Mankiw wrong on estate tax

1 view
Skip to first unread message

Rue The Day

unread,
Nov 11, 2003, 10:02:13 AM11/11/03
to
"susupply" <susu...@mindspring.com> wrote in message news:<06vrb.18356$Oo4....@newsread1.news.atl.earthlink.net>...
> The estate tax is a tax on capital. As such, one would naturally expect it
> to discourage capital accumulation. Now, put this together with the fact
> that a smaller capital stock reduces productivity and labor income
> throughout the economy and the implication is clear:
> the repeal of the
> estate tax would stimulate growth and raise incomes for everyone, even
> those who never receive a bequest.

First, let us look at the notion that capital is somehow destroyed in
order to pay the estate tax. A wealthy man whose sole asset is a
factory dies and bequeaths the factory to his son. In order to pay
the estate tax, the son is forced to sell the factory to someone else.
What has happened? In effect, ownership of the factory was
transferred. The total capital stock of the nation is unchanged. It
is not as if the son were forced to demolish the factory and sell the
machines as scrap metal. Capital flowed from one person to another,
it was neither created nor destroyed. In all fairness to Mankiw, I
don't believe he is arguing that capital was destroyed, but it's
important that we nip that mistaken theory in the bud.

Now, what I believe Mankiw was arguing is that the mere presence of an
estate tax provides people with a disincentive to save. This theory
can easily be shown to be false as well. People save primarily as a
means of deferring consumption to a later point in time. It's a
matter of intertemporal choice. Since the estate tax does not tax
current income, and current income can be used either for consumption
or saving, clearly the presence of the estate tax does not provide a
disincentive to earn. So you say, "Aha! It provides a disincentive
to save. That's how it discourages capital accumulation." But the
estate tax is not paid at the time one makes the save/consume
decision. It is not a tax on savings. The criteria that are used to
determine whether one should consume now or defer that consumption and
save are in no way impacted by the estate tax. Income can be saved
and consumed later and still avoid being taxed. So it would appear
that the only possible way that the estate tax can alter behavior is
by encouraging people to consume/save as they ordinarily would, with
one exception - it would encourage people to liquidate all of their
assets immediately before they died and go on a spending spree in
order to avoid paying the estate tax. Apart from the practicality
concerns and the uncertainty of the time of death, there is a fatal
flaw in this logic. That flaw is the capital gains tax, which the
person would pay upon liquidating their assets. Thus, it is only
logical to conclude that the estate tax does not reduce the total
capital stock of the nation, it merely results in a different
distribution of it.

susupply

unread,
Nov 11, 2003, 10:33:12 AM11/11/03
to

"Rue The Day" <ruet...@outgun.com>

who used the wrong word in his thread title (hint: antonym),

wrote in message news:a44a8c58.03111...@posting.google.com...

> First, let us look at the notion that capital is somehow destroyed in
> order to pay the estate tax.

That's not what Mankiw said. His words were:

> > The estate tax is a tax on capital. As such, one would naturally expect
it
> > to discourage capital accumulation.

And you even admit it:

> In all fairness to Mankiw, I

> don't believe he is arguing that capital was destroyed....

[snip]

> So it would appear
> that the only possible way that the estate tax can alter behavior is
> by encouraging people to consume/save as they ordinarily would, with
> one exception - it would encourage people to liquidate all of their
> assets immediately before they died and go on a spending spree in
> order to avoid paying the estate tax.

Didn't read Mankiw's paper, did you? He makes the same point Milton
Friedman did:

-----------------quote--------------------
Consider the story of twin brothers - Spendthrift Sam and Frugal
Frank. Each starts a dot-com after college and sells the business a few
years later,
accumulating a $10 million nest egg. Sam then lives the high life, enjoying
expensive
vacations and throwing lavish parties. Frank, meanwhile, lives more
modestly. He keeps
his fortune invested in the economy, where it finances capital accumulation,
new
technologies, and economic growth. He wants to leave most of his money to
his children,
grandchildren, nephews, and nieces.

Now ask yourself: Which millionaire should pay higher taxes? It seems
natural
that they should face the same tax burden. They both started life with the
same resources.
What notion of fairness suggests that they should face different tax
burdens? What
principle of social justice says that Frank should be penalized for his
frugality? None
that I know of.

Several years ago the book The Millionaire Next Door made bestseller lists
with
the message that getting rich is more often the result of patience than of
good luck.
Recent research suggests that this is right on the mark.Whether a person
reaches old age
wealthy or penniless mostly depends on the percentage of his earnings he
saved -not on
the total amount he made in his lifetime. This means that most of the burden
of the estate
tax falls not on those who have been lucky throughout life but rather on
those who have
been frugal. In other words, when the government taxes your estate, it is,
literally, taxing
your patience.
---------------------endquote-------------------

Anyway, your logic is also flawed in that you aren't considering the
opportunity costs of an heir having to sell a factory to pay estate taxes.
If the heir didn't have to do that, the prospective purchaser would have to
find another opportunity, which would include a start-up.


Tim Worstall

unread,
Nov 11, 2003, 1:23:01 PM11/11/03
to
ruet...@outgun.com (Rue The Day) wrote in message news:<a44a8c58.03111...@posting.google.com>...

Two thoughts on this.

1) Capital stock is unchanged, yes. But the number of people with
large amounts of capital ( ie those children who have to pay the tax )
is reduced. As Gilder argues in " Wealth and Poverty " it is just
those rich , with an excess of capital over and above anything they
need for consumption purposes, either now or in the future, who
provide most of the venture capital. A reduction in the number of
people willing or able to undertake that form of investing could
indeed reduce future total wealth. Or could at least.

2) I think your second point ignores certain human reactions. People
want to provide for their children. What some have called the "
cascade of wealth down the generations " . An estate tax will change
people's willingness to save for this purpose, and thus could reduce
capital formation across the economy.
Another way of putting this is that I don't think the simple
formulations of the lifetime savings model are correct : Many desire
to leave capital, and thus choices, to children and grandchildren.

How important either of these two are I don't know. But I think it an
error to dismiss both of them as being non existent.

Tim Worstall

xenman

unread,
Nov 11, 2003, 1:26:55 PM11/11/03
to
On 11 Nov 2003 07:02:13 -0800, ruet...@outgun.com (Rue The Day)
wrote:

>"susupply" <susu...@mindspring.com> wrote in message news:<06vrb.18356$Oo4....@newsread1.news.atl.earthlink.net>...
>> The estate tax is a tax on capital. As such, one would naturally expect it
>> to discourage capital accumulation. Now, put this together with the fact
>> that a smaller capital stock reduces productivity and labor income
>> throughout the economy and the implication is clear:
>> the repeal of the
>> estate tax would stimulate growth and raise incomes for everyone, even
>> those who never receive a bequest.
>
>First, let us look at the notion that capital is somehow destroyed in
>order to pay the estate tax. A wealthy man whose sole asset is a
>factory dies and bequeaths the factory to his son. In order to pay
>the estate tax, the son is forced to sell the factory to someone else.
> What has happened? In effect, ownership of the factory was
>transferred. The total capital stock of the nation is unchanged. It
>is not as if the son were forced to demolish the factory and sell the
>machines as scrap metal. Capital flowed from one person to another,
>it was neither created nor destroyed. In all fairness to Mankiw, I
>don't believe he is arguing that capital was destroyed, but it's
>important that we nip that mistaken theory in the bud.
>

[snip]

The problem with your analysis is the cash used to buy the
factory came from some kind of investment that had to be sold.
Likewise, the seller of the factory would in turn invest all the cash
if there were not taxes. What you have here is a net loss of
capital, liquid and non-liquid, that ends up being estate taxes.

Why you choose to ignore this obvous result is beyond my
comprehension.

ro...@telus.net

unread,
Nov 11, 2003, 3:24:29 PM11/11/03
to
On Tue, 11 Nov 2003 15:33:12 GMT, "susupply" <susu...@mindspring.com>
wrote:

>"Rue The Day" <ruet...@outgun.com>
>
>who used the wrong word in his thread title (hint: antonym),
>
> wrote in message news:a44a8c58.03111...@posting.google.com...
>
>> First, let us look at the notion that capital is somehow destroyed in
>> order to pay the estate tax.
>
>That's not what Mankiw said. His words were:
>
>> > The estate tax is a tax on capital.

I have already explained why that is a lie. So Rue is right, and
Patrick and Mankiw are wrong.

>>So it would appear
>> that the only possible way that the estate tax can alter behavior is
>> by encouraging people to consume/save as they ordinarily would, with
>> one exception - it would encourage people to liquidate all of their
>> assets immediately before they died and go on a spending spree in
>> order to avoid paying the estate tax.
>
>Didn't read Mankiw's paper, did you?

It is garbage, as explained below.

