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December 30, 2009

Comments

Steve Keen makes a point that wealth concentration among the very rich slows the velocity of money and hurts economic growth because the wealth will be mostly invested in low performing assets rather than spent in the consumer economy. The inheritence tax could somewhat address that.

I think there should be some loophole for certain majority held assets though, so that heirs wouldn't be forced to sell off longtime family businesses or farms to pay those taxes.

Selling farms does little harm; a field is still a field, a barn a barn. Businesses that depend less on real estate, and less on commodity products, are more vulnerable to damage by transfer of ownership.

Half Sigma,

I used to think exactly the way you do.

However I now spend a lot of my time among software and technology businesspeople. There are quite a few of them who have put $20 or $30 million in the bank. These guys value their vacation time - the only motivation they have for continuing to work is the thought of giving their children and grandchildren a good life style.

If the estate taxes are too high, they will decide that too much of their earnings are going to the government (basically, if they work and make an extra 1 million, half goes to the government as income taxes and then half again goes to government as inheritance taxes, leaving their kids and grandkids with only 250k)

So my point is that, IF you want to motivate people to work hard even after they have saved up all the money they themselves will ever save, you have to provide them with an attractive way to make their hard work translate in to money in the pocket of their kids and grandkids.

Bottom line, rich productive people will retire earlier if estate tax rates are raised.

Just to be clear, politically I am very liberal and I think it is "unjust" that certain people are born with the skills to earn 20 or 30 million and other people are genetically lacking in those skills. I don't like the fact that the children of the rich inherit huge ammts of money. It bothers me. But to me that is the price we have to pay as a society in order to motivate the rich productive people to keep working. It is a bitter pill but I have swallowed it. I urge you to consider swallowing as well

[HS: They're doing winner-take-all work, which is a type of value transference. Other people would step in and do their work, and they'd have an opportunity to get rich instead of just one rich guy. Society would be better off if this guy worked less and spend TIME with his children.]

Your last point (value transference class not supporting the Republican Party) is well-taken HS.

What's your position on family farms? A 640 acre farm provides very small income, but, if sold, would make the seller a multi-millionaire. Should we tax away ownership of the farm from a guy making minimum wage? Does the increase in value of the property from what it was 200 years ago represent value transference?

should we be primarily concerned with how to label the transfer of money, or rather, it's utility in the market?

I'm less inclined to believe that money taken by the government through taxation of this type is going to produce any value for anyone whatsoever, and even so, only in a nominal sense. Instead, I think the money is best used by giving it to private donees. I just don't see how additional money in the hands of the government is going to be of any benefit aside from Wall Street or other public lobbying groups. You can argue that a person who receives the inheritance will quit his job because he has that extra money, but one could also argue that he'd use it as a vehicle for further wealth creation (starting a new business, for example). Even so, those who receive inheritances can only exist so long as they continue to produce value anyways - by analogy, those who win the lottery are very often ending back up where they started in just a few short years, meaning they'll have to go back into the labor force.

The government isn't really in the business of value creation; rather, it is in the business of value exaction.

[HS: Higher estate taxes means lower income taxes for regular people. That's a benefit for everyone except the super-rich.]

My problem with your argument is that it runs up against my own argument: which is that the government is a landowner and that we who live here pay rent.

Since under my system the government doesn't own me (just my house), estate taxes are a form of serfdom - like income taxes - and so unjust.

"[HS: Higher estate taxes means lower income taxes for regular people. That's a benefit for everyone except the super-rich.]"

In theory yes, but in reality it really doesn't mean lower income taxes for other people. It just means the government can fund another agency without having to borrow from abroad by selling yet more treasuries.

I've been a reader long enough to know that you believe private enterprise to be a more efficient allocator of capital than government. Even if lucky offspring of rich people "win the lottery" they are still going to invest their winnings in things that create value. The alternative is "investing in the government" which is not (at the moment) creating value. In other words, there is a sizable opportunity cost associated with the estate tax.

IMO Government is an absolute necessity for certain things such as evaluating the cost of negative externalities produced by business and consumers, and making sure those who are unfairly wronged are fairly compensated.

