Rethinking Soaking the Rich 2

Do rich wastrels really benefit the economy?

As American politics becomes ever more polarized, it seems as if there are no issues remaining that can't be divided into a "left" and a "right" side.  Sometimes pundits try to distill these down into first principles in a manner which is generally slanted to make one side or the other (or both) look silly - like the trope that the Left wants to control all aspects of your life except your sex life, whereas the Right wants the opposite.

It's actually fairly hard to really define the underlying principles even though we all feel like there surely are some.  In economics, though, there's been one distinction that's been pretty clear for a long time: the idea that, generally, the Right believes that you have the right and ability to make your own decisions about what to do with your own money, whereas the Left believes they know better and that we'll all be better off if they take away your money and redistribute it as they think best.  We see this in arguments over welfare spending, health care, education, and a host of other issues that, in the end, boil down to the questions "who decides?" and "who pays?"

Thus it's natural that, again generally speaking, the Right calls for lower taxes and less money given to the power of government, while the Left wants the opposite.  In this, it's the Right that's in the historic tradition of what it means to be American.  After all, wasn't our very Revolution fought over an oppressive and confiscatory government?

In the first article in this series, we explored an potential exception to this Founding rule.  Our Founders were not opposed to the idea of taxation in general.  They understood the principle that "the power to tax is the power to destroy" and they had something very specific that they wanted to destroy using taxes: inherited aristocratic wealth.  After all, they'd been suffering under a regime run mostly by inherited aristocratic wealthy toffs that didn't seem to be doing a particularly good job of it.

What did he ever do to deserve it?

So, while our Founders felt strongly that people ought to be able to keep what they earn, in the case of great fortunes, they did not feel any obligation to allow the entire fortune to be left to the original earner's descendants when he himself shuffled off this mortal coil.  A rich man's kids would automatically be provided with all sorts of advantages - powerful contacts, the best of education, and so on - and they figured that it wasn't necessary for them to also inherit a vast bank account they themselves had not earned.

Indeed, some of our Founders felt that the survival of our Republic required systematic efforts to minimize hereditary wealth.  This point of view also can be understood when you think about their own backgrounds: every piece of property and source of potential wealth in England was already owned by somebody and had been for a long time.  Anyone unlucky enough to be born in poverty had little chance of advancement, no matter how skilled or talented they might be - the opportunity simply wasn't there anymore.

Unlike Old Blighty, the New World provided unlimited opportunity for hard-working risk-takers to obtain their own wealth.  Or rather, apparently unlimited - James Madison, the Father of the Constitution, calculated the physical size of the North American continent against the observed growth rate of its population.  He realized that the free land would run out in maybe a century or so, which turned out, indeed, to be true.  When that happened, he feared that America would become just like fully-occupied Europe, with everything already owned by somebody and little opportunity for non-aristocrats once again.

It hasn't entirely worked out that way, at least not so far.  This has mostly been because of the potential of technological innovations that our Founders could not have foreseen or imagined.  Within living memory, people have managed to create vast fortunes from little more than a garage and a computer, which is not so very different from doing the same 150 years ago with an ax and a rifle.

But the modern path to entirely self-made wealth is getting more difficult all the time.  Jeff Bezos, like Sam Walton before him, has brought convenience and low prices to millions of people, but in so doing, he has destroyed many if not most of the independent small businesses that once populated our small towns.

Our Founders would consider the original entrepreneurs of Amazon, Wal-Mart, and the like to have earned their fortunes and that they should be allowed to keep them.  They would, however, see no reason why those fortunes should devolve on their descendants, who contributed nothing to creating them.

Points To Ponder

This is certainly an unusual perspective for conservatives to consider.  We generally feel that, no matter what a rich person buys, it's always better than government taking the money.  Even when a rich playboy spends all his money on fine wine, huge yachts, and prostitutes, he is providing opportunity for grape farmers, shipbuilders, and young ladies of small wealth but large... well, you get the idea.

But is this really true?  Let's think this through with a few thought experiments.  Suppose some deranged trust-fund kid decides to entirely liquidate his holdings into a monster pile of physical cash, which he then pours gasoline over and lights.  He's just burned up $10,000,000,000!  How horrible - that could have gone to feed the hungry!

Well, it could have, but in reality, the pyre destroyed very little actual wealth.  It just burnt up a bunch of colored paper.  The actual wealth itself still exists... evenly divided between everybody who also own dollars, each of which is now worth just a little bit more.  Our affluent pyromaniac has merely created deflation - the exact opposite of inflation, which is when government prints more money and each dollar becomes worth less.

What could be more fair than that?  Everyone who has a dollar is now worth a bit more, nicely and evenly.  The Founders felt it appropriate that unearned inherited wealth be made to benefit the body politic in some fashion; what better way than this?

But let's face it: Long before all those lovely, lovely Benjamins were reduced to ash, the EPA would show up with a huge fine for all the pollution.  So instead, our inherited plutocrat decides to spend all that money building a giant, garish Wonder-of-the-World-class monument to himself.

