Herewith my remarks about the estate tax (with particular reference to its effects on the very rich, and why we should care) to Congressional staffers, presented a couple of days ago under the auspices of the American Family Business Institute. Here is higher quality video. Here is the even higher quality YouTube version. Here is video of the entire event. I particularly recommend the first talk, by Stephen Entin.
Note that all of my remarks apply equally well to all forms of capital taxation. Entin did a better job of focusing on the particular shortcomings of the estate tax.
I wonder if you’d comment on the latest theoretical effort to rationalize positive capital and inheritance taxes. This seems like a very important argument on a very important front.
http://piketty.pse.ens.fr/fichiers/public/PikettySaez2011.pdf
“In this paper, we have developed a tractable normative theory of socially optimal taxation. Our results challenge the conventional zero capital tax results, which in our view rely on ill-suited models. If one assumes from the beginning that there is zero or little inheritance, and that the bulk of wealth accumulation comes from lifecycle savings, then it is maybe not too surprising if one concludes that inheritance taxation is a secondary issue. If one assumes from the beginning that the long run elasticity of saving and capital supply is infinite, then it is maybe not too surprising if one concludes that taxing capital is a bad idea in the long run. Our model removes these assumptions, and shows that the optimal tax mix between labor and capital depends on the various elasticities at play and on critical distributional parameters.
At a deeper level, one of our main conclusions is that the professionís emphasis on 1 + r as a relative price is inappropriate, or at least excessive. We do not deny that capital taxation can entail distorsions in the intertemporal allocation of consumption. But as long as the intertemporal elasticity of substitution is moderate, this effect is likely to be second order as compared to other effects. In particular, as far as capital taxes are concerned, distributional issues are likely to be first order. We hope our results will contribute to the emergence of more pragmatic debates about capital taxation, based more upon relevant empirical parameters and less upon abstract theoretical results.” (Piketty and Saez, 2011, Conclusion)
Thanks Steve. Very insightful.
This is the first time I’ve seen you “in person”. I had a different image in my mind. Your argument is very insightful, and further advances the argument I’ve made here: http://sabhlokcity.com/2010/12/the-case-against-inheritance-tax/ – particularly the argument that families that tend to die at an average age of 50 (say) would be taxed far more heavily than those that die at age 90, say.
I’ve provided a further blog post on this subject here, to spread this vital insight: http://sabhlokcity.com/2011/10/the-case-against-inheritance-tax-2/
Sanjeev Sabhlok:
families that tend to die at an average age of 50 (say) would be taxed far more heavily than those that die at age 90
I had never stopped to think of this before. It’s an eye-opening argument. Thanks for sharing it.
Two things are traded on the island – coconuts and back-rubs. Bob has all the coconuts. Everyone else knows how to give back-rubs. Bob doesn’t want to trade his coconuts for back-rubs. He likes having coconuts and he wants to give them to his son when he dies. The other people on the island are sad about this because they want coconuts too. Bob sees their sadness and knows they should not be sad. If he trades his coconuts for their back-rubs, he explains, future generations will have fewer back-rubs. The people on the island see the wisdom in his argument. Thank you, they say, for while we may not have any coconuts, we are now so much wiser.
Oh, come on; regular visitors to this blog have enjoyed seeing Landsburg for a while now.
May I suggest, however, enhancing the presentation’s visual appeal by offering while suspended from silks?
Steve and Lazslo,
I am not saying I share it, but there is also a paper by Conesa, Kitao and Krueger (2009) that argues FOR capital taxation.
The citation is:
Conesa, Juan Carlos, Sagiri Kitao, and Dirk Krueger. 2009. “Taxing Capital? Not a Bad Idea after All!.” American Economic Review, 99(1): 25–48.
If I recall correctly, this is an OLG model. Since OLGs behave differently than representative agent models, I guess their result should not surprise.
I dont agree with your argument. For years, I have argued that we should have a 100% inheritance tax and 0% income tax. Here is what I wrote to a friend that showed me your video:
Perhaps a high inheritance tax would make resources more expensive than otherwise need to be, but there wont be a shortage. As long as prices float, there won’t be any shortage of materials.
Also, I dont think that the majoity of rich people face the problem of spending allor even most of their money on junk. I would guess by far the majoity end up giving to charity (which they wouldn’t if there was no/low estate tax – and then the government would end up spending more to help those the charities helped), find ways to avoid the estate tax, or just pay it. For sure they over-buy stuff they may not need, but then they end up selling that same stuff at a big loss – good for the people that buy from them, and good for the company that sold them the product at the original price.