I really don't get people who blindly trust government to make all the "right" decisions. What's the government's motivation to be efficient? At least private enterprises have a monetary incentive -- the government just needs to keep private enterprise in check to make sure they are not screwing people but instead are creating true economic value.

when planning a policy, you need to think about what it incentivizes people to do in reality, not about what would happen in the ideal world of hope and change. And what happens in practice is that the rich people start spending lots of money on accountants and lawyers to get around this. They do get around it to a good extent, but along the way they end up paying a big "tax" to accountants and lawyers and they potentially expose themselves to prosecution as well as to disdain of the people. So in the end everybody loses out except for the, you guessed it, the accountants and lawyers.

If you want to get the rich to invest, the way to do is not with confiscatory taxes. Create a good investment climate, and people will line up to invest. Even the dissolute rich kids will hire a good manager to invest in a gold mine. Create a lousy investment climate full of hope and change, and what you will get is basically what we are getting. With the death tax or without, things are still lousy.

"I've been a reader long enough to know that you believe private enterprise to be a more efficient allocator of capital than government. Even if lucky offspring of rich people "win the lottery" they are still going to invest their winnings in things that create value. The alternative is "investing in the government" which is not (at the moment) creating value. In other words, there is a sizable opportunity cost associated with the estate tax."

As I stated before, I am enamored with Peter Thiel's explanation that the current economic crisis is not a "credit crisis," but an innovation or technology crisis. The innovative aspect of Half-Sigma's post-Marxist is that it does not confirm Marx's labor theory of value in modern terms, but it argues with concinnity that "wealth" does not necessarily follow "wealth-creation" activity implying that much wealth is derived from "value transference." It is very tempting and easy to reconcile Thiel and Half-Sigma's ideas to explain the current economic situation -- much of the perceived wealth creation in the last decade has been in the form of value transference capital, and this period occured when we are depleting intangible wealth such as social capital from immigration, and tangible wealth by depleting natural resources. The allure of the post-Marxist theory is not a recapitulation of the labor theory of value, but it strongly implies that wealth comes from innovation, not value transference.

But to put my own left-wing Rawlsian normative perspective in their ideas, we could assume that innovation, in a reasonable time frame, can enhance the welfare of the least well-off, and if wealth inequality encourages innovation, then one could use a Rawlsian argument to defend such inequality even though redistribution well benefit the least well off in the short-term. However, if that wealth (or income) inequality are primarily due to variances in value transference capital (and Rawls himself even argued if there from natural talents), then it is justifiable for an agent such as the government to rectify such differences for the benefit of the least well-off because this differences would not result in long term gains in welfare. To put it laconically, these are the ethical arguments that can argue for or against an estate tax from a Rawlsian or utilitarian perspective.

But to get on my hobby horse, I will ask the question what would be a productive use of capital? What should we (society collectively, corporations, or venture capital entreprenuers) invest in to promote innovation and actual value creation? I'll copy and paste from my other posts.

" http://www.marketfolly.com/2009/09/hedge-fund-clarium-capitals-august.html


In the linked commentary, Clarium pointed out that corporations are net suppliers of capital meaning that they do not have a shortage of investable capital. The report also points out, that unlike China, developed nations have reached the limit of tangible capital formation (e.g. houses, factories, etc.) so investing in tangible capital would not lead to significant returns. For developed nations, this would leave intangible capital, but the two known investments on intangible capital - education and health care - are horrible investments and some might argue that they should be viewed as comsumption. Another form of investment that was not in the report is social capital investment, but my realist side say that is type of sending will not yield much because the US is a diverse nation (ironically, it might have worked in Japan though, but they built bridges to nowhere.)

Also, Peter Thiel pointed out that investment in technological innovation is inhibited by a free-rider problem as everyone expect great innovation, but they expect someone else to innovate.

http://www.leveragingideas.com/2009/10/04/notes-peter-thiel-singularity-summit-talk/ "


How does your value transferrence theory apply to a small manufacturing business started with sweat equity 30 or 40 years ago and grown to a valuation of $25 million?

Has not this business, by the veryfact of its success, provided value in its products commensurate with what its customers were willing to pay over the decades of its existence? What would you have the business do on the death of the majority owner? Where are the assets to come from in order to pony up the cash demanded by the IRS? There is only one source - the business itself. Almost all estate plans for small business succession are constructed around this core fact. The ownership of the entity has a theoretical rather than a practical value. Unfortunately, the IRS assesses a REAL tax, payable in cash, on this entity value with little regard to its effect on the continuing operation of the business.