Now we're moving back toward conventional economic theory.  Presumably the masons, stonecutters, crane-operators, and carvers will benefit from doing all that work.  Then, when the project is done, it'll be a tourist attraction, bringing dollars to the community for years to come.

Or will it?  The excess demand for skilled labor for an otherwise economically-useless project will simply drive up the costs of skilled labor that must be paid by other, actually useful construction.  There will be fewer tunnels and bridges built as a result.

As for the tourism, every tourist visiting the Mausoleum will be one less visiting Mount Rushmore or the Statue of Liberty.  At best, you've robbed Peter to pay Paul; at worst, you've created a broken-window fallacy.  Rather than consuming labor to create something inherently useless, economically we'd all be better off with the big bonfire.

No, the only way the fortune can be made to benefit the public is by it being used to, well, benefit the public - namely, by investing in something that the public actually wants.  And there's no better way to do this than via the free market: we know for sure that Wal-Mart and Amazon truly do benefit the general public because the general public freely chooses to give their own hard-earned dollars to them in exchange for something they desire more than those dollars.

Anyone investing in a successful, profitable enterprise is by definition benefiting the public - if they weren't, the public wouldn't be paying in money and the enterprise wouldn't be profitable.

To the extent that inheritors of great wealth are able to put it to effective use, then they are benefiting the public and walking in the path of our Founders.  Donald Trump is a case in point: while his own father was indeed very wealthy, Mr. Trump has increased his inheritance many times over through creating things people want to buy.

But for every successful rich kid like Donald Trump, there's a useless parasite like Paris Hilton - indeed, probably a hundred of them.  There's nothing wrong with hardworking heirs like Mr. Trump, but the idle rich heirs are precisely what our Founders wanted to avoid.

Which brings us back to our topic of discussion: a confiscatory estate tax that ensures rich kids don't inherit too much of the money their parents earned.  That's certainly an effective way of making sure there aren't too many Rich Kids of Instagram, but is it really any better at making us all better off?  We'll examine that, in the next article in this series.

Petrarch is a contributing editor for Scragged.  Read other articles by Petrarch or other articles on Economics.
Reader Comments

How would we get the gov't to burn up the money? We all know they'd keep it. Probably wind up giving it to Iran.

March 18, 2019 5:07 PM

Independent pockets of wealth are a check on the federal government's power. Even if some heirs are as useless as Paris Hilton, the fact that useless heirs have the money instad of the government makes the government less powerful. Independently wealthy people often go into politics and seek to change government policy, challenging the existing power structure. That's a good thing.

The founder's biggest concern was concentration of power. A confiscatory inheritance tax would definitely concentrate wealth and power in the federal government's hands. The federal government already has much more power than the founders ever intended. It doesn't need any additional power concentrated in its hands.

If you are looking for an area the founders would view as completely against their principles, examine the way Congress creates regulatory agencies. These agencies have executive, legislative and judicial functions all concentrted in a single agency. Contrary to the Constitution, regulations become law without being passed by Congress or signed by the president. Infractions are prosecuted without the executive branch. Disputes are ajudicated without the judicial branch. Under the Chevron Doctrine, these agencies are granted undue deference by the courts because of their presumed subject expertise.

The method by which the aristocracy concentrated wealth and power in Europe was primogeniture, where the firstborn got all the land. The English made fun of the Irish, who split their land holdings equally among heirs, because without primogeniture, the land holdings gradually shrank to uneconomic sizes.

At one point land may have been the source of most wealth. However, in modern technological times it most assuredly is not. The fact that all the land is taken does not mean that all the opportunity is taken. The existence of today's tech billionaires conclusively demonstrates that land isn't the only source of wealth.

Because wealth today is generally split between heirs, great inheritances are gradually broken down into reasonable chunks. The ability to pass on wealth is a great motivator for entrepreneurs to keep making money after their own needs are met.

All taxes on the "rich" eventually become taxes on everybody. All temporary taxes become permanent. The income tax was both only for the rich and a temporary tax to finance World War I. Your confiscation of large estates will gradually get targeted at ordinary ones, once the priciple of confiscation is established.

Your desire to tax away "excessive" inheritances is pure socialism, in that you view the possession of wealth by heirs as illegitimate and thus, effectively, theft. I believe that we have to put up with some useless heirs to preserve the invisible hand of capitalism.

March 18, 2019 7:25 PM

You wrote..." They would, however, see no reason why those fortunes should devolve on their descendants, who contributed nothing to creating them...."

But people work hard not just for themselves but also for their families.

March 19, 2019 7:41 AM

This article about perpetual, impenetrable trusts in South Dakota may suggest a reason we don't want to let wealth grow throughout the generations without taxing it somehow when someone dies

explains how wealth can grow untaxed forever in South Dakota - it has no income tax or inheritance tax and its impenetrable trusts shield money from other taxes. That means rich people get more income from their wealth than the rest of us - they get it tax-free and we have t [pay taxeson all our gains.

It's not clear to me from the article that these trusts avoid Federal estate taxes, but that's a minor quibble.

November 14, 2019 11:49 AM
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