Moreover, that is not even the biggest reason I disagree with your argument. Inheritance is probably the greatest cause of inequality in this country. if I were a minority, that is where I would feel anger – that I was not given a fair shot. Granted, you can never make it “fair” cause your parents may be terrible, the school you go to may not be good, etc, but economically – inheritance is probably the greatest social injustice. It’s ironic that your argument is about using too many recourses (which we need people to do now) and ignoring any social impact (which the tea party and OWS people are bringing to light). It would be a lot easier to say that everyone has to contribute equally to the government (a flat sales-tax) if everyone started at the same point.
Second to last point – for anyone that says that a 100% inheritance tax / 0% income tax will kill incentive to make a lot is wrong. You don’t need a lot of money in this country to get to the point where you wont need anymore to live a nice lifestyle. Everyone has a differnt number, but it isn’t huge (I suppose that is relative). So why when people make so much more than they need do they keep working hard? /they do it because it is who they are and they love to do what they do. If they could get that money tax free and give to whatever chairty they want, they would still do it. In fact, they may do it more happily cause they arent giving 50% up front to the government,(which most view as inefficient) and they can give 100% to the charity they support – which they probably would have done anyway.
Lastly, anyone who dies young is not worried about their postmordem tax rate. They are dead. A better deal for that guy would be to keep what he/she earned while they were alive.
Bob
Bob raises an interesting point: Are there aspects of this debate that are a classic efficiency vs. equity trade-off?
In other words, SL would argue that by getting rich ppl to save instead of spending all their money, there are more resources available for investment. This benefits us all. On the other hand, his heirs get to inherit that money that was accumulated. So you’ve increased the total amount of stuff but made things “more unequal”.
SL might counter-argue that rich ppl might just spend everything given that there’s a big estate tax, but maybe that’s not true. Maybe rich ppl never really get around to spending a lot of their money regardless of taxes,
I understand Landsburg to deny that he’s arguing about an efficiency/equity trade-off. He’s saying that an income/consumption tax is more efficient than a wealth tax, and that you can achieve any degree of progressivity you like with an income/consumption tax. Because the choice of tax structure is unrelated to the choice of progressivity, why not choose the more efficient tax structure?
Somebody got a haircut. . . .
No, but seriously. . . your views were quite insightful. I’m a first-year economics major and I just completed Armchair Economist, and found this website.
I look forward to your future entries.
Be Well
nobody.really:
I understand Landsburg to deny that he’s arguing about an efficiency/equity trade-off. He’s saying that an income/consumption tax is more efficient than a wealth tax, and that you can achieve any degree of progressivity you like with an income/consumption tax. Because the choice of tax structure is unrelated to the choice of progressivity, why not choose the more efficient tax structure?
Yes, my point exactly — and extremely well put.
Very sorry; it won’t happen again.
In fact, let me toss in a caveat or two.
Income/consumption taxes work by extracting a portion of the benefits of transactions. When I rent stuff, I get the beneficial use of the thing I rent; I also pay a sales tax, and the price of the rental incorporates the renter’s need to pay income tax. When I own something, I also receive a stream of benefits – benefits that are quite similar to the benefits derived from renting the thing. Consequently a property tax seems to me a fair complement to an income/consumption tax, and may offset the distortion that an income/consumption tax creates in the own/rent decision.
Take this a step further: Does wealth in the abstract – say, cash in the bank – generate a stream of benefits in the same way that a house or a car does? Kinda. It represents a kind of insurance (“self-insurance”), which enables me to avoid the cost of other forms of insurance. For example, when my cash reserves are low and my credit cards are maxed out, I feel anxious and engage in a lot of time-consuming, short-term optimizing strategies that cost more in the long run. If we regard mere wealth as generating a form of income/consumption, does that change our views of taxing it? And how would we measure this psychic value of wealth for purposes of complementing an income/consumption tax (distinct from purposes of discouraging financial dynasties, etc.)?
particularly the argument that families that tend to die at an average age of 50 (say) would be taxed far more heavily than those that die at age 90, say.
Nonsense. One is still working and has life insurance and other benefits at age 50, so there would tend to be MORE assets passed “tax free” when dying at age 50 than at age 90 (when assets have been spent down and dissipated by required spending over the retirement years). Most family groups that die young tend to have a genetic problem that causes relatively early death. Otherwise, the primary cause of deaths among younter people is accidents (which are, by definition, random).
The claim the wealthy use a LOT more resources is generally also nonnsense.
