how economics works.

[Gustaf]

It disincentivizes people to be successful.

That is a lie.

Reporter:  Hey Mr. Gates are you going to start Microsoft?

Bill Gates:  No.

Reporter:  Why not?

Bill Gates:  Estate Tax.

Reporter:  I don't get it.

Bill Gates:  (sighs)  If I start Microsoft and have to pay estate tax decades from now when I'm dead my heirs will only get $30 billion instead of $60 billion.  What kind of person would relegate their children to living on $30 billion?!  I simply can't do that to them.

Reporter:  But I thought you were going to give most of it away anyway?

Bill Gates:  That's irrelevant.

Reporter:  But if you don't start Microsoft your children will have to live on a lot less than $30 billion.

Bill Gates:  Again that is irrelevant. You must be a dumb ass Democrat liberal that doesn't understand economics.
The End.

I'm afraid this is too stupid to be worth my time in responding. I suggest you take a basic course in economics (or maybe just try thinking a little) and you might get how this actually works.

Like clockwork.

Yeah, I considered being cute about that, but, again, it didn't seem worth the effort. You seem to not really understand what I was saying, you see.

If you had said that the effect is unlikely to be very large I'd agree. I never claimed otherwise. But calling it a lie based on Bill Gates...well, that wasn't very convincing.

[Gustaf]

That there would be no effect on the margin goes against pretty basic theory, I'd say. I never quantified my statement. To take one example and think that it proves that there is no effect indicates having no understanding of how economics works.

That's the danger of basic economics ) It makes things look simpler than they are.

Constructing a theory where it would even have an opposite effect wouldn't be difficult at all. Suppose I don't really like my children, but want everybody to think I like them. A large estate tax would give me an excuse to spend the money on myself or to donate it to my favorite cause - you know, kids, the government would have taken it all, anyway. But that would, actually, increase my incentives to earn: I'd be spending on my own precious self, not on those stupid kids.

Or, for that matter, how about this one. Expectation of inheritance could destroy incentives kids of rich people have to work: why bother, if I am going to have more money than I could possibly spend in a lifetime. If you think that children of good businessmen might inherit their parents' talents, this would be outright waste.

In fact, I could write zillions of fairly basic theories that could go either way. In principle, I could even find parameters under which even without any esoteric considerations of the sort mentioned above you'd be working the more, the higher you are taxed (income effects could be funny). True, you would be unhappier - but you would, actually, create more jobs ))

Or, for that matter, I might simply not care about kids. Yes, of course, people leave inheritances. But whether they do this for the sake of the kids, or because they don't know when they'd die and do not want to be penniless if they happen to live long, is not such a simple issue to resolve (I've seen some studies, and, if I recall correctly, there might be some bequest motive detected in them - but it is, definitely, not something easy to resolve).

Which one of these theories is right is not something you could resolve by thinking hard. You need to test it with real data. And doing that is not easy.

BTW, even if there is a distortionary effect of estate tax that would have people work less, there is no reason to believe that this distortion is bigger than the distortion from the income tax. So, given that, in any case, taxes should be collected, it could well be more efficient to tax estates more and incomes less. Once again, I am not claiming this - I don't know. But there is nothing so special about the estate tax that would make it obvious that it is something not to be done.

Eh, I know. That's why I support having an estate tax. You have a tendency to make very far-reaching conclusions about other peoples' opinions.

The reply that you just gave is hardly stupid, but I maintain that the one Link gave was. His second post even further underlined that he doesn't really get it.

Anyway, a model where the income effect is that strong goes against all the research I've come across on labour supply (although feel free to point to papers indicating this). And a model that assumes people don't care about their kids...well, that sounds like the kind of model bad economists would come up with. I think it is fairly reasonable to assume people on average do take their children into consideration to some extent.

As I said, I'd be inclined to agree that the quantitative effect of estate tax probably isn't very large. I never claimed otherwise.

[Gustaf]

It disincentivizes people to be successful.

That is a lie.

Reporter:  Hey Mr. Gates are you going to start Microsoft?

Bill Gates:  No.

Reporter:  Why not?

Bill Gates:  Estate Tax.

Reporter:  I don't get it.

Bill Gates:  (sighs)  If I start Microsoft and have to pay estate tax decades from now when I'm dead my heirs will only get $30 billion instead of $60 billion.  What kind of person would relegate their children to living on $30 billion?!  I simply can't do that to them.

Reporter:  But I thought you were going to give most of it away anyway?

Bill Gates:  That's irrelevant.

Reporter:  But if you don't start Microsoft your children will have to live on a lot less than $30 billion.

Bill Gates:  Again that is irrelevant. You must be a dumb ass Democrat liberal that doesn't understand economics.
The End.

I'm afraid this is too stupid to be worth my time in responding. I suggest you take a basic course in economics (or maybe just try thinking a little) and you might get how this actually works.

Like clockwork.

Yeah, I considered being cute about that, but, again, it didn't seem worth the effort. You seem to not really understand what I was saying, you see.

