Why Is There Taxation Of Estates?

There are two easy to see reasons. Some tiny government revenue and envy. The idea of a tax on accumulated capital will fit into those imperatives too.

Great wealth doesn’t last

I was reading about the Vanderbilt fortune and its evolution over the last 150 years or so. There are pieces of it still in family hands, but I think much of it is so dissipated as to be irrelevant in today’s world. The essence of the vanderbilt fortunes is simple. Cornelius born 1794 built it and by his death in 1877 was worth $100,000,000. A near unimaginable sum at the time. His son William inherited the bulk of it and died eight years later with more than $200 million. From then on, it spiraled into the ground. The third generation problem.

There is a thought from the 18th century that summarizes the process. “Finance Is Circular. Rags make paper. Paper makes money. Money makes banks. Banks make loans. Loans make beggars. Beggars make rags.

Taken together with extravagant, non-productive assets, like houses, yachts, race horses, and such. MOney disappears. Money must be nurtured and taught to be productive and earn. Just like children. It’s not easy and it isn’t common.

Estate taxes and such merely add to the speed with which the fortunes are spent.

Not all  wealth is lost to improvident heirs

It doesn’t always happen but absent other circumstances it’s the way to bet.

Some Rockefeller heirs have been productive with their inheritances for more than three generations. Maybe their fortune was too big to ruin in only three. Time will tell. Their are still concentrations of wealth among the Mellons, the DuPonts, and the Fords. None is huge by today’s standards, and there seems little ability in families to create entrepreneurial skill for more than three generations.

Look at the list of today’s billionaires. How many are more than three generations from the founder. There is a thought in finance that claims you can inherit a million but you must build a billion. With inflation, I suppose that is not as true as it once was.

The biggest killer of large fortunes is not estate tax. Those are not easy to minimize but neither are they impossible. Improvident spending destroyed the Vanderbilt fortune, but not all of them. In many cases, the people who built the wealth gave it away. Philanthropy!

And it continues today. Gates, Buffett, Turner, Huntsman, and others spend huge sums to improve our lives. I expect Bezos, Musk, Zuckerberg, Balmer, Brin, Page, Ellison, and many more will move that way too. They just aren’t finished building and enjoying yet. First generation money tends to be busy. Philanthropy takes time and effort t do well. If nothing else, the people who build great wealth know the value and will bring their native intensity to giving it away.

Why have wealth and estate taxes?

Because many people, especially among academics,  politicians, and bureaucrats envy it. The money it raises is trivial. Nonetheless, we should expect more of it. Pity!

What we need instead of taxes on wealth

The first and foremost is an educations system that lauds wealth. Maybe there are a few who could have become super-wealthy entrepreneurs if properly motivated. How many would it take to make up for the loss of estate taxes? Not many. Estate tax doesn’t even show up as aline item in Federal tax revenue. It is part of other and other, in total, is less than 5% of revenue.

Second current income taxation should be more careful. Taxation is a friction item when creating wealth. If people are reinvesting their earnings in growing a business, does it make sense to slow them down? Probably not. Despite what president Obama said to “Joe the Plumber,” People do build businesses. If the system created them, each of us would have one. Business building is an art and an intense lifestyle. It is far harder than most people realize. Even can realize. Every self-made millionaire works harder than you imagine.

Third, consumption taxes make more sense. Taxation by choice. If someone wants to buy a $100 million yacht. I could live with the idea of a $50 million sales tax. Same thing with houses over some amount, or maybe on third, fourth, and fifth homes. Those are choices.

Fourth we must notice you get money by trading. Skill, ingenuity, effort, team building, networks and many other factors are necessary. People don’t just give up money for nothing. If you use a service like Amazon, you do so because it suits your needs, not the needs of Jeff Bezos. Great wealth is attained by great contribution. I have trouble fitting hedge fund managers here, but I suppose they do something useful. See the fifth need.

Fifth, notice an important difference. The difference between earning money and getting money. Earning is a value trade idea, getting is based on other factors. Some are not avoidable. Like luck, (lottery winner) appreciation due to inflation, and stock appreciation while you own your business. Others are more reprehensible. Fraud, theft, and government cronyism.

Some, but very few people can achieve wealth by taking advantage of society. Drug cartels, Russian oligarchs, some government created people in China, have wealth that has not been earned in the same way as Bill Gates, Jeff Bezos, Larry Ellison, and Elon Musk.

Fifth, stop focussing on the edge situations.

There are perhaps 20,000 people in the United States with a net worth greater than $100,000,000. About one in 17,000 people. Statistically, they are outliers. Interesting but not part of society as we know it. Just as rare cases make bad law, rare achievement leads to weak policy. Outliers cannot be easily categorized and more study of their characteristics and skills matters.

The takeaway

We are all better off having rich people among us. Usually not right away, but in the end society gets more. We must become less impatient to take away their money.

Envy is the only “deadly sin” that has no payback for the sinner. Learn to avoid it.

Think systemically. Some things need a concentration of wealth in capable hands to be available to anyone. Don’t harm strong systems.

Look at a list of America’s all time richest people. How many have you heard of? How many gave away most of their fortune? You cannot make sound policy with unsound perspective. Know what you want before you decide how to get it.

We should encourage entrepreneurial skills and support the ones that we can find. Everybody wins.

I help people have more income and larger, more liquid estates.

Call or email don@moneyfyi.com or in Canada 705-927-4770

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