We recently published a series discussing the views of our Founders on hereditary fortunes: they were vehemently against them. Yes, they didn't much like taxes either, but for many of our Founders, estate taxes were the lesser evil when compared to hereditary wealth. Eliminating the ability of rich, powerful families to retain that wealth over many generations was more important than minimizing taxation.
Our founders weren't the only ones who saw problems with long-term concentration of wealth.
What is most important for democracy is not that great fortunes should not exist, but that great fortunes should not remain in the same hands. In that way there are rich men, but they do not form a class.
Alexis de Tocqueville
The reaction of our readership, who tend towards the conservative, was not entirely approving. Why would we propose increasing taxes? Aren't we all about decreasing the power and reach of government?
And most particularly - by specifically targeting one segment of the populace, namely rich heirs, wouldn't we be engaging in social engineering that is wrong in principle?
Let's start with first principles. As much as conservatives hate taxes and government power, we nearly all agree that there has to be some minimum degree of government power in order to keep civilization around. To fund that, there has to be some level of taxation. We may argue over the appropriate levels, but no serious person argues for no government or no taxation at all. The only thing worse than a bad government is an anarchy - otherwise Somalia would be booming.
So given that there have to be taxes, it follows that something in
particular has to be taxed. Do we want to put a tax on
property? On income? On sales, perhaps? Maybe
imports, or exports? Tea? Sugary drinks?
Our Founders intended the Federal government to subsist mostly off import duties. They picked this on purpose: it was their express intent that, by taxing imports, domestic manufacturing and production would be encouraged. To cite but two:
Indeed we have already been too long subject to British prejudices. I use no porter or cheese in my family, but such as is made in America.
- George Washington
The prohibiting duties we lay on all articles of foreign manufacture which prudence indeed requires us to establish at home, with the patriotic determination of every good citizen to use no foreign article which can be made within ourselves, without regard to difference of price, secures us against a relapse into foreign dependency.
- Thomas Jefferson
If it cost England $100 to manufacture an item, but there was a 10%
import tax, then an American firm could still compete even if it cost
them $109 to manufacture the same item, because the import, once the
tariffs were added in, would cost $110. And that's without
accounting for patriotism which, according to Jefferson, called for
citizens to buy locally even if it cost them more.
In economic terms this seems foolish, because it raises the cost of goods to the customers, but our Founders were thinking long term. They knew that American industry, being in its infancy, would have a hard time competing against the well-established and well-funded British enterprises. They needed a helping hand much as the Chinese governmetn felt that their industries needed a helping hand.
In other words, the Founders favored customs duties to explicitly engage in social engineering, picking economic winners and losers: They wanted American firms to have an easier time of things, and British a harder.
Would this have an even effect on everything? Of course not! Some goods were already cheaper to produce in America. Others would be impractical for a long time to come due to economies of scale. The Founders didn't care; they wanted to put a heavy thumb on their side of the scale.
The reason conservatives instinctively recoil from using taxation in this way is because our government has long established a powerful reputation of being bad at it. As Donald Trump repeatedly pointed out during his campagin, we don't seem able to negotiate good trade deals that benefit America, American consumers, American workers, and American businesses. So if you're incompetent at something, it's not wholly illogical to try not to do it.
But that doesn't escape the fact that all taxation is social engineering. If you tax tea, people will drink more coffee. If you tax waged income, people will earn less in wages and will try to move income to other forms such as capital gains. If you provide tax deductions for charitable donations, people will - surprise! - donate more to charity. We do this sort of social engineering all the time, thinking nothing of it.
Now, as with tariffs, these manipuations often don't work as planned. Many cities tax cigarettes enormously in an attempt to discourage their use; all they actually accomplish is taking even more money from the poor who smoke. This also creates a black market of smuggling untaxed cigarettes that provides great wealth to criminals while requiring cops to enforce yet one more law.
As with any weapon, taxes can be used to a wide range of destructive effect. President Obama understood this well:
If somebody wants to build a coal-fired power plant, they can. It’s just that it will bankrupt them... Under my plan … electricity rates would necessarily skyrocket.
Mr. Obama knew he wouldn't get away with actually outlawing coal; he simply wanted to make the regulations and taxes so costly that nobody would use it anymore.
Whole books have been written about this approach to governance: don't ban things, simply discourage people from doing them using taxation. The Left uses it constantly: we see congestion charging introduced to discourage driving and encourage uneconomic mass transit, for instance, and in California the government charges massive fees to discourage people from building new housing or from using plastic straws.
Given that we have to have taxes, and taxes by their nature discourage whatever is being taxed, why can't conservatives wield the same weapon? We've already seen how vast fortunes left unspent when their original earner dies over time almost always end up funding the Left. So taxing vast fortunes, in addition to being recommended by the Founders, is a good way to remove money from the opposition.