>He makes the same point Milton
>Friedman did:
>
>-----------------quote--------------------
>Consider the story of twin brothers - Spendthrift Sam and Frugal
>Frank. Each starts a dot-com after college and sells the business a few
>years later,
>accumulating a $10 million nest egg. Sam then lives the high life, enjoying
>expensive
>vacations and throwing lavish parties.

IOW, Sam gives his money to the people who are engaged in producing
the goods and services he wants to consume. The productive are of
course more likely than anyone else to use that money productively, so
unlike Frank, Sam has done the best he can to make that money
available for productive investment.

>Frank, meanwhile, lives more
>modestly. He keeps
>his fortune invested in the economy, where it finances capital accumulation,
>new technologies, and economic growth.

No, actually, it doesn't. Frank doesn't let the productive use his
money to finance capital accumulation, new technologies, or economic
growth; that would be too risky. Instead, he just buys up idle,
unproductive rent collection privileges like land, government bonds,
rentier stocks like Micro$oft, REITs, Fannie Maes, etc. His
"investments" typically add nothing whatever to production of wealth,
but only redirect wealth out of other people's pockets and into his
own -- unlike Sam's money, which went directly to the productive.

>He wants to leave most of his money to
>his children,
>grandchildren, nephews, and nieces.

His _equally_idle_and_parasitic_ children, grandchildren, nieces and
nephews...?

>Now ask yourself: Which millionaire should pay higher taxes?

Frugal Frank, beyond any possible question. All the great thinkers
are agreed on this point:

"The preservation of property is the end of government, and that for
which men enter into society. It is true governments cannot be
supported without great charge, and it is fit everyone who enjoys his
share of that protection should pay out of his estate his proportion
for the maintenance of it."
-- John Locke, Second Treatise on Government, 1690

"The revenues of the state are the fraction that each subject gives of
his property in order to secure or to have the agreeable enjoyment of
the remainder."
-- Baron de Montesquieu, The Spirit of Laws, 1751

"The expense of government to the individuals of a great nation is
like the expense of management to the joint tenants of a great estate,
who are all obliged to contribute in proportion to their respective
interests in the estate. In the observation or neglect of this maxim
consists what is called the equality or inequality of taxation."
-- Adam Smith, The wealth of Nations, 1776

"It is generally allowed by all, that men should contribute to the
public charge but according to the share and interest they have in the
public peace; that is, according to their estates or riches."
-- Sir William Petty, British Prime Minister, 1782-3

"Every man is bound to contribute to the public revenue in proportion
to the benefits he receives from the public protection."
-- Thomas M Cooley, Constitutional Limitation, 1868

A higher tax burden for Frank also satisfies the two most fundamental
and widely accepted principles of fair and economially efficient
taxation policy: ability to pay, and beneficiary pay. Frank is more
able to pay taxes because he has the assets, and is consequently
collecting unearned income from the community for doing nothing. He
is also thus benefiting far more from government spending than Sam, as
explained in the quotes above. Almost all government spending
ulltimately benefits asset owners, especially landowners, far more
than anyone else.

>It seems
>natural
>that they should face the same tax burden. They both started life with the
>same resources.
>What notion of fairness suggests that they should face different tax
>burdens? What
>principle of social justice says that Frank should be penalized for his
>frugality? None
>that I know of.

See above. He is not being "penalized for frugality." He is merely
being asked to pay appropriately for the additional benefits he
receives from government and the community by virtue of idly owning
his assets.

>Several years ago the book The Millionaire Next Door made bestseller lists
>with
>the message that getting rich is more often the result of patience than of
>good luck.

But carefully avoided mentioning the fact that it is most often the
result of privately pocketing publicly created value, and not paying
tax on it.

>Recent research suggests that this is right on the mark.Whether a person
>reaches old age
>wealthy or penniless mostly depends on the percentage of his earnings he
>saved -not on
>the total amount he made in his lifetime.

This is merely an artefact of treating mortgage payments (i.e.,
payments for the privilege of privately pocketing publicly created
value) as "savings."

>This means that most of the burden
>of the estate
>tax falls not on those who have been lucky throughout life but rather on
>those who have
>been frugal. In other words, when the government taxes your estate, it is,
>literally, taxing
>your patience.
>---------------------endquote-------------------

Better than taxing your production. While it would certainly be
fairer and more economically efficient to tax assets annually by value
as real estate is taxed, rather than only when they are transferred
through an estate, it is nevertheless fairer and more efficient to tax
estates than to tax the earned incomes of the productive.

>Anyway, your logic is also flawed in that you aren't considering the
>opportunity costs of an heir having to sell a factory to pay estate taxes.
>If the heir didn't have to do that, the prospective purchaser would have to
>find another opportunity, which would include a start-up.

Your logic has a much bigger flaw: you aren't considering the fact
that money spent on consumption of goods and services goes to the
producers of those goods and services, who are more likely than
non-producers to use it productively to produce more goods and
services. Money "invested" in idle rent collection privileges (by far
the majority of the assets of the rich), OTOH, does nothing whatever
to enhance production of goods and services, but only transfers wealth
away from the productive and into the idle "investor's" pockets.

-- Roy L

Rue The Day

unread,
Nov 11, 2003, 4:56:25 PM11/11/03
to
"susupply" <susu...@mindspring.com> wrote in message news:<Yi7sb.21366$Oo4....@newsread1.news.atl.earthlink.net>...

> "Rue The Day" <ruet...@outgun.com>
>
> who used the wrong word in his thread title (hint: antonym),
>
> wrote in message news:a44a8c58.03111...@posting.google.com...
>
> > First, let us look at the notion that capital is somehow destroyed in
> > order to pay the estate tax.
>
> That's not what Mankiw said. His words were:
>
> > > The estate tax is a tax on capital. As such, one would naturally expect
> it
> > > to discourage capital accumulation.
>
> And you even admit it:
>
> > In all fairness to Mankiw, I
> > don't believe he is arguing that capital was destroyed....
>
> [snip]

That's right. I clearly stated that I was just providing some
background information for my argument at that point and not yet
directly addressing Mankiw's position.

Quite possibly the most ludicrous thing I have ever read. Let's add a
third character to this story - a taxi driver who is not a millionaire
and has to work in order to feed his family. Should he not have to
pay taxes either in this hypothetical example? Either we tax income
or we don't, and if we do, to suggest that wage income be taxed while
investment income is not in the name of "fairness" is lunacy.
Furthermore, Milton's example is just flat out wrong in that it fails
to account for the fact that Spendthrift Sam is paying sales tax on
goods he purchases, excise taxes on other goods, and property tax on
real property that he purchases. So to suggest that he's not paying
taxes is ignorant. Wasn't Milton Friedman the one who said that it's
not important if economic models don't reflect reality? Not
surprising.

> Several years ago the book The Millionaire Next Door made bestseller lists
> with
> the message that getting rich is more often the result of patience than of
> good luck.
> Recent research suggests that this is right on the mark.Whether a person
> reaches old age
> wealthy or penniless mostly depends on the percentage of his earnings he
> saved -not on
> the total amount he made in his lifetime. This means that most of the burden
> of the estate
> tax falls not on those who have been lucky throughout life but rather on
> those who have
> been frugal. In other words, when the government taxes your estate, it is,
> literally, taxing
> your patience.
> ---------------------endquote-------------------

Pure fiction. It's deceitful to suggest that most wealthy people
became wealthy by working hard and saving a large portion of their
wage, when in fact the reality is that most either inherited their
wealth or acquired it by collecting some sort of economic rent.

> Anyway, your logic is also flawed in that you aren't considering the
> opportunity costs of an heir having to sell a factory to pay estate taxes.
> If the heir didn't have to do that, the prospective purchaser would have to
> find another opportunity, which would include a start-up.

Opportunity costs are largely irrelevant to this particular analysis.
It's merely a transfer of an asset from one party to another. Much
like what happens when the old man dies and transfers the asset to his
son.

Rue The Day

unread,
Nov 11, 2003, 5:29:58 PM11/11/03
to
xenman <xen...@sprynet.nospaam.com> wrote in message news:<29a2rvshq0fmhmppt...@4ax.com>...

> The problem with your analysis is the cash used to buy the
> factory came from some kind of investment that had to be sold.

To someone else. Which means it still exists.

> Likewise, the seller of the factory would in turn invest all the cash
> if there were not taxes.

That's an assumption. He might well have spent some of it.
Meanwhile, the government, might use it to fund investment in
infrastructure.

>What you have here is a net loss of
> capital, liquid and non-liquid, that ends up being estate taxes.

Incorrect. Cash is not capital.

> Why you choose to ignore this obvous result is beyond my
> comprehension.

Because the assumption is wrong.

sinister

unread,
Nov 11, 2003, 5:37:16 PM11/11/03
to

"xenman" <xen...@sprynet.nospaam.com> wrote in message
news:29a2rvshq0fmhmppt...@4ax.com...

