The endowment effect and the taxation of wealth
The endowment effect and the taxation of wealth
As you may recall, I am reading the histories of a number of past Republics which have had various levels of success. Without getting too far ahead of myself, it appears that one constant is that, once plutocratic oligarchies are entrenched, they will refuse to yield power or money, even to the point of destroying democratic or republican institutions. In other words, David Frum‘s observation that “If conservatives become convinced that they can not win democratically, they will not abandon conservatism. They will reject democracy” is true not just at the present, but across history.
I raise this in the context of Elizabeth Warren’s proposal for a “wealth tax.” Leaving aside its practicality or even Constitutionality, the above historical observation is probably at the root of the apoplexy with which plutocrats have reacted against it.
A further context to consider this issue is what psychologists and behavioral economists call “the endowment effect.” The endowment effect describes the consistent result that people would rather retain something that they have acquired – even if by charity, chance, or gift – than earn the same thing when they do not own it. Put another way, people’s maximum willingness to pay to acquire something is typically lower than the least amount they are willing to accept to give it up, even when there is no cause for attachment, or even if the item was only obtained minutes ago, and was not in any way “earned.”
This paradigm is applicable to taxation. Consider payroll tax withholding. Suppose a person’s income tax liability were $10,000. In strictly economic terms, they should be indifferent to paying that lump sum at the end of the tax year, or having it withheld at $385 per biweekly paycheck. But it is almost certain that the former situation would lead to a lot of anger at the end of the year, while the latter once started would be barely noticed. In the former case, the government is trying to take away the “endowed” $10,000, while in the latter case the taxpayer never even receives the money.
A “wealth tax” is like the former situation, and is likely to engender the strongest angry reaction. And it certainly appears to be the case from several thousand years of history that it oligarchs will be willing to trash everything else in order to keep their “endowment.”
Obviously this points to the importance of equitable interception of income before it vests in the recipient, I.e., withholding taxes. But in a case such as the US, where that horse has long ago left the barn, it argues for a recapture that at least minimizes the endowment effect.
That, I think, is the estate or inheritance tax. I prefer the latter, because it emphasizes the fact that the heir has not “earned” the wealth, vs. the former which has been demogogued as a “death tax.” And it does make a difference. One of the Koch brothers, for example, could leave either $250 to every American household, or $40 Billion to their sole surviving heir. The estate tax would be identical, but the inheritance taxes would be very much different! Individuals who are having legal problems with their taxes may consult with tax lawyers.
By no means am I suggesting that the wealthy would roll over for a robust inheritance tax. But I am suggesting that the reaction would be much less intense than for a “wealth tax.” That means a much better chance of the tax “sticking,” and a much better chance that the wealthy would not destroy our representative democracy to avoid it.
Not to be picky, but the federal government doesn’t need the tax money. Two things disappear when a Koch pays his or her taxes: The bill, and the money. When Congress spends it creates the money. Taxes are there primarily to reduce the wealth of those who pay the tax. Reducing income inequality is a righteous effort. Congressional spending increases the wealth of the non government sector. Dollar for dollar. Pretty simple. Too bad we’ve been intentionally misled, but there you have it.
Chris:
CBO projects individual income tax receipts will rise sharply between 2025 and 2027. What is gong to make this happen?
An often missed, yet crucial argument for an inheritance tax.
“Warren Buffett, the world’s second-richest man, announced this week that he plans to give away 85 percent of his $44 billion fortune to charity. Buffett explained his motivation in today’s New York Times:
“I love it when I’m around the country club, and I hear people talking about the debilitating effects of a welfare society,” he said. “At the same time, they leave their kids a lifetime and beyond of food stamps. Instead of having a welfare officer, they have a trust officer. And instead of food stamps, they have stocks and bonds.”
It’s hardly a suprise, then, that Buffett also opposes repealing the Estate Tax (aka the Paris Hilton Tax), a “graduated inheritance tax on big fortunes”:
Mr. Buffett said repealing the estate tax “would be a terrible mistake,” the equivalent of “choosing the 2020 Olympic team by picking the eldest sons of the gold-medal winners in the 2000 Olympics.” …
“We have come closer to a true meritocracy than anywhere else around the world,” he said. “You have mobility so people with talents can be put to the best use. Without the estate tax, you in effect will have an aristocracy of wealth, which means you pass down the ability to command the resources of the nation based on heredity rather than merit.” [NYT, 2/14/01]
Buffett was also opposed to President Bush’s dividend and income tax cuts for the wealthy. “If class warfare is being waged in America,” he wrote, “my class is clearly winning.” Congress ought to listen.”
https://thinkprogress.org/warren-buffett-major-philanthropist-and-opponent-of-estate-tax-repeal-4cd42e6251bf/
Meanwhile, we have one of the gene-pool winners in the white house. Without his father’s wealth, he wouldn’t have had a chance in 20 billion.
