27 March 2007

1,000 Billionaires vs. a Billion Thousand-aires

Last week, Forbes magazine identified 946 billionaires, a record. "The net worth of the world’s 4 billion poorest souls actually dropped, to less than $35 dollars each," a stark contrast to the average net worth of $3.6 billion for the world's wealthiest 1,000. How stark is the contrast? 100 million times more. (You might want to read that again. The average net worth of the world's wealthiest 1,000 is 100 million times greater than the average net worth of the world's poorest 4 billion. If you stopped reading now, I'd understand.)

At this point, blogging traditions suggest that I rail against the rich. I have other intentions: I plan to rail against their children.

As I get older (something that happened again this morning), I have more admiration for entrepreneurs brave enough to risk starting a business and who are clear headed enough to succeed. More than 90% of the American work force works as an employee; the days of independent businessmen are largely gone. We work for these entrepreneurs and our ability to pay the rent literally depends on their business acumen. The fact that such people have a shot at wealth strikes me as perfectly just. Their success means jobs for us and tax monies for roads and schools and more cool stuff to buy. Unlike most Americans, I neither resent their wealth nor expect to join them.

But what has this to do with their children?

We’re eager to wean families of welfare. Reliance on easy money breeds sloth and bad habits. We should be as eager to wean families of inheritances. It, too, breeds a propensity for parties, a disdain for work, and a sense of detachment from the struggles of everyday working men and women. It makes little sense to me that a working, single mother would pay a higher percentage of taxes than Paris Hilton. Wait. Let me restate that. It makes no sense to me. Estate values over, say, $3 to 5 million should be taxed at a minimum of 50%.

Beyond the benefit of sloth reduction, such a tax policy could address an odd relic from the age of capital. In this country, returns to labor are taxed at a higher rate and more consistently than are returns to capital. Warren Buffet has pointed out how his dividend income is taxed at a lower rate than his secretary’s income; this doesn’t strike him as fair. He doesn’t even mention something that strikes me as worse: the tax rate his children will pay on an inheritance is lower yet. (Of course, such a policy is irrelevant to Warren - he's giving away most of his money.) It would be hard to explain to a Martian why returns to income are taxed more than returns to capital which are taxed more than inheritance. If we value work, such policies seem backwards.

I don’t much resent Sam Walton’s wealth (particularly since he's dead and unable to enjoy it). I do resent his children’s. 50% of their $60-some billion could help to offset some of the government costs of providing health care to WalMart employees. If they wanted to be one of America’s top ten wealthiest, let them do what their father did: build their own business. Somehow, that just seems more American.


Life Hiker said...

Can you hear Teddy Roosevelt clapping in response to this post? Well, he is applauding loudly!

Republicans hate to hear that old Teddy was an early and loud proponent of the estate (not "death") tax. His logic was simple - have an effective estate tax or have an American royalty - read "Bush and Buddies".

The current estate tax law has reduced rates and a higher threshold, yet the Rethugs hate it. "Abolish the death tax!", they cry as they beg tears for the small businessman or family farmer who they - as they lie thru their teeth - claim will be harmed unless the tax is eliminated.

In my view, the first order of business for a new Democrat president and supermajority congress is to return the estate tax to the rates of yesteryear, with the threshold increased to compensate for inflation.

Even with these changes Paris Hilton and her ilk will still get all the money their worthless lives require. However, they and each of their successor generations will have to do something positive or the gold mine will play out. Their royalty will expire. Just as Teddy intended.

Ron Davison said...

Now that's one of the better images I've conjured up - Teddy applauding an R World posting. Teddy was one of my favorites. Thanks.

Patrizia said...

I agree on a lot of what you say.
But I do not agree on the fact that inheritance and capital incomes should be taxed as the secretary's salary.
The inheritance comes from money which is supposed to be saved by parents and on which they are supposed to have already paid taxes (if they didn't is another matter, you do not make laws on what could be, but on what you suppose it is)and taxing more the capital interest produces exactly what you are highlighting: that nobody wants to be an entrepreneur anymore.
Why saving and risking your money to actually pay again on it?
It's easier an eight hours a day job with paid holydays and pension...
The ones who decides about economical strategies have to keep this in mind: the consequences of what they do...
Do they want people to invest and to build new businesses? So, they have to help and encourage them, low taxes can be a good way...

Ron Davison said...

Thanks for stopping by R World.
You write:
"The inheritance comes from money which is supposed to be saved by parents and on which they are supposed to have already paid taxes"
I don't see this. If you've ended up with more than, say, $5 million, you probably didn't just scrimp on eating out to get that. Rather, the value of your investments has taken off. If your real estate rises from $100,000 to $10,000,000, you haven't paid taxes on the rise in the same way that someone who's salary has gone from $100,000 to $10,000,000 would have. Capital appreciation isn't taxed, whereas salary appreciation is. That strikes me as odd.

Norman said...

One of my first roommates, when I learned his dad was an executive VP at Ford, set me straight when I teased him about having "Money."

He looked me in the eye and said, "I don't have money. My dad has money. If I want to get ahead in this world, I have to work for it."

As I think back on it, that strikes me as profound now as it did then.

Ron Davison said...

Wow. An amazing attitude for a kid just starting life.

Daryl said...

A few issues that make your suggestion not very pragmatic...
1) People want to leave a legacy so a large estate tax just makes people spend most of their life how to get around it - money knows no boundaries.
2) Estate tax gives the money to the government, about the worst place to put it -- maybe it should be forced into the Gates charity.
3) If people know wealth will get taken away their is less an incentive to build it and you get less entrepreneurs (who I know you love)