Since the IRS is unconcerned with the continuity of business operation across ownership generations, business succession planning is a requirement to keep the entity going so that its customers, lenders, suppliers, employees and other dependents can go on without experiencing the calamity brought on by ill-considered tax laws. To ensure a smooth transition (tax-wise; new management challenges are a separate issue) on the death of the majority owner, many sophisticated financial strategems are employed. The effect of all of them are to have the business budget and pay the transfer costs on an ongoing basis ahead of the death instead of all at once at the time of death. In effect, the estate tax becomes a surtax on small business operations, stifling growth, employment, acquistion of new talent and technology and all the other benefits capital can bring to a small business.

The takeaway is: the estate tax on the "rich" is an income surtax on every worker at every level in a successful small business.

williakz

"And what happens in practice is that the rich people start spending lots of money on accountants and lawyers to get around this."

Yes, and this puts a fuzzy cap on how high you can set the estate tax. But that cap is far higher than 2010's 0% rate, and there's no good reason not to set the estate tax to that cap as long as you're simultaneously levying worse taxes like the income tax.

I'd be curious if H.S. can point to a country -- any country in the history of man -- that wisely taxed people who made fortunes from mere value transference without mysteriously creating low growth rates and plunging itself into relative poverty when compared to countries that taxed "parasites" less.

When you first wrote the transference thing, I assumed it was something you'd tossed off late one night when semi-intoxicated, the sort of blog post that all bloggers write and are embarrassed about the next day. To see you linking back to it makes me sort of embarrassed to read this blog because no one has seriously argued this sort of thing since the first world war.

No one can create more than $150,000 of value? A plumber with a high school education can easily create that much value in six months. How do I know he has created that much value? Because customers pay him the money, which means they value the service more than the money. That's the definition of creating value. Same with the owner of a decent restaurant, an independent cab driver, a popular tour guide, a lawyer, an accountant, a masseuse, a successful hair dresser, a musician.

I use these professions as examples because they are all people who independently perform services for customers who pay them directly and who thus -- by definition -- are creating value equal to or greater than the amount those customers pay them.

There are hundreds of thousands in these categories alone that take in more than $150,000 a year. And there are hundreds of thousands more in other direct service professions who do likewise.

As for folks who work through larger organizations, it's impossible to determine mathematically what value they create, so mortal men can only have opinions. But I'm willing to state here that in my opinion, if it's possible for a lawyer to create $1 million a year in direct value that people pay him (so it clearly is value that he is creating for his clients) then it's certainly possible that the guys who created Google made created billions in value.

Winner take all and somebody else would have done it? Who else would have done it in your silly world where rewards are capped at $150,000 a year? What investor would have put in the money to capitalize Google for the first six years of its existence before it turned a profit? Either grow up or stick to analysis of reality TV shows. This is the sort of crap I expect from an overly earnest junior high school student who volunteers at the soup kitchen.

I guess if one begins with the mindset that all property belongs to government, and it gets to decide how much the citizens keep, your argument makes sense.

Also, Republicans oppose the death tax because they believe it to be immoral and in many cases destructive of value-creating family businesses, not because of some electoral calculus.

"I'd be curious if H.S. can point to a country -- any country in the history of man -- that wisely taxed people who made fortunes from mere value transference without mysteriously creating low growth rates and plunging itself into relative poverty "

USA 1945-1973

What economic purpose does value transference serve? It transfers wealth from people who don't know what to do with it to people who do. What is the point of a casino? It's to take money from retirees and the idle rich and transfer it to people who can make better use of it. Every time a 25 year old hooker with a kid gets a $100 tip from some old guy, money is being transferred from where it isn't needed. Without zero-sum activities like casinos and futures markets and $15 cocktails, money would get stuck in the hands of people who don't need it. I briefly worked in fundraising, and charity is another form of value transferece, and what I learned is that rich people have no idea what to do with all their dollars, and they'll listen to some of the stupidest schemes for giving it away. Look at Ted Turner.

Agree 100% with you.

Actually HS, you should put the onus on the anti-estate tax people to justify why not to tax them.

Make them justify taxing middle/upper-middle class people's salaries instead of Paris Hilton's inheritance.

Saying "I'm against all taxes" is a lazy and invalid cop-out. You can be against taxes generally and still have an opinion on which taxes are less bad. You have to be really dumb or willfully obstuse not to get his point.

"it's certainly possible that the guys who created Google made created billions in value."

Most of the work was other google employees. Saying that google would not exist "but for" its founders does not mean they did most of the work. You equate without any proof "creating billions" with being the founder of a company with tens of thousands of employees that creates billions.