Oboy.
As I write that post a pop-up ad appeared.
“Blackrock. It’s not what you make that counts, it’s what you keep.”
Problem with taxes is there is always a way around it. The more wealth you acquire, the more political influence you have by way of campaign donations. The candidate with the biggest war chest almost always wins. I will hand it to Trump, he created a media masterpiece and still to this day continues to have the spotlight on him. But thats an aside.
Anyway, with political influence comes back doors into taxes, and then paying folks like me to find those holes and exploit them to pay half the rate of some blue collar guy pays.
Was reading “Folks, This Ain’t Normal” by Joel Salatin and in it he described estate taxes and all that mess and how his son would have to pay half a million to keep the farm. Simple solution, sell it to your kid for $10. Pay someone a couple hundred dollars to form a contract, or do it yourself. Inheritance tax = $0.
Wealth taxes (including inheritance tax) are easily avoidable by wealthy households. Even the U.S. is now a global tax haven. https://www.theguardian.com/world/2019/nov/14/the-great-american-tax-haven-why-the-super-rich-love-south-dakota-trust-laws
I know all about the avoidance thing. However, you can legislate changes in those avoidances. Hard to keep up with the accountants, but it can be done.
Need more Sanders, Warrens and AOC’s in Congress.
Long, hard road.
What gets lost is that an inheritance is income. So are dividends, interest income, capital gains and everything else. The feudal lords’ insistence that taxing this income is somehow double taxation misses the fact that it’s all money the recipient didn’t have before. The cost basis doesn’t get taxed, since that’s money you had before. In the instance of an inheritance, that’s all money you didn’t have before. Yeah, we will hear sob stories about selling the family business or family farm, but those sob stories are just cover. Or examples of extremely poor planning and intellectual sloth.
One doesn’t see the same objections to real estate taxes which is sort of a form of wealth tax. It’s not the principle of the thing, it’s the amounts of money involved.
Will, I would have to agree with that position.
But I also would like to add that if the government would cut down on expenditures, for example, stop playing police in oil rich countries just to keep low energy prices for us domestically, we would be much better off and wouldn’t necessarily need the additional tax dollars.
Also as far as inheritance taxes, we are not talking about a large percentage of the population. Most of the greatest generation are living well into their 90s which almost all did not plan for. The boomers will live to at least that, and for the most part have saved but will most likely blow through everything they have keeping up their life style. Gen X Z M and whatever not only lack in personal savings, but many are foregoing 401k contributions, IRAs, or the like. So again, any estate or inheritance taxed are probably only likely to hit the top 20%.
To be quite fair, I don’t really understand inheritance anyway. I understand keeping the family farm for 4 generations, that fine. But why in the hell would I need $85 billion in stocks and bonds for my great great great grand-kids to be able to live a posh lifestyle? I think taxing it during transference is fine. I think a better idea would be to give it back to the public directly through charitable grants and things of that nature. Like here is an idea. I have $20 billion and die, I’ll leave my kids a trust fund with say, $250,000 to be able to buy a house. No more. They need to work, be productive, and not potential loss of economic and social value. Then I would say that the other $19 billion and set up endowments for teachers. You want to teach, well I want to match dollar for dollar what that school district is going to pay you. Teachers, not the administrators. Those folks are governmental bloat. Teachers get paid what they are actually worth, schools don’t increase in taxes, my kids arent spoiled little shits, and look at that, no taxes.
Depending on the wealthy to choose the best public use of their “excess” money will result in a very clunky railroad indeed. Government may be inefficient and sometimes misguided in its expenditures but at least the public gets some say in what is supposed to be for its benefit.
Markets also are clear dictators in a free and open capitalist economy. Government is riddled with waste.
Clear dictators are wasteful too in that they do what they wish without regard for what is in the common interest. Aside from being obnoxious, that is.
Anyone who thinks markets aren’t also riddled with waste doesn’t know anything about markets or capitalism.
You can consider healthcare and trace the money and incentives in that industry to see how markets don’t always make efficient choices. Never mind any collateral damage.