No, what's truly beyond comprehension is your ignoring of the fact that
taxes have to be raised *somehow*. If we eliminate the estate tax, then we
have to raise the taxes from somewhere else.


xenman

unread,
Nov 11, 2003, 8:59:08 PM11/11/03
to

>> Why you choose to ignore this obvous result is beyond my
>> comprehension.
>
>No, what's truly beyond comprehension is your ignoring of the fact that
>taxes have to be raised *somehow*. If we eliminate the estate tax, then we
>have to raise the taxes from somewhere else.
>

And what does your response have anything to do with whether or not
capital is reduced by estate taxes. This thread has a subject and
your response ignored it, as does this response.

xenman

unread,
Nov 11, 2003, 9:06:36 PM11/11/03
to
On 11 Nov 2003 14:29:58 -0800, ruet...@outgun.com (Rue The Day)
wrote:

>xenman <xen...@sprynet.nospaam.com> wrote in message news:<29a2rvshq0fmhmppt...@4ax.com>...


>> The problem with your analysis is the cash used to buy the
>> factory came from some kind of investment that had to be sold.
>
>To someone else. Which means it still exists.
>

Yes it does. Which is why I pointed it out.

>> Likewise, the seller of the factory would in turn invest all the cash
>> if there were not taxes.
>
>That's an assumption. He might well have spent some of it.
>Meanwhile, the government, might use it to fund investment in
>infrastructure.
>

He may have spent some of it, but if the government takes it
in the form of taxes, it can't be either spent or invested. Since
government spending/investiing in infrastructure is decreasing
and spending on entitlements is increasing, you scenario is
unlikely.

>>What you have here is a net loss of
>> capital, liquid and non-liquid, that ends up being estate taxes.
>
>Incorrect. Cash is not capital.
>

Yes it is. No one puts cash in a hole in the ground. They invest
it, which means it is capital.

>> Why you choose to ignore this obvous result is beyond my
>> comprehension.
>
>Because the assumption is wrong.

It's really simple, assets were invested at X dollars before the
taxes and there are X minus T dollars invested after the tax.
This ain't rocket science.

Rue The Day

unread,
Nov 11, 2003, 9:47:39 PM11/11/03
to
"sinister" <sini...@nospam.invalid> wrote in message news:<wwdsb.40192$p9.1...@nwrddc02.gnilink.net>...

> "xenman" <xen...@sprynet.nospaam.com> wrote in message
> > Why you choose to ignore this obvous result is beyond my
> > comprehension.
>
> No, what's truly beyond comprehension is your ignoring of the fact that
> taxes have to be raised *somehow*. If we eliminate the estate tax, then we
> have to raise the taxes from somewhere else.

That's right. Personally, I'd like to see all taxes replaced with a
land tax. But in the meantime, eliminating estate and investment
taxes mean that the entire burden falls on workers while those who
inherited vast sums of money and live off of the interest don't pay a
dime. It boggles the mind how anyone can argue that would be fair.

Rue The Day

unread,
Nov 12, 2003, 6:56:27 AM11/12/03
to
xenman <xen...@sprynet.nospaam.com> wrote in message news:<uv43rvg05g3eq7hva...@4ax.com>...

Two problems with that analysis - 1. The tangible assets are still
there, just with a value of X-T. 2. The tax payments didn't just fall
off the face of the earth. The government either spent or invested
them, the person/entity that received them from the government either
spent or invested them and so on down the line.

sinister

unread,
Nov 12, 2003, 8:00:22 AM11/12/03
to

"xenman" <xen...@sprynet.nospaam.com> wrote in message
news:uv43rvg05g3eq7hva...@4ax.com...

> On 11 Nov 2003 14:29:58 -0800, ruet...@outgun.com (Rue The Day)
> wrote:
>
> >xenman <xen...@sprynet.nospaam.com> wrote in message
news:<29a2rvshq0fmhmppt...@4ax.com>...
> >> The problem with your analysis is the cash used to buy the
> >> factory came from some kind of investment that had to be sold.
> >
> >To someone else. Which means it still exists.
> >
>
> Yes it does. Which is why I pointed it out.
>
> >> Likewise, the seller of the factory would in turn invest all the cash
> >> if there were not taxes.
> >
> >That's an assumption. He might well have spent some of it.
> >Meanwhile, the government, might use it to fund investment in
> >infrastructure.
> >
>
> He may have spent some of it, but if the government takes it
> in the form of taxes, it can't be either spent or invested. Since
> government spending/investiing in infrastructure is decreasing
> and spending on entitlements is increasing, you scenario is
> unlikely.

But spending issues are in this context a red herring. The question is most
fairly posed in a revenue-neutral context. Otherwise, your point could be
countered with "well, maybe we should decrease payroll taxes and increase
estate taxes."

sinister

unread,
Nov 12, 2003, 8:00:22 AM11/12/03
to

"xenman" <xen...@sprynet.nospaam.com> wrote in message
news:2r43rv4c5lpi42js2...@4ax.com...

No I didn't. It was implicit.

Suppose you replace the estate tax with a slight increase in the capital
gains tax. Then the net effect on capital, to first order, is zero.

If you replace the estate tax with a tax on, say, income, then while it
might appear there's less of a burden on capital, it's not so clear.
Consumers will then have a little less money to spend. Given that most
corporate capital formation comes from retained profits, this will also
impact capital formation.

If you don't replace the taxes on estates with anything at all, you're not
revenue neutral, and the government will borrow the money. But then the
government is (by your lights) eating up capital...

My response was circumscribed as it was because other posters (not just the
ones responding to your post) debunked most of the bad ideas floating around
here.


sinister

unread,
Nov 12, 2003, 8:00:22 AM11/12/03
to

"Tim Worstall" <t...@2xtreme.net> wrote in message
news:825e2890.03111...@posting.google.com...

But as Roy has pointed out, where's the evidence that this form of capital
formation is particularly useful?

And are you sure you want to cite Gilder as an authority on *anything*?

> 2) I think your second point ignores certain human reactions. People
> want to provide for their children. What some have called the "
> cascade of wealth down the generations " . An estate tax will change
> people's willingness to save for this purpose, and thus could reduce
> capital formation across the economy.
> Another way of putting this is that I don't think the simple
> formulations of the lifetime savings model are correct : Many desire
> to leave capital, and thus choices, to children and grandchildren.
>
> How important either of these two are I don't know. But I think it an
> error to dismiss both of them as being non existent.

They're not nonexistent, of course. The question is whether they're high
enough to make the estate tax, on balance, a bad idea. Doesn't seem likely,
and Mankiw provides no evidence that their is. (Just like there's little
empirical evidence of disincentive effects of the income tax on *high*
incomes (at least for males IIRC).)

>
> Tim Worstall


Dez Akin

unread,
Nov 12, 2003, 12:29:42 PM11/12/03
to
t...@2xtreme.net (Tim Worstall) wrote in message news:<825e2890.03111...@posting.google.com>...

>
> Two thoughts on this.
>
> 1) Capital stock is unchanged, yes. But the number of people with
> large amounts of capital ( ie those children who have to pay the tax )
> is reduced. As Gilder argues in " Wealth and Poverty " it is just
> those rich , with an excess of capital over and above anything they
> need for consumption purposes, either now or in the future, who
> provide most of the venture capital. A reduction in the number of
> people willing or able to undertake that form of investing could
> indeed reduce future total wealth. Or could at least.

But there is the rise of VC funds that individuals can contribute to
as part of a retirement package. Perhaps they're smaller and more
conservative than tradictional VC. How much does VC, given its
enourmous failure rate, contribute to the economy? What kind of
ventures are good for the economy that individuals will take a risk on
that corporations wont?

> 2) I think your second point ignores certain human reactions. People
> want to provide for their children. What some have called the "
> cascade of wealth down the generations " . An estate tax will change
> people's willingness to save for this purpose, and thus could reduce
> capital formation across the economy.
> Another way of putting this is that I don't think the simple
> formulations of the lifetime savings model are correct : Many desire
> to leave capital, and thus choices, to children and grandchildren.

I suspect that if the estate tax is below 60% people will save
anyways. Its still a sizable chunk of change you are passing on
towards your heirs.

> How important either of these two are I don't know. But I think it an
> error to dismiss both of them as being non existent.

I mostly agree. I'm slightly revolted by born privlage, and I think
that these points are largely less important than estate tax
detractors, but certainly a factor.