Note also HS advocates high estate tax rates so people like the plumber will work more and keep more of what they earn.

Compare two alternatives:

1. Guy worth $5 million knows that if he makes an extra dollar, some time after his death the government might take half of it from his heirs

2. Guy worth $5 million knows that if he makes an extra dollar the gov will certainly take half of it right away.

It's obvious #2 is worse for the economy and his motivation to keep working, which is why the estate tax should be at revenue maximizing rates around 50% and the income tax should be as low as possible.

A lot of idiot libertarians can't understand this basic point because the libertarian movement is heavily funded by the children of billionaires, in particular the Koch family, and as a result libertarian intellectuals who rely on their funding never shut up about the estate tax.

Speaking of regrettable things written late at night in a state of semi-intoxication, I apologize to H.S. and this blog's community for the tone of my comment above.

I stand by the substance of what I wrote, for I still think the value transference theory to be easily disprovable. That said, there was absolutely no reason for the personal and insulting tone of the comment.

No one benefits when the comment section of blogs devolve into acrimonious idiocy, so again, I apologize (even if such an action makes me look like a beta in Roissy's eyes.)

Very nice apology, scoop.

I'd still like to hear something about the owner of the family farm, which could be sold for millions to some city-person-with-money, but only produces a minimum wage income.

My chief problem with inheritence taxes is the same problem I have with property taxes. With either in place, you never really OWN property. It's a form of governmental rent. I think if you could separate actual property from just concentrated wealth that inheritance taxes could have some use.

I also think the "value creation" vs. "value transference" debate is actually something that was pretty commonly discussed in politics and business before a couple of generations ago. The terms were just different. It was the debate between "commerce" and "finance". Finance was always understood as an area that could create tremendous harm to society and therefore needed to be heavily regulated. It's been that way for most of human history (e.g. usury laws).

Unfortunately we have forgotten that in the last couple of generations, which is why finance now makes up about 40% of economic growth and why banks and investment houses have such an outsized amount of control over our society.

HS: Could you start a thread where you give us your "predictions" for 2010, however absurd, and the "peanut gallery" provides their predictions also?

(Predictions on: DJIA, S&P 500, Iraq/Afghanistan, terrorism, foreign relations, politics, economy, music, popular culture, trends, celebrities, celebrity deaths, anything goes, etc.)

A pointless exercise, but always fun!

***Those libertarian economists who argue against the estate tax will say it’s discouraging value creation. But the way I see it, anyone who is rich enough to have an estate big enough to be subject to the tax became that rich through value transference rather than value creation.***

Leaving aside the fundamental incoherence of your argument - value is subjective, after all - you have zero evidence of this.

***Taxes on value transference are good taxes, because they tax a zero-sum or negative-sum activity and allow lower taxes on value creation activities.***

Taxes create a "dead-weight loss", which are themselves a negative-sum game. Add in the phalanx of new accountants and lawyers employed to separate "transference" from "creation", and the loss is even worse.

You just don't know what you're talking about.

***It's easy to see how inheritence results in less value creation: a lucky heir might quit his value-creating job because he got rich through inheritence.***

That lucky heir might also invest the inheritance in wealth creation. You simply don't know.

"The plans differ; the planners are all alike." - Hayek

Zinc, you do realize that "Guy worth $5 million" is in fact using this $5 million to finance companies which in turn provide jobs, which in turn allow people to create value, which in turn provides government with payroll tax revenue. This has a multiplier effect.

With no estate tax, his heirs can continue to do the same thing. With an estate tax (and for the sake of argument ignoring when it kicks in), suddenly the heirs are forced to liquidate some of these investments in order to pay the government.

When this happens with large enough numbers, you kill private sector jobs because you reduce the number of companies in the economy that can be financed due to the finite amount of investment capital.

The only situation where this would be beneficial is if the government can use the estate tax proceeds to create more value and jobs than would be done through private investment.

There are governments where this is true. At some points in history this was even true of the US. I personally don't think this is true today, but that's subjective and is obviously open to debate while the rest really is not -- it's pure logic and reason.

Do opponents of high taxation care about taxes' bad incentives, or about catering to the rich?

Here's a good way to put the Steve Forbes crowd's moralizing to the test: What happens when federal law subjects middle-class workers to confiscatory marginal rates on their labor?