I think the problem is with the way you expressed yourself, not my comprehension.

It disincentivizes people to be successful.

I think if you made that statement to 100 people 99 would interpret it the way I did.

It disincentivizes people to be successful≠Sometimes in certain uncommon niche situations it may disincentives people but not to a degree that is germane to this conversation or economic policy.

There is a difference.

If you had said that the effect is unlikely to be very large I'd agree.

Unlike you that is exactly what I said...

Are there certain niche situations where it may come into play?  Sure, maybe.

But calling it a lie based on Bill Gates...well, that wasn't very convincing.

Unfortunately I have a limited writing staff so I could only put on a small play with a cast of two.  Some other characters that I considered budget permitting were...

Warren Buffet
Michael Bloomberg
Steve Jobs
Mark Zuckerberg
Micheal Dell
Michael Jordon
Tiger Woods

The list goes on.  I think you get the idea.  You are just going to have to trust me.  When Michael Jordon was practicing free throws in high school the vagaries of an oppressive estate tax were not on his mind.

At any rate if your position is that it is possible for an estate tax to discourage some kind of further risk taking when you are playing so far out on the curve already in certain isolated situations then sure I already stated I agreed with that before you wrote your rebuttal.

*sigh*

Anyone who knows economics would know that any discussion on taxation is about aggregate effects on the margin. I mean, obviously I wouldn't be claiming that estate taxes would stop Bill Gates from founding Microsoft.

This is because your argument can be equally applied to income tax. If I were to say that income taxes (especially progressive ones) disincentivizes success you could also have made your cute Bill Gates example. And it would have been equally clueless.

Now, had you said "are you claiming that it would prevent people from becoming super-rich, because surely that makes no sense? I'm asking since I don't know much about economics so maybe I'm missing something" I would probably have replied with an explanation, an apology for not wording it clearer and a nice smiley.

But you decided to go with "that is a lie" and being all smartass-y about it. And people who are both ignorant and arrogant are very tedious to discuss with, in my experience.

And of course where you said that was not in the post I was responding to. But I'm glad you saw the light. I did point out that you could probably do it if you just thought a little instead of spending time trying to write zingers.

[Gustaf]

This is nonsense (what Politico says). Dead people do not pay taxes: once you are dead, you don't do anything. The taxes are paid by the heirs. In fact, estates are already treated very lightly. The logical thing would have been to treat any estate income as income, at the normal rates for the income tax.

Also, there is every reason to believe that this tax is both less distortionary and less unpleasant for those that bear them, than the regular income tax. While the bequest motive might be there, it is also pretty well established that the big chunk of estates are left because of the precautionary motive: people don't know when they'd die and would like to have some wealth around in case they happen to live long and need expensive services as they get old. What you propose is to tax people, while they are alive: i.e. make them pay when they are old and might need these resources themselves, make it difficult for them to make savings for when they are at their most vulnerable, pushing them towards dependency in old age.

To sum up, this nonsense about "taxing death" is both bad policy (from the conservative standpoint) and sickening demagogy (from any standpoint).

While that is all true, people do find it tasteless for emotional reasons which is a large part of the explanation for why estate taxes are controversial. It's been the same in Sweden with property taxes. Despite being a good tax it was abolished simply because people were too mad about it.

[Gustaf]

While that is all true, people do find it tasteless for emotional reasons which is a large part of the explanation for why estate taxes are controversial. It's been the same in Sweden with property taxes. Despite being a good tax it was abolished simply because people were too mad about it.

This is why, rather than taxing estates it would make sense to tax the income the heirs get from the estates. This, purely formal, change, would have the impact of switching the default. Rather than taxing something otherwise not taxed, one could offer steep discounts off the regular income tax rates )

How would this work though? Do you mean all income generated over a life-time that can be traced to inherited assets? Because that seems like it would be pretty thorny to monitor.

I'd also note that typically a traditional estate tax needs to be accompanied by a similar tax on gifts, since you want neutrality between inheriting and being given stuff.

Also, fun aside: last week I adjudicated a debate on essentially abolishing inheritance. 1st government, arguing for state confiscation of all inherited assets beyond a primary residence and $80 000 got the win from me.

[Gustaf]

Actually, in the US gifts are taxable, I believe.

The simplest arrangement, of course, would be to treat gift and inheritance as income in the year you obtain it. Not that hard to monitor: your great-aunt has died and left you USD$50,000 in a year in which you earned USD$20,000, so your gross income should be USD$70,000 and that's it. Then, of course, you could have different rates not only for wage and investment, but also for inheritance income. But the default should be that it is your income, period.

Yes, that was my point.

Ok, so that's what you meant. When you said income derived from the estate I thought you meant income streams or something. I guess that sounds fairly reasonable. Of course, when you're forcing people to give up family houses or heirlooms because they can't afford to pay 30% or 50% of its value in taxes (or whatever the income tax rate is in one's country) people will be mightily pissed. Then again, if you have very low rates they won't. But if the rates get really low you can start wondering what the point of them is overall...