My opinion on the estate tax is to eliminate it because its
complicated, and just replace it with income tax. When you inherit
something it wasn't yours before, and it is yours now, so income. What
income tax structure you want is a different debate. With the current
estate tax or a total estate tax, the very rich who wish to finance
their heirs will likely just make them employees and siphon off large
chunks of the estate, form living trusts, or other legal shortcuts.

ro...@telus.net

unread,
Nov 12, 2003, 1:26:25 PM11/12/03
to
On Tue, 11 Nov 2003 18:26:55 GMT, xenman <xen...@sprynet.nospaam.com>
wrote:

>On 11 Nov 2003 07:02:13 -0800, ruet...@outgun.com (Rue The Day)
>wrote:
>
>>"susupply" <susu...@mindspring.com> wrote in message news:<06vrb.18356$Oo4....@newsread1.news.atl.earthlink.net>...
>>> The estate tax is a tax on capital. As such, one would naturally expect it
>>> to discourage capital accumulation. Now, put this together with the fact
>>> that a smaller capital stock reduces productivity and labor income
>>> throughout the economy and the implication is clear:
>>> the repeal of the
>>> estate tax would stimulate growth and raise incomes for everyone, even
>>> those who never receive a bequest.
>>
>>First, let us look at the notion that capital is somehow destroyed in
>>order to pay the estate tax. A wealthy man whose sole asset is a
>>factory dies and bequeaths the factory to his son. In order to pay
>>the estate tax, the son is forced to sell the factory to someone else.
>> What has happened? In effect, ownership of the factory was
>>transferred. The total capital stock of the nation is unchanged. It
>>is not as if the son were forced to demolish the factory and sell the
>>machines as scrap metal. Capital flowed from one person to another,
>>it was neither created nor destroyed. In all fairness to Mankiw, I
>>don't believe he is arguing that capital was destroyed, but it's
>>important that we nip that mistaken theory in the bud.
>

>The problem with your analysis is the cash used to buy the
>factory came from some kind of investment that had to be sold.

?? If somebody sold it, somebody else bought it. Hello?

>Likewise, the seller of the factory would in turn invest all the cash
>if there were not taxes.

If you want capital accumulation to occur, having no taxes is not one
of the options.

>What you have here is a net loss of
>capital, liquid and non-liquid, that ends up being estate taxes.

Nope. You are assuming that whatever tax would be used to make up for
the absence of the estate tax would burden capital formation less than
the estate tax. That is far from being clear, let alone proved.

>Why you choose to ignore this obvous result is beyond my
>comprehension.

He ignores it because this "obvious" result is obviously wrong.

-- Roy L

ro...@telus.net

unread,
Nov 12, 2003, 1:33:36 PM11/12/03
to
On Wed, 12 Nov 2003 02:06:36 GMT, xenman <xen...@sprynet.nospaam.com>
wrote:

>On 11 Nov 2003 14:29:58 -0800, ruet...@outgun.com (Rue The Day)
>wrote:
>
>>xenman <xen...@sprynet.nospaam.com> wrote in message news:<29a2rvshq0fmhmppt...@4ax.com>...
>>> The problem with your analysis is the cash used to buy the
>>> factory came from some kind of investment that had to be sold.
>>
>>To someone else. Which means it still exists.
>
>Yes it does. Which is why I pointed it out.
>
>>> Likewise, the seller of the factory would in turn invest all the cash
>>> if there were not taxes.
>>
>>That's an assumption. He might well have spent some of it.
>>Meanwhile, the government, might use it to fund investment in
>>infrastructure.
>
>He may have spent some of it, but if the government takes it
>in the form of taxes, it can't be either spent or invested.

?? It _will_ be spent or invested, just by the government rather than
the taxpayer.

>Since
>government spending/investiing in infrastructure is decreasing
>and spending on entitlements is increasing, you scenario is
>unlikely.

No less likely than the recipient spending it on productive capital
rather than consumption or rent collection privileges.

>>>What you have here is a net loss of
>>> capital, liquid and non-liquid, that ends up being estate taxes.
>>
>>Incorrect. Cash is not capital.
>
>Yes it is. No one puts cash in a hole in the ground.

They do economically equivalent things, like buy land.

>They invest
>it, which means it is capital.

No, it just flat-out _isn't_ capital, in the economic sense. Cash may
be capital in the accounting sense, but in economics, "capital" means
the durable goods that enhance production of goods and services. Cash
isn't goods, and doesn't enhance production unless employed thus.

>>> Why you choose to ignore this obvous result is beyond my
>>> comprehension.
>>
>>Because the assumption is wrong.
>
>It's really simple, assets were invested at X dollars before the
>taxes and there are X minus T dollars invested after the tax.
>This ain't rocket science.

It might as well be, for all you understand of it.

-- Roy L

Jim Blair

unread,
Nov 12, 2003, 2:25:38 PM11/12/03
to

>"susupply" <susu...@mindspring.com> wrote:
>
>> Several years ago the book The Millionaire Next Door made bestseller lists
>> with
>> the message that getting rich is more often the result of patience than of
>> good luck.
>> Recent research suggests that this is right on the mark.Whether a person
>> reaches old age
>> wealthy or penniless mostly depends on the percentage of his earnings he
>> saved -not on
>> the total amount he made in his lifetime. This means that most of the burden
>> of the estate
>> tax falls not on those who have been lucky throughout life but rather on
>> those who have
>> been frugal. In other words, when the government taxes your estate, it is,
>> literally, taxing
>> your patience.
>> ---------------------endquote-------------------

ruet...@outgun.com (Rue The Day) wrote:
>
>Pure fiction. It's deceitful to suggest that most wealthy people
>became wealthy by working hard and saving a large portion of their

>wage, ...

Hi,

That does summarize the conclusions in The Millionaire Next Door.

This book is the most comprehensive attempt to study a much
envied but little understood culture: the US millionaire.

Stanley was a professor of marketing at Georgia State University,
and Danko is associate professor of marketing at State University
of New York, Albany. The authors surveyed 11,000 millionaires to
gather the data for this study. To qualify for the study, only
those with over 1 million dollars in total wealth (assets minus
liabilities) were included. The average (mean) household net
worth of those studied was $3.5 million, about 6% had over $10
million. Over a thousand answered a 249 question survey, and over
500 were interviewed.

The results, presented in this book, were a surprise to the
authors, and may be to you as well.

NOTE: the November '97 issue of READER'S DIGEST has a condensed
version of this book. It summarizes the practical steps to take
to become a millionaire.


>....when in fact the reality is that most either inherited their


>wealth or acquired it by collecting some sort of economic rent.

Stanley and Danko say about 80% of their millionaires inherited their
wealth. They explain where their data comes from. Where does your data
come from?

Maybe the key is in that "some sort of economic rent"?

Are millionaires typical of "wealthy people"? Mason Clark dismissed
the Stanley and Danko study as dealing with mere "middle class
millionaires".


,,,,,,,
_______________ooo___(_O O_)___ooo_______________
(_)
jim blair (jeb...@facstaff.wisc.edu) Madison Wisconsin
USA. This message was brought to you using biodegradable
binary bits, and 100% recycled bandwidth. For a good time
call: http://www.geocities.com/capitolhill/4834


Jim Blair

unread,
Nov 12, 2003, 2:37:27 PM11/12/03
to
ruet...@outgun.com (Rue The Day) wrote:


>.... Thus, it is only


>logical to conclude that the estate tax does not reduce the total
>capital stock of the nation, it merely results in a different
>distribution of it.

Hi,

It redistributes wealth from those who have it (and know they have it),
to the lawyers and estate planners who help them avoid the estate tax for
a fee.

The government collects it from those who didn't realize how much they
had, or didn't expect to die.

susupply

unread,
Nov 12, 2003, 4:21:14 PM11/12/03
to

"Rue The Day" <ruet...@outgun.com>

admitting he began with a red herring,

wrote in message news:a44a8c58.03111...@posting.google.com...

> That's right. I clearly stated that I was just providing some


> background information for my argument at that point and not yet
> directly addressing Mankiw's position.

Why would you do that in a thread titled, "Mankiw wrong on estate tax"? A
title you created.

[snip story of Spendthrift Sam and Frugal Frank]

> Quite possibly the most ludicrous thing I have ever read. Let's add a
> third character to this story - a taxi driver who is not a millionaire
> and has to work in order to feed his family. Should he not have to
> pay taxes either in this hypothetical example?

He probably doesn't pay income taxes (federal, that is).

> Either we tax income
> or we don't, and if we do, to suggest that wage income be taxed while
> investment income is not in the name of "fairness" is lunacy.

Mankiw also didn't say that. You have some rather sloppy intellectual
habits.

> Furthermore, Milton's example is just flat out wrong in that it fails
> to account for the fact that Spendthrift Sam is paying sales tax on
> goods he purchases, excise taxes on other goods, and property tax on
> real property that he purchases.

Not to the federal government he isn't. (BTW, if he lives in Oregon,
Alaska, Delaware, Montana or New Hampshire, he isn't paying any state sales
tax either)

> So to suggest that he's not paying
> taxes is ignorant. Wasn't Milton Friedman the one who said that it's
> not important if economic models don't reflect reality? Not
> surprising.

I guess you think sci.econ posts shouldn't reflect reality?