The wealthy do NOT use a lot more of the general resources (iron, steel, plastic, wood, etc) that most others use. The use a bit more, not a lot. Definitely not enough to impact the general supply or demand, and not enough to impact the price (given normal supply and demand). Rather, the wealthy demand NON-standard materials that–by definition–are NOT normally used by the general public in large volumes. This creates new jobs in new industries–jobs that would not exist if the rich used “ordinary” materials and processes. Thus, as the basic premise of the argument is false, so is the conclusion.
The estate tax exists in order to prevent the concentration of wealth in a small group. While the tax itself can be avoided by estate planning and setting up trusts, etc–it does compel the creator of that wealth to think and make plans for the use of those resources after his/her death.
Steve, I can understand two of the arguments about eliminating the estate tax, whether I agree with them or not:
1. Fairness – it’s double taxation
2. Efficiency – like any tax it imposes a deadweight loss
But I don’t see why the overconsumption issue should matter at all. Can’t you just impose a consumption tax on the rich on top of the estate tax, to balance out the added consumption they would engage in because of the estate tax? Of course, the consumption tax would impose additional deadweight losses. But if you weren’t already persuaded by the first two arguments, why would you accept the third?
Keshav Srinivasan:
The fundamental argument is this: A constant estate tax is equivalent to an ever-increasing tax on consumption (that is, the Euler equations, and hence the pattern of consumption, is the same for either tax). But an ever-increasing tax on consumption imposes a bigger deadweight loss than a constant tax on consumption, essentially because the deadweight loss goes as the square of the disincentive effect, so that for a given present value of govt revenue, it’s optimal to keep the tax constant across generations.
In other words, this is a pure efficiency argument. Holding govt revenue fixed, the deadweight loss from an inheritance tax is greater than the deadweight loss from a consumption tax.
Some observations that may or may not be helpful:
— The Estate / property taxes bas does indeed encourage consumtion, but it needs to be tied to the unqual rates on long term capital gains. Since one encouorages consumption and one discourages consumption, I am not certain what the net effect is. My suspicion in a net discouragement to consumption.
— A means to avoid the estate tax is charitable donations. Theyt also tend to encourage consumption by expenditures in the current period.
— Capital investment is treated inconsistently. We double tax dividends as ordinary income which is a return on capital. We tax interest on debt which is an important part of capital formation. We defer taxes on unrealized gains until realized and in the case of personal housing, we then usually exempt the gain anyways.
— Treating all forms of capital returns as the same as earned income may also have other effects on future capital formation. Dividends may become a more attractive componant since lonterm capital gains are not taxed at a lower rate. Certainly, this would be more attractive to retired people which may become a very important consideration as the population ages. Doubly so if we also allow corporations to adjust net income by dividends paid.
Excellent speech. Enjoyed it. Thank you for posting.
In the video you mention a professor “Chris Chandley” (spelling?), could you put a link to his web page. I have had no success in finding it.
Bradley:
1) Chris Chamley’s web page is here.
2) The most readable account of Chamley’s major insight — together with an argument that the insight has extremely broad applicability — is in this paper by Atkeson, Chari and Kehoe.
Suppose that a 0% estate tax is more efficient than a 100% estate tax. Does it necessarily follow that instantly changing the 100% to 0% produces desirable outcomes?
What role do expectations play? Suppose the government maintained the estate tax at 100% forever, but somehow credibly promised year after year to reduce it to 0% next month. Wouldn’t people allocate resources as if the tax were, in fact, 0%, producing efficient results, but still give the government that 100% to spend, allowing them to reduce income tax and consumption tax?
Mike H: Yes, from a pure efficiency point of view, what you really want is an estate tax (and a dividend/interest tax) that fall to zero over some period of time, rather than cutting them to zero immediately.
None of this works, though, unless people believe that 0% rate is on the horizon, and will stay fixed once it’s reached. I think it’s arguable that people are more likely to believe that if you do the cut all at once, but that’s not at all something I can prove.
What about interest rates.
When the rich person delays consumption, someone else uses the assets for a while, but then has to give back the assets with interest. The rich person then ends up consuming more than he would have if he had spent it originally.
Your argument seems to assume that more investment is always better and that the investment always returns more than the interest rate to the borrower.
Seem like reasonable assumptions, though. Also, the assumption that more investment is always better is probably reasonable too. The interest rate will be driven down so the marginal investment is always a good thing.
Just sayin’.
