My Argument For an Inheritance Tax And Against a Wealth Tax

It’s hardly surprising that in the wake of the first billionaire’s presidency we would have a backlash against billionaires and talk of a wealth tax. 

Trump transforming the White House into a home theater dedicated to Fox News is less indictment of billionaires, though, than an affirmation of the need for a much higher estate tax. 

Trump’s pride in having turned a half a billion from his father into $3 billion in half a century is like a rabbit breeder taking pride in having transformed a herd of two rabbits into a herd of three in a year. He's not good with capital. He's no Warren Buffet. There are three ways be an old rich guy.  The first is luck. The second is to start with little or nothing and earn and invest well. The other is to start rich and then end rich. Trump chose the third door, which as it turns out doesn't so much open onto a path as a lovely room.

One (of many) advantage(s) the US had over the USSR is that it left the allocation of most capital to individuals and institutional investors (like mutual fund managers or private and public corporations). The way that wealth works is this: the better you are at getting a return on capital, the more of it the market gives you. If Warren Buffet gets 13% return on a billion, he has two billion to invest in 6 years. The guy who gets a -2% "return" on his billion will have only $890 million in 6 years.

It is true that variation in the ability to invest leads to wealth inequality. It is also true that the market ruthlessly gives more capital to the folks best able to create more capital and takes capital from those who destroy it through bad investments. It's true that luck plays a role in returns but it is also true that - just as with ability to play basketball or write poems - different people have different levels of ability in investing. A smart community likes the idea of good investors having more capital than bad investors.

I don't think the kind of wealth tax that Elizabeth Warren is proposing is a bad thing, I'm just not real excited about it. I'd much rather see an inheritance tax of 50% (or more) for amounts over $10 million than a wealth tax. Why? I don't believe in aristocracies.

Michael Jordan was an amazing player. His sons also played basketball but did not make it to the NBA. It's rare that a child inherits the gifts of the parent. This is likely true of Warren Buffet's children as well; it is highly unlikely that they have their father's genius for investment. Just as there is no reason to give Michael Jordan's sons the ball to play in the NBA, there is no reason to give Warren Buffet's kids billions to invest. They can't do anything special with it.

Just from a perspective of "How do we create the most wealth," question, we should let great wealth builders keep their wealth and then tax that wealth when it passes from one generation to the next. Obviously the next generation might preserve a fortune if they get it, but it's not obvious that the next generation will get returns any higher than average. There is no argument for accumulating great wealth over generations. That is the definition of an aristocracy, and one of many reasons that aristocracies are associated with stagnant economies is because they are about protecting wealth, not creating it. Entrepreneurs have an impulse to disrupt the status quo; aristocrats have the impulse to protect it. 

Billionaires help to create - and are created by - dynamic economies. As they build companies and invest capital, they add to a communities wealth. Billionaires are a natural companion to dynamic and healthy economies. Aristocrats are not. And that is the reason I think inheritance tax is a good idea and a wealth tax is only a mediocre one.