[snip]

> > Anyway, your logic is also flawed in that you aren't considering the
> > opportunity costs of an heir having to sell a factory to pay estate
taxes.
> > If the heir didn't have to do that, the prospective purchaser would have
to
> > find another opportunity, which would include a start-up.
>
> Opportunity costs are largely irrelevant to this particular analysis.
> It's merely a transfer of an asset from one party to another. Much
> like what happens when the old man dies and transfers the asset to his
> son.

You missed the point completely. If an heir does not have to sell the
family factory to satisfy estate taxes it will continue to exist. AND, the
investor who would have purchased that factory will have to find another
investment opportunity for his money. Meaning he can invest in a new
factory, and the country will have two, rather than one factories.


Albert Wagner

unread,
Nov 12, 2003, 5:33:05 PM11/12/03
to
On Wed, 12 Nov 2003 19:25:38 +0000 (UTC)
Jim Blair <s...@sig.com> wrote:
<snip>
> Stanley was a professor of marketing at Georgia State University,
> and Danko is associate professor of marketing at State University
> of New York, Albany. The authors surveyed 11,000 millionaires to
> gather the data for this study. To qualify for the study, only
> those with over 1 million dollars in total wealth (assets minus
> liabilities) were included. The average (mean) household net
> worth of those studied was $3.5 million, about 6% had over $10
> million. Over a thousand answered a 249 question survey, and over
> 500 were interviewed.
>
> The results, presented in this book, were a surprise to the
> authors, and may be to you as well.
>
> NOTE: the November '97 issue of READER'S DIGEST has a condensed
> version of this book. It summarizes the practical steps to take
> to become a millionaire.

Well, everyone knows that it was a copy of READER'S DIGEST that Moses
brought down from sinai.

>
>
> >....when in fact the reality is that most either inherited their
> >wealth or acquired it by collecting some sort of economic rent.
>
> Stanley and Danko say about 80% of their millionaires inherited their
> wealth. They explain where their data comes from. Where does your data
>
> come from?

Looks to me that his data might well have come for Stanley and Danko
themselves. 80% qualifies as "most" in my book.

<snip>

--
Life is an offensive, directed against the repetitious mechanism of the
Universe.
--Alfred North Whitehead (1861-1947)

ro...@telus.net

unread,
Nov 12, 2003, 6:25:38 PM11/12/03
to
On Wed, 12 Nov 2003 19:25:38 +0000 (UTC), Jim Blair <s...@sig.com>
wrote:

>>"susupply" <susu...@mindspring.com> wrote:
>>
>>> Several years ago the book The Millionaire Next Door made bestseller lists
>>> with
>>> the message that getting rich is more often the result of patience than of
>>> good luck.
>>> Recent research suggests that this is right on the mark.Whether a person
>>> reaches old age
>>> wealthy or penniless mostly depends on the percentage of his earnings he
>>> saved -not on
>>> the total amount he made in his lifetime. This means that most of the burden
>>> of the estate
>>> tax falls not on those who have been lucky throughout life but rather on
>>> those who have
>>> been frugal. In other words, when the government taxes your estate, it is,
>>> literally, taxing
>>> your patience.
>>> ---------------------endquote-------------------
>
>ruet...@outgun.com (Rue The Day) wrote:
>>
>>Pure fiction. It's deceitful to suggest that most wealthy people
>>became wealthy by working hard and saving a large portion of their
>>wage, ...
>

>That does summarize the conclusions in The Millionaire Next Door.

I have already exposed that piece of trash as the blatant propaganda
exercise it is. I will now do so again:

The respondents did work hard... but not to create wealth -- only to
place themselves in positions where they would be able to intercept
and pocket the wealth created by others. They did save a large
portion of their (mainly unearned) incomes... but mainly by arranging
not to pay income tax on them.

>This book is the most comprehensive attempt to study a much
>envied but little understood culture: the US millionaire.

That is false and ridiculous. It was not a remotely scientific study,
but grossly tendentious in both design and execution, and from an
economics standpoint, was an amateurish and even sophomoric exercise.
Basically, all they did was invite the marginally well-to-do to
pontificate on how virtuous, thrifty, and deserving they were.

>Stanley was a professor of marketing at Georgia State University,
>and Danko is associate professor of marketing at State University
>of New York, Albany.

Right. Neither of them has ever demonstrated any knowledge of the
relevant economics. TMND was primarily a marketing project, a
propaganda piece to improve the public image of the ultra-rich in the
USA by first pretending that ultra-rich billionaires get their
billions the same way middle class millionaires get one or two
millions, and then carefully not looking very closely at how the
latter achieve even that modest result.

>The authors surveyed 11,000 millionaires to
>gather the data for this study.

IOW, the "sample" was entirely self-selected: anyone who wasn't
especially proud of how he got his money, or had enough (or had it
long enough) to be suspicious of such a survey, was simply excluded
from the data. The old rich know better than to divulge any
information about their affairs, so not a single one of them answered
the survey. The survey results are thus complete garbage. The
authors might as well have sat in their basements and made up all the
data themselves.

>To qualify for the study, only
>those with over 1 million dollars in total wealth (assets minus
>liabilities) were included. The average (mean) household net
>worth of those studied was $3.5 million, about 6% had over $10
>million. Over a thousand answered a 249 question survey, and over
>500 were interviewed.

IOW, almost none of the respondents was really rich, and the
overwhelming majority had only 1 or 2 $M.

>The results, presented in this book, were a surprise to the
>authors, and may be to you as well.

Not when you understand how grossly tendentious, unscientific and
unrepresentative the sample and questions were.

>>....when in fact the reality is that most either inherited their
>>wealth or acquired it by collecting some sort of economic rent.
>
>Stanley and Danko say about 80% of their millionaires inherited their
>wealth.

I think you mean that they claim 80% _didn't_. But the way they
arrive at this figure is just ridiculous: passive growth of asset
value from the time of inheritance to the time of the survey was not
counted; gifts other than inheritances from family members were not
counted; loans from parents or other family members to finance
education or asset (especially land) purchases were not counted;
highly paid jobs warming seats at family businesses were not counted;
etc.

>They explain where their data comes from.

Wrong. _I_ have explained where their data come from.

>Where does your data come from?

The lack of data on the really rich is the most informative datum of
all.

>Maybe the key is in that "some sort of economic rent"?

Right. The late-night infomercials are quite correct: almost all
sizable fortunes are founded on private appropriation of publicly
created rent collection privileges, especially land titles.



>Are millionaires typical of "wealthy people"?

And are the survey respondents even typical of millionaires?

>Mason Clark dismissed
>the Stanley and Danko study as dealing with mere "middle class
>millionaires".

An entirely accurate description. Even the Fed's data on consumer
finances exclude the very wealthiest households -- who just happen to
own almost half of all the privately owned assets.

-- Roy L

ro...@telus.net

unread,
Nov 12, 2003, 7:11:56 PM11/12/03
to
On Wed, 12 Nov 2003 21:21:14 GMT, "susupply"
<susu...@mindspring.com>,

proving that dishonesty is the best policy (the best one he can come
up with, anyway), wrote:

>"Rue The Day" <ruet...@outgun.com>
>
>admitting he began with a red herring,
>
> wrote in message news:a44a8c58.03111...@posting.google.com...
>
>> That's right. I clearly stated that I was just providing some
>> background information for my argument at that point and not yet
>> directly addressing Mankiw's position.
>
>Why would you do that in a thread titled, "Mankiw wrong on estate tax"? A
>title you created.

Because unlike you, he understands that context is necessary to an
honest and informative discussion (or do you habitually chop the
context just _because_ you also understand that?).

>[snip story of Spendthrift Sam and Frugal Frank]
>
>> Quite possibly the most ludicrous thing I have ever read. Let's add a
>> third character to this story - a taxi driver who is not a millionaire
>> and has to work in order to feed his family. Should he not have to
>> pay taxes either in this hypothetical example?
>
>He probably doesn't pay income taxes (federal, that is).

Lie. He probably does.

>> Either we tax income
>> or we don't, and if we do, to suggest that wage income be taxed while
>> investment income is not in the name of "fairness" is lunacy.
>
>Mankiw also didn't say that.

Right. Mankiw carefully avoided identifying who should be taxed, and
for what, in order to make up the foregone estate tax revenue --
microscopic as it is.

>You have some rather sloppy intellectual
>habits.

?? _This_, from _you_?? ROTFL!!

>> Furthermore, Milton's example is just flat out wrong in that it fails
>> to account for the fact that Spendthrift Sam is paying sales tax on
>> goods he purchases, excise taxes on other goods, and property tax on
>> real property that he purchases.
>
>Not to the federal government he isn't.

Wrong. Many of his purchases will likely be taxed federally, and he
will also be sharing some portion of the federal income tax burdens of
many of the providers he buys his consumer goods and services from.

>(BTW, if he lives in Oregon,
>Alaska, Delaware, Montana or New Hampshire, he isn't paying any state sales
>tax either)

He is paying federal excise taxes, tariffs, etc.