Steve, did economists before 1986 really believe in heavily taxing capital income, as suggested in the paper you linked to? (It says that was the prevailing view in the public finance literature.) Does that include people like Milton Friedman? Or did some of these economists already favor low capital taxation for ideological reasons, and then used Chamley’s results to bolster their results?
Keshav Srinivasan: I am, of course, not privy to everything everyone thought pre-1986. But I believe pretty much everyone (and I assume, but do not know, that this includes Milton Friedman) thought that capital income should be taxed at the same rate as labor income, on the basis of a misapplication of the principle that deadweight losses are minimized when everything is taxed at the same rate. (The right principle is, roughly, that all *consumption goods* should be taxed at the same rate, not that all *sources of income* should be taxed at the same rate).
I think Bob Lucas (Nobel prize winner, and, in many people’s opinion, including mine, the greatest macroeconomist of the 20th century) spoke for much of the profession when he said: “When I left graduate school in 1963, I believed that the single most desirable change in the U.S. tax structure would be the taxation of capital gains as ordinary income. I now believe that neither capital gains nor any of the income from capital should be taxed at all. My earlier view was based on what I viewed as the best available economic analysis, but of course I think my current view is based on better analysis. “
Which returns us to the question, does wealth have components of a consumption good?
“Inheritance and estate taxes
Figures on inheritance tell much the same story. According to a study published by the Federal Reserve Bank of Cleveland, only 1.6% of Americans receive $100,000 or more in inheritance. Another 1.1% receive $50,000 to $100,000. On the other hand, 91.9% receive nothing (Kotlikoff & Gokhale, 2000). Thus, the attempt by ultra-conservatives to eliminate inheritance taxes — which they always call “death taxes” for P.R. reasons — would take a huge bite out of government revenues (an estimated $253 billion between 2012 and 2022) for the benefit of the heirs of the mere 0.6% of Americans whose death would lead to the payment of any estate taxes whatsoever (Citizens for Tax Justice, 2010b)”
Source: http://sociology.ucsc.edu/whorulesamerica/power/wealth.html
I found this particular excerpt to be very interesting, and contentious with what was said here by Landsburg.
Also, I’m not looking for any trouble. I’m here to learn. . . I’m assuming there’s something here I am not privy to at the moment.
I do not understand Landsburg to deny that estate and gift taxes are progressive. Landsburg is merely arguing that there are more efficient ways to get those progressive revenues.
So the tax man can just sit on his butt as Junior inherit all of daddy’s money, the whole pot. The tax man can smile and wave as Junior carries the sack of gold to the bank. And when Junior goes to spend the money, the tax man can POUNCE AND TAX THE EVER-LOVIN’ BEJEZUZ OUT OF IT. (I trust you’re acquainted with these public finance terms of art.) You can get the same progressive taxation — or even more progressive — with fewer deadweight social losses.
Or that’s the theory, anyway.
Thank you very much, sir. I appreciated the elucidation. It dispelled all of my queries.
I’ll keep a lookout for your future posts as well.
Be well
It appears not to have occurred to Landsberg and other posters here that there are those of us out here who have opted against breeding and owning children. As far as we are concerned, the economic disincentives of the death tax are of no concern to us; we would be happy with 100% taxation of breeders’ wealth and current income to enhance the lives of whales and songbirds.
As it is, we are burdened by very high taxes to support the brood of the breeders that will never be of any use to us. If I could distribute contraception throughout the world’s waters, I would, if only in the interests of animal and plant life of the planet.
And breeders wonder why their brood will continue to suffer wars?
Steven, I’m tempted by your argument here, but what about the idea that greater consumption of resources means we have more resources? There are so many chickens in the world because we eat them. There’s a lot of copper available for us to use because we use so much of it.
Rich people contribute disproportionately by providing a market for initially expensive methods of resource extraction/creation. In time, those methods become more economical and begin to benefit the non-rich.
Allessa: There are more chickens because we eat them, but there are less of something else in consequence. Raising chickens requires both capital and labor that could otherwise be employed elsewhere.
All else equal, what you’re saying has to be true. But all else can’t be equal, because what you are describing doesn’t look like the history of the world. Over time, I see a trend of more people, more consumption of everything, and more of all resources. We’re not just crazy rich in Chickens… we’re crazy rich in everything!
Where am I going wrong?
Allessa: The only thing you’re missing is this: If we’d all done just as much work as we actually did, but if some of us had consumed less than they actually did, then we’d be even richer than we are now.
Excellent Steve!
This is very well put!
I see your point and agree with it. However, I still suspect that there may be something special about rich people sending price signals to the market via their consumption.