President Trump and the Republicans in Congress, in one of their precious few joint accomplishments, managed to cap the deduction of state income tax against federal taxes. This means the people in high-tax states - mostly Democrats - will be paying more in they were before. We also know that wealthy people tend to be Democrats, so why wouldn't we want to take money away from them that otherwise will likely fund our enemies? Taxes have to be paid by somebody, why not them?
Elite private colleges - universally leftist - sit on billion-dollar endowments which make them largely independent of economic pressure, and which, being "educational" institutions, are untaxed. In effect, the Ivies have become a generations-descended heir who've long abandoned the principles of those who earned the money. Why not tax these stockpiles that drive Leftist indoctrination, a change that even some on the Left support?
A few moment's contemplation reveals a myriad of other opportunities to use the legitimate power of taxation in a strategic way to make America better off. Political campaigns are already taxed - why not political pressure groups, currently mostly nonprofits? How about a new Stamp Act of heavy charges on all legal filings - surely we want to discourage those, while equally surely not eliminating courts?
All this talk of raising taxes will raise the hackles of any true conservative - after all, we don't want government to have even more resources than it already does. If we choose to raise a tax for the purpose of harming something we want harmed, we should also lower taxes on things we want to promote.
We already don't tax churches, and that's good.
For decades, we haven't allowed states to tax stores that sell by mail from some other state, but the Supreme Court recently changed the rules to allow it - we need to fix that, to remove the onerous burden of compliance to an infinitude of taxing entities from small businesses.
Work is something we want to encourage - why, then, do we tax it? We also want to encourage families, and we do have tax deductions for children, but the deduction is a tiny fraction of what it actually costs to raise a child. If a parent is raising the next generation of taxpayers, isn't it fair for them to have full relief from taxes?
And since we all pay property taxes which pay for public schools, even those of us who don't want to send our children to them, why shouldn't people be allowed to deduct the costs of private school or homeschool?
If your employer pays for your health insurance, you don't pay income tax on that money. If you pay for your own health insurance, though, you do, and that's insane.
Of course, each and every one of these changes would have unintended consequences. But then, so does every law - it's not possible to think of everything. And unless we are satisfied with things exactly as they are, we have to change something.
Why not make social-engineering taxation changes that would hurt the opposition and help our side? That's what they've been doing for a hundred years, and it's seemed to work pretty well for them.
What does Chinese history have to teach America that Joe Biden doesn't know?
Well heck. YOU be the clay, and I will be the sculptor.
Tough sell to screw your kids after you have worked hard to give them some inheritance. This seems to assume that anybody who passes funds on to their kids is talking millions of $ . For many it’s less . Not sure they should be penalized along with the Bloomberg and Sanders heirs.
Even though Herman Cain is the piñata du jour, may make sense to relook at his 9-9-9 plan. Everybody gets screwed...consumers, working stiffs, and corporations. Helps assure that less is left for the next generation. Which I guess your goal.
Hardly. The Founders were opposed to hereditary *fortunes*. Think Bill Gates, Mark Zuckerberg, Jeff Bezos sort of people. Obviously we don't think *all* inheritances should be taxed away. Say, over $100 million - and even then, the point wasn't to give the government money, but to incentivize the super-wealthy to use it wisely and charitably before they go.
Interesting discussion with a co-worker yesterday, while thinking about this series of articles. A few years ago the grid operator tripled the cap on the wholesale price of electricity. Many thought it was a get-rich-quick scheme to benefit the electric companies. A little thought at the time led me to think that the market price would never get to the cap because enough generation would be encouraged to be built and that's exactly what happened. In fact, a couple of years after the move the market price failed to reach the original cap because of the generation that was built in response to removing the price control (tripling the cap).
Just like the author has pointed out, the grid operator did not intend to pay that higher wholesale price any more than the founders expected to collect on an estate tax. I know that even in my meager tax situation, I go out of my way to avoid flushing money down the federal toilet, and anyone capable of building a fortune would do likewise, and still manage to provide a reasonable inheritance for his children while not depriving them of the joy of work and accomplishment.
When you consider that tax avoidance is a primary objective of anyone in big business, the thesis makes complete sense. However, most others are tax victims, who just pay and complain- while not taking the time or discipline to arrange their matters to minimize impact.
One should not forget that generational wealth usually ends up funding leftist causes...I think we all know of some examples of "trust fund babies" in our lives who were not made better by having every need effortlessly met.
Thank you for a very enlightening series.
bsinn, I don't get the impression they were against inheritance per se, just megadynasties resulting in a permanent wealthy class likely to conspire to exclude others from obtaining wealth. One of the assumptions of a free market is that the market is effectively unlimited. That is not strictly true, and it is apparent that some of the old moneyed families are literally born into power. If Congress were to place a cap on inheritance indexed to the median working wage, statistically most family fortunes would decline over a few generations. So, say the median salary is $50k (it is a bit higher, but this is for easy math) and the index said you could bequeath 100x the median salary. That would be $5 million - enough to immediately retire on, but not enough to be an automatic Prince. I've thought something like this would be a positive thing for decades, but did not realize until reading this article that the Founders had so clearly addressed inheritance.