>> So to suggest that he's not paying
>> taxes is ignorant. Wasn't Milton Friedman the one who said that it's
>> not important if economic models don't reflect reality? Not
>> surprising.
>
>I guess you think sci.econ posts shouldn't reflect reality?

Yours certainly don't, and the Mankiw exerpt is a perfect example.

>> > Anyway, your logic is also flawed in that you aren't considering the
>> > opportunity costs of an heir having to sell a factory to pay estate
>taxes.
>> > If the heir didn't have to do that, the prospective purchaser would have
>to
>> > find another opportunity, which would include a start-up.
>>
>> Opportunity costs are largely irrelevant to this particular analysis.
>> It's merely a transfer of an asset from one party to another. Much
>> like what happens when the old man dies and transfers the asset to his
>> son.
>
>You missed the point completely.

No, it was the "point" that missed completely. The argument about
opportunity cost is completely spurious, because it doesn't consider
all aspects of the transactions.

>If an heir does not have to sell the
>family factory to satisfy estate taxes it will continue to exist.

?? And it would somehow be vaporized if he sells it to someone who is
able to use it more productively?

>AND, the
>investor who would have purchased that factory will have to find another
>investment opportunity for his money. Meaning he can invest in a new
>factory, and the country will have two, rather than one factories.

No. Both the heir and the prospective buyer want to make money, and
so do their other potential competitors. If there is room in the
market for another factory of that type, _someone_ will build it,
estate tax or no.

In any case, the heir will only sell if the buyer will be a more
efficient user of the factory -- otherwise, he would just borrow to
pay the estate tax. So to the extent that it affects capital
investment decisions at all, the estate tax just makes the capital
markets more liquid.

-- Roy L

Rue The Day

unread,
Nov 12, 2003, 7:39:27 PM11/12/03
to
First you say:


Jim Blair <s...@sig.com> wrote in message news:<bou1fi$1ta$1...@news.doit.wisc.edu>...


> ruet...@outgun.com (Rue The Day) wrote:
> >
> >Pure fiction. It's deceitful to suggest that most wealthy people
> >became wealthy by working hard and saving a large portion of their
> >wage, ...
>
> Hi,
>
> That does summarize the conclusions in The Millionaire Next Door.


Then you say:


> >....when in fact the reality is that most either inherited their
> >wealth or acquired it by collecting some sort of economic rent.
>
> Stanley and Danko say about 80% of their millionaires inherited their
> wealth. They explain where their data comes from. Where does your data
> come from?


Make up your mind. They either worked hard and saved or they
inherited their wealth. Or are you arguing the semantic point that
80% is not "most"?

xenman

unread,
Nov 12, 2003, 7:45:19 PM11/12/03
to
On Wed, 12 Nov 2003 13:00:22 GMT, "sinister" <sini...@nospam.invalid>
wrote:

>
>"xenman" <xen...@sprynet.nospaam.com> wrote in message
>news:2r43rv4c5lpi42js2...@4ax.com...
>>
>> >> Why you choose to ignore this obvous result is beyond my
>> >> comprehension.
>> >
>> >No, what's truly beyond comprehension is your ignoring of the fact that
>> >taxes have to be raised *somehow*. If we eliminate the estate tax, then
>we
>> >have to raise the taxes from somewhere else.
>> >
>>
>> And what does your response have anything to do with whether or not
>> capital is reduced by estate taxes. This thread has a subject and
>> your response ignored it, as does this response.
>
>No I didn't. It was implicit.
>
>Suppose you replace the estate tax with a slight increase in the capital
>gains tax. Then the net effect on capital, to first order, is zero.
>

Actually, that is what will happend in 2010, according to my
tax accountant, except probably not in the way that you envision.
Currently when an asset is passed to an heir by inheritance, the
cost basis of the asset is reset to the value of the asset at the day
of death. Beginning in 2010, the cost basis will remain unchanged
when an asset is inherited.

Example: Suppose Grandpa, a widow, bought Microsoft at a split
adjusted price of $5/share. When he dies the value is $20/share.
You inherit the shares of stock. Later on you sell it at $25/share.
Under current law you would have a taxable gain of $5/share. Under
the law expected in 2010, you would have a taxable gain of $20/share.

When the estate tax is eliminated, it will be replaced with a capital
gains tax, according to my CPA tax accountant. Now, other people
have in the past called me a bold faced liar for writing this because
it didn't fit into their preconcieved notions of taxation.

xenman

unread,
Nov 12, 2003, 7:48:03 PM11/12/03
to
On 11 Nov 2003 18:47:39 -0800, ruet...@outgun.com (Rue The Day)
wrote:

>"sinister" <sini...@nospam.invalid> wrote in message news:<wwdsb.40192$p9.1...@nwrddc02.gnilink.net>...

I've never heard anyone argue that we should eliminate all taxes on
investment income. Replacing the estate tax with a capital gains tax
would be fair,.. Ooops, they already plan to do that.

Rue The Day

unread,
Nov 12, 2003, 7:57:22 PM11/12/03
to
Jim Blair <s...@sig.com> wrote in message news:<bou25n$1ta$2...@news.doit.wisc.edu>...

> ruet...@outgun.com (Rue The Day) wrote:
>
>
> >.... Thus, it is only
> >logical to conclude that the estate tax does not reduce the total
> >capital stock of the nation, it merely results in a different
> >distribution of it.

> Hi,
>
> It redistributes wealth from those who have it (and know they have it),
> to the lawyers and estate planners who help them avoid the estate tax for
> a fee.

If, as someone else mentioned, you replace the estate tax with an
unexcludable income tax on the heir, that problem goes away.

> The government collects it from those who didn't realize how much they
> had, or didn't expect to die.

See above.

xenman

unread,
Nov 12, 2003, 8:59:58 PM11/12/03
to

>
>Pure fiction. It's deceitful to suggest that most wealthy people
>became wealthy by working hard and saving a large portion of their
>wage, when in fact the reality is that most either inherited their
>wealth or acquired it by collecting some sort of economic rent.
>

Well, what's fiction to one person is true fact to another peson.

A brief look at the Forbes 400, as an example of the super wealthy
shows that the majority did not inherit their wealth. When I first
saw that it as an eye opener for me, as I thought like you, that
the wealthy usually inherited their wealth. Since then I've
become more worldly and knowledgeable and have discovered
that most people that could be classified as wealthy, say $1M,
earned their wealth. It was usually done through small
businesses and not spending all that they earned. It should also
be noted that the wealthiest age group is 65 and older, which means
they've had a lifetime to acquire and invest their wealth. I can tell
you that I personally know a number of wealthy people, and the
vast majority earned it rather than inherited it.

Rue The Day

unread,
Nov 12, 2003, 10:31:50 PM11/12/03
to
"susupply" <susu...@mindspring.com> wrote in message news:<evxsb.25890$9M3....@newsread2.news.atl.earthlink.net>...

> "Rue The Day" <ruet...@outgun.com>
>
> admitting he began with a red herring,
>
> wrote in message news:a44a8c58.03111...@posting.google.com...
>
> > That's right. I clearly stated that I was just providing some
> > background information for my argument at that point and not yet
> > directly addressing Mankiw's position.
>
> Why would you do that in a thread titled, "Mankiw wrong on estate tax"? A
> title you created.

I was being thorough. You should try it some time.

> > Quite possibly the most ludicrous thing I have ever read. Let's add a
> > third character to this story - a taxi driver who is not a millionaire
> > and has to work in order to feed his family. Should he not have to
> > pay taxes either in this hypothetical example?
>
> He probably doesn't pay income taxes (federal, that is).

Sure he does. A full-time taxi driver in any major American city can
easily make $40k/year. And if he's married, it's likely that his wife
works too, so they're almost certainly paying federal income tax. And
without any doubt, they are paying FICA tax. It's a very fashionable
lie amongst the neoconservative unintelligentsia these days that the
poor and working classes do not pay taxes, but it is a lie
nonetheless.

> > Either we tax income
> > or we don't, and if we do, to suggest that wage income be taxed while
> > investment income is not in the name of "fairness" is lunacy.
>
> Mankiw also didn't say that. You have some rather sloppy intellectual
> habits.

He argued against the estate tax on fairness grounds in his
Spendthrift Sam and Frugal Frank parable. Why don't you read what you
copy and paste?

> > Furthermore, Milton's example is just flat out wrong in that it fails
> > to account for the fact that Spendthrift Sam is paying sales tax on
> > goods he purchases, excise taxes on other goods, and property tax on
> > real property that he purchases.
>
> Not to the federal government he isn't. (BTW, if he lives in Oregon,
> Alaska, Delaware, Montana or New Hampshire, he isn't paying any state sales
> tax either)

So local and state taxes don't count now? Keep squirming.

> > So to suggest that he's not paying
> > taxes is ignorant. Wasn't Milton Friedman the one who said that it's
> > not important if economic models don't reflect reality? Not
> > surprising.
>
> I guess you think sci.econ posts shouldn't reflect reality?

Yours clearly don't.

> > > Anyway, your logic is also flawed in that you aren't considering the
> > > opportunity costs of an heir having to sell a factory to pay estate
> taxes.
> > > If the heir didn't have to do that, the prospective purchaser would have
> to
> > > find another opportunity, which would include a start-up.
> >
> > Opportunity costs are largely irrelevant to this particular analysis.
> > It's merely a transfer of an asset from one party to another. Much
> > like what happens when the old man dies and transfers the asset to his
> > son.
>
> You missed the point completely. If an heir does not have to sell the
> family factory to satisfy estate taxes it will continue to exist. AND, the
> investor who would have purchased that factory will have to find another
> investment opportunity for his money. Meaning he can invest in a new
> factory, and the country will have two, rather than one factories.

Or he will buy land or maybe T-Bonds, neither of which represent a
productive investment, or maybe he will just buy another existing
factory.

sinister

unread,
Nov 12, 2003, 11:16:22 PM11/12/03
to

"xenman" <xen...@sprynet.nospaam.com> wrote in message
news:afk5rvgl55pr8mh61...@4ax.com...

> On Wed, 12 Nov 2003 13:00:22 GMT, "sinister" <sini...@nospam.invalid>
> wrote:
>
> >
> >"xenman" <xen...@sprynet.nospaam.com> wrote in message
> >news:2r43rv4c5lpi42js2...@4ax.com...
> >>
> >> >> Why you choose to ignore this obvous result is beyond my
> >> >> comprehension.
> >> >
> >> >No, what's truly beyond comprehension is your ignoring of the fact
that
> >> >taxes have to be raised *somehow*. If we eliminate the estate tax,
then
> >we
> >> >have to raise the taxes from somewhere else.
> >> >
> >>
> >> And what does your response have anything to do with whether or not
> >> capital is reduced by estate taxes. This thread has a subject and
> >> your response ignored it, as does this response.
> >
> >No I didn't. It was implicit.
> >
> >Suppose you replace the estate tax with a slight increase in the capital
> >gains tax. Then the net effect on capital, to first order, is zero.
> >
>
> Actually, that is what will happend in 2010, according to my
> tax accountant, except probably not in the way that you envision.
> Currently when an asset is passed to an heir by inheritance, the
> cost basis of the asset is reset to the value of the asset at the day
> of death. Beginning in 2010, the cost basis will remain unchanged
> when an asset is inherited.

I know that that idea is being batted around. But I've also heard proposals
to leave in place the current situation (reseting the cost basis).

But
(a) the heir pays no tax, change in basis or no, until she sells it;
(b) you don't provide any evidence that this will make up for the loss in
tax revenue due to repealing the estate tax.

> Example: Suppose Grandpa, a widow, bought Microsoft at a split
> adjusted price of $5/share. When he dies the value is $20/share.
> You inherit the shares of stock. Later on you sell it at $25/share.
> Under current law you would have a taxable gain of $5/share. Under
> the law expected in 2010, you would have a taxable gain of $20/share.
>
> When the estate tax is eliminated, it will be replaced with a capital
> gains tax, according to my CPA tax accountant. Now, other people
> have in the past called me a bold faced liar for writing this because
> it didn't fit into their preconcieved notions of taxation.

When the estate tax is eliminated, it will be replaced with whatever
Congress and the President decide to replace it with. It doesn't bode well
that the same parties who desire to eliminate the estate tax are tripping
over themselves trying to replace the progressive income tax with a
so-called flat tax and/or consumption taxes, to reduce capital gains taxes
(which are lower than income taxes), and to eliminate taxes on unearned
income.


Tim Worstall

unread,
Nov 13, 2003, 3:25:34 AM11/13/03
to
"sinister" <sini...@nospam.invalid> wrote in message news:<G9qsb.41799$p9....@nwrddc02.gnilink.net>...

An " authority " ? Perhaps not. I am perhap[s too susceptible to the
last Laureates bbok that I've read. Only got to Gilder a few weeks
ago.

>
> > 2) I think your second point ignores certain human reactions. People
> > want to provide for their children. What some have called the "
> > cascade of wealth down the generations " . An estate tax will change
> > people's willingness to save for this purpose, and thus could reduce
> > capital formation across the economy.
> > Another way of putting this is that I don't think the simple
> > formulations of the lifetime savings model are correct : Many desire
> > to leave capital, and thus choices, to children and grandchildren.
> >
> > How important either of these two are I don't know. But I think it an
> > error to dismiss both of them as being non existent.
>
> They're not nonexistent, of course. The question is whether they're high
> enough to make the estate tax, on balance, a bad idea. Doesn't seem likely,

" Likely " to which the answer is, someone ought to go and do an
empirical study, Then we'll know.

> and Mankiw provides no evidence that their is. (Just like there's little
> empirical evidence of disincentive effects of the income tax on *high*
> incomes (at least for males IIRC).)

That last I simply don't believe. At high tax rates ( say the 83 % on
incomes in the UK in 1965 - 1979 ) there was certainly a trade off
amongst the high paid : more leisure less earning. And one does notice
a higher level of DIY amongst high earners in high tax economies :
neurosurgeons taking a week off to paint their house rather than
paying house painters to do it is a gross loss to the economy ( to use
an example from Sweden in " Eat the Rich " ). And the earlier UK
example also had " tax exiles " in great abundance : something rather
more difficult for US citizens to acheive. Your contention would also
make it rather difficult to explain why the LAffer curve was shown to
be correct, at least in relation to income taxes, in both the UK and
the US. Lower rates brought in more tax, both in total and as a
proportion of income tax collected.

Tim Worstall
>
> >
> > Tim Worstall

Tim Worstall

unread,
Nov 13, 2003, 3:33:25 AM11/13/03
to
dez...@usa.net (Dez Akin) wrote in message news:<dd43b4da.03111...@posting.google.com>...

> t...@2xtreme.net (Tim Worstall) wrote in message news:<825e2890.03111...@posting.google.com>...
> >
> > Two thoughts on this.
> >
> > 1) Capital stock is unchanged, yes. But the number of people with
> > large amounts of capital ( ie those children who have to pay the tax )
> > is reduced. As Gilder argues in " Wealth and Poverty " it is just
> > those rich , with an excess of capital over and above anything they
> > need for consumption purposes, either now or in the future, who
> > provide most of the venture capital. A reduction in the number of
> > people willing or able to undertake that form of investing could
> > indeed reduce future total wealth. Or could at least.
>
> But there is the rise of VC funds that individuals can contribute to
> as part of a retirement package. Perhaps they're smaller and more
> conservative than tradictional VC. How much does VC, given its
> enourmous failure rate, contribute to the economy? What kind of
> ventures are good for the economy that individuals will take a risk on
> that corporations wont?

Individuals have both faster decisions making processes, and are
willing to look at much smaller operations. $ 50,000 - $ 500,000 will
start many types of small business. One cannot get that sort of
capital from any institutional arrangement. ( I write as one whose
business life has been concentrated in this size of business ).

>
> > 2) I think your second point ignores certain human reactions. People
> > want to provide for their children. What some have called the "
> > cascade of wealth down the generations " . An estate tax will change
> > people's willingness to save for this purpose, and thus could reduce
> > capital formation across the economy.
> > Another way of putting this is that I don't think the simple
> > formulations of the lifetime savings model are correct : Many desire
> > to leave capital, and thus choices, to children and grandchildren.
>
> I suspect that if the estate tax is below 60% people will save
> anyways. Its still a sizable chunk of change you are passing on
> towards your heirs.
>
> > How important either of these two are I don't know. But I think it an
> > error to dismiss both of them as being non existent.
>
> I mostly agree. I'm slightly revolted by born privlage, and I think
> that these points are largely less important than estate tax
> detractors, but certainly a factor.
>
> My opinion on the estate tax is to eliminate it because its
> complicated, and just replace it with income tax. When you inherit
> something it wasn't yours before, and it is yours now, so income. What
> income tax structure you want is a different debate. With the current
> estate tax or a total estate tax, the very rich who wish to finance
> their heirs will likely just make them employees and siphon off large
> chunks of the estate, form living trusts, or other legal shortcuts.

I agree that the current estate tax in the US, and inheritance tax in
the UK, don't actually acheive what they are setting out to do:both
raise tax revenue (there is ample evidence in the UK that collection
costs are near revenue collected ) and reduce born privilege for
social reasons. The latter simply isn't working becasue there are too
many other ways to pass on the loot. The truly rich are not affected
by it. In the UK for example, it's the middle classes with a house in
an expensive area : the tax kicks in at 250,000 pounds, the price of a
three bedroomed in much of London.

I would rather move to an expenditure tax system. All savings are tax
free until spent on consumption :at which point they pay taxes, which
can be progressive if one wishes. All money form income put into
savigs is similarly tax free.

Tim Worstall

Rue The Day

unread,
Nov 13, 2003, 6:57:13 AM11/13/03
to
xenman <xen...@sprynet.nospaam.com> wrote in message news:<83l5rvgobh7fhelb2...@4ax.com>...

Hello??!! In the original Bush tax proposal, the plan was to entirely
remove the tax on stock dividends.

sinister

unread,
Nov 13, 2003, 7:51:51 AM11/13/03
to

"xenman" <xen...@sprynet.nospaam.com> wrote in message
news:83l5rvgobh7fhelb2...@4ax.com...

Really? That's surprising.

> Replacing the estate tax with a capital gains tax
> would be fair,..

Not necessarily, and it would depend on the terms.

sinister

unread,
Nov 13, 2003, 8:19:25 AM11/13/03
to

"Tim Worstall" <t...@2xtreme.net> wrote in message
news:825e2890.03111...@posting.google.com...
> dez...@usa.net (Dez Akin) wrote in message
news:<dd43b4da.03111...@posting.google.com>...
> > t...@2xtreme.net (Tim Worstall) wrote in message
news:<825e2890.03111...@posting.google.com>...
> > >
> > > Two thoughts on this.
> > >
> > > 1) Capital stock is unchanged, yes. But the number of people with
> > > large amounts of capital ( ie those children who have to pay the tax )
> > > is reduced. As Gilder argues in " Wealth and Poverty " it is just
> > > those rich , with an excess of capital over and above anything they
> > > need for consumption purposes, either now or in the future, who
> > > provide most of the venture capital. A reduction in the number of
> > > people willing or able to undertake that form of investing could
> > > indeed reduce future total wealth. Or could at least.
> >
> > But there is the rise of VC funds that individuals can contribute to
> > as part of a retirement package. Perhaps they're smaller and more
> > conservative than tradictional VC. How much does VC, given its
> > enourmous failure rate, contribute to the economy? What kind of
> > ventures are good for the economy that individuals will take a risk on
> > that corporations wont?
>
> Individuals have both faster decisions making processes, and are
> willing to look at much smaller operations. $ 50,000 - $ 500,000 will
> start many types of small business. One cannot get that sort of
> capital from any institutional arrangement. ( I write as one whose
> business life has been concentrated in this size of business ).

Well, you're wrong. I have a friend who's about $80,000 in debt, most of it
credit card debt, run up trying to start a small business.

Pretty convenient for the rich, who spend much less on consumption than
anyone else. Does nothing to reduce rent collection, either.

And how do you define "consumption"? Suppose Rupert Murdoch buys up radio
stations with the aim of garnering political influence. Is that an
"investment"?

> Tim Worstall


sinister

unread,
Nov 13, 2003, 8:19:25 AM11/13/03
to

I think the onus is on the people who claim the esetate tax is "bad", given
(a) how far into the future it affects a particular individual, (b)
first-order human psychology (viz, people like building wealth, can give
their children substantial amounts *before* they did, etc etc).

>
>
>
> > and Mankiw provides no evidence that their is. (Just like there's
little
> > empirical evidence of disincentive effects of the income tax on *high*
> > incomes (at least for males IIRC).)
>
> That last I simply don't believe. At high tax rates ( say the 83 % on
> incomes in the UK in 1965 - 1979 ) there was certainly a trade off
> amongst the high paid : more leisure less earning.

But the tax level in the US right now is 39% or less. That's a far cry from
83%.

More to the point, the theory about the tradeoff between leisure and earning
is limited--this is something many economists seem not to understand, but
it's obvious. Look at Bill Gates. In the leisure/luxury model, why would
he work at all? The same argument applies to many people who make lots of
money.

> And one does notice
> a higher level of DIY amongst high earners in high tax economies :
> neurosurgeons taking a week off to paint their house rather than
> paying house painters to do it is a gross loss to the economy ( to use
> an example from Sweden in " Eat the Rich " ).

That's an example of people not knowing how to value their time. Not
surprising in the case of doctors, who are amazingly "innumerate".

> And the earlier UK
> example also had " tax exiles " in great abundance : something rather
> more difficult for US citizens to acheive. Your contention would also
> make it rather difficult to explain why the LAffer curve was shown to
> be correct, at least in relation to income taxes, in both the UK and
> the US. Lower rates brought in more tax, both in total and as a
> proportion of income tax collected.

Over what time period? During and after the Reagan era in the US? And what
about when Clinton *raised* the income tax?

> Tim Worstall
> >
> > >
> > > Tim Worstall


Rue The Day

unread,
Nov 13, 2003, 8:30:27 AM11/13/03
to
t...@2xtreme.net (Tim Worstall) wrote in message news:<825e2890.03111...@posting.google.com>...

> I would rather move to an expenditure tax system. All savings are tax


> free until spent on consumption :at which point they pay taxes, which
> can be progressive if one wishes. All money form income put into
> savigs is similarly tax free.
>
> Tim Worstall


How does one enact a progressive consumption tax? I suppose exempting
necessities and taxing luxuries at a higher rate than other goods
could be considered progressive if you really stretch the definition
of the term "progressive", but I still don't see it.

sinister

unread,
Nov 13, 2003, 8:35:49 AM11/13/03
to

From _Taxing Ourselves: A Citizen's Guide to the Great Debate over Tax
Reform_, 2nd edition, p. 107:
"What does the evidence show? The responsiveness of the labor supply, both
in hours worked and the labor-force participation rate, has been studied
extensively and is a rare example of a question on which there is a broad
concensus among economists. Nearly all research concludes that male
participation and hours worked respond hardly at all to changes in after-tax
wages and therefore to marginal tax rates. There is evidence that female
labor-force participation and male retirement decisions are somewhat
responsive, but those responses do not contribute enough to total labor
supply to alter the conclusion that, overall, labor supply is not greatly
affected by taxes."

> Tim Worstall
> >
> > >
> > > Tim Worstall


Tim Worstall

unread,
Nov 13, 2003, 9:20:19 AM11/13/03
to
ruet...@outgun.com (Rue The Day) wrote in message news:<a44a8c58.03111...@posting.google.com>...

You forget : company profits are already taxed at the company level.
They are then taxed again if they are paid out as dividends : in the
form of taxes on dividend income. So they are double taxed.
You are correct that the original plan would have removed the tax on
stock dividends : but not the prior taxation of the company profits.
This would have brought the US broadly into line with other countries
: for example, in the UK,
Only retained company profits are subject to corporation tax :
distributed profits ( ie dividends ) are not taxed a thte company
level : They are taxed as income for the people receiving them (
although it is a touch more complicated, The company collects this
income tax in the form of Advanced Corporation Tax ....but don't worry
about that ).

Whatever you think the correct level of taxation of dividends or
corporate profits should be, it's difficult to argue that dividends
should be double taxed.

Tim Worstall

tonyp

unread,
Nov 13, 2003, 10:58:33 AM11/13/03
to

"Tim Worstall" <t...@2xtreme.net> wrote

> Whatever you think the correct level of taxation of dividends or
> corporate profits should be, it's difficult to argue that dividends
> should be double taxed.


Do you really mean "whatever"? Consider two cases:

1) Corporate income tax 0%, personal dividend tax 40.5%
2) Corporate income tax 30%, personal dividend tax 15%

In both cases, $1 of company profit becomes 59.5 cents of after-tax cash in the
shareholder's pocket. To first order, what the hell difference does it make
whether we "double tax" or not?

-- Tony P.


Gordon Sande

unread,
Nov 13, 2003, 11:37:16 AM11/13/03
to
In article <bp09mp$a0k$1...@bob.news.rcn.net>,
"tonyp" <to...@world.std.com> wrote:

>Subject: Re: Mankiw wrong on estate tax
>From: "tonyp" <to...@world.std.com>
>Date: Thu, 13 Nov 2003 10:58:33 -0500
>Newsgroups: sci.econ


>
>
>"Tim Worstall" <t...@2xtreme.net> wrote
>
>> Whatever you think the correct level of taxation of dividends or
>> corporate profits should be, it's difficult to argue that dividends
>> should be double taxed.
>
>
>Do you really mean "whatever"? Consider two cases:
>
>1) Corporate income tax 0%, personal dividend tax 40.5%
>2) Corporate income tax 30%, personal dividend tax 15%

Is the "personal dividend tax" rate the same as the "personal
income tax" rate? This discussion usually assumes that these
two rates are the same.

>In both cases, $1 of company profit becomes 59.5 cents of after-tax cash in the
>shareholder's pocket. To first order, what the hell difference does it make
>whether we "double tax" or not?

Technically correct but overly complicated and thus subject to subtrafuse
and abuse.

The discussion is not about total take but about the distortions due
to different takes on different modes of doing basically the same thing.

>-- Tony P.
>
>