It is commonly known that The Fair Labor Standards Act singles out IT pros for tooling: "There are, in addition, some special rules which apply to employees who work with computers and permit them to be classified as exempt even if they don't meet the usual requirements for exempt executives or administrators."

"Exempt" in this context means the -boss- is "exempt" from paying overtime rates for long weeks. Furthermore, he is "exempt" from paying anything at all to these damnable geeks once they've keyed away for 40 hours!

The takeaway is that work performed by IT pros > 40 hrs is de facto taxed at a 100 percent rate, (See "The Soul of a New Machine" by Tracy Kidder, p. 61, 223, 257).

At any rate, this government-mandated wealth transfer from value creators to managers and shareholders has hardly been met with appreciation or gratitude on the part of those who reap the benefits. Nor has there been any outrage from the conservative blogosphere, which should be a natural ally.

Instead, our managers are now eager to squeeze even more value from the productive class, and are lobbying politicians for bigger immigration loopholes to bring in foreign workers.

They taunt and threaten the IT pros who publicly disagree - "We will bring them over or we will send your job away. Which is it to be, Whiz Kid?"

"But, boss, didn't you used to lecture us that outstanding communication skills were critical for this job? Most of these guys' e-mails and phone calls are barely intelligible."

"Whiz Kid, you are a racist. March on over to HR now."

FLSA's placing of IT pros in a similar category as admin or exec types becomes more antiquated with each passing year as accounting and operations consolidate their dominance of IT in many companies and push the glass ceiling as low as they can by stuffing middle management with their paper-pushing cronies.

Here's another example: when Obama proposed raising taxes on income over $250K, ABC News and NRO's The Corner sympathetically devoted many column inches to the rich's howls of protest. On 3/3/09 in Stephen Spruiell's post "Wealthy Idiots," all manner of highly compensated professionals took time - during the middle of the afternoon on a workday - to write long e-mails about how hard they worked and how they were going to Take Their Ball And Go Home! if marginal taxes increased a grand total of 4 points.

In sum - 39 percent tax on value-creating doctors and value-transferring lawyers, big controversy! Reinstating the estate tax, big controversy! 100 percent tax on the value-creating middle class, yawn, what else can we do to run up the score on them?

"I guess if one begins with the mindset that all property belongs to government, and it gets to decide how much the citizens keep, your argument makes sense.

Also, Republicans oppose the death tax because they believe it to be immoral and in many cases destructive of value-creating family businesses, not because of some electoral calculus.'

Exactly right. Taxation is theft and is immoral regardless of how the wealth was created. If someone inherited a fortune or won it in the lottery, rather than "honestly" earning it, it is STILL THEIR MONEY, and the government has ZERO claim on it.

As one says to a grabby toddler: "NOT YOURS!"

Off subject and with all due respect: a new study disproves the feminist/Half Sigma dogma that being overweight is okay. Between this and Rush’s hospitalization, I think the Gaia Mother Earth Goddess is trying to suggest a New Year’s resolution.

Here is some red meat for you..

http://science.slashdot.org/story/09/12/31/1334257/Scientists-Postulate-Extinct-Hominid-With-150-IQ

"Scientists Postulate Extinct Hominid With 150 IQ"Neuroscientists Gary Lynch and Richard Granger have an interesting article in Discover Magazine about the Boskops, an extinct hominid that had big eyes, child-like faces, and forebrains roughly 50% larger than modern man indicating they may have had an average intelligence of around 150, making them geniuses among Homo sapiens. The combination of a large cranium and immature face would look decidedly unusual to modern eyes, but not entirely unfamiliar."


"Taxation is theft and is immoral regardless of how the wealth was created. If someone inherited a fortune or won it in the lottery, rather than "honestly" earning it, it is STILL THEIR MONEY, and the government has ZERO claim on it."

Do you think we should have police and a military? They will not work for free. How do you propose to pay them? Since you think taxation is theft should they be funded by bake sales?

"Do you think we should have police and a military? They will not work for free. How do you propose to pay them? Since you think taxation is theft should they be funded by bake sales?"

How about only cops and an army? If only taxes went just to those 2 instead of NAMs, edumakation, or the all liberal bullshit that exists. My advice: buy a gun (or 5) and precious metals.

http://mangans.blogspot.com/2009/12/us-is-bankrupt-and-social-security-will.html

Usually, I think you must be a pretty intelligent person. You have original ideas and insights, and mostly present them quite convincingly.

Your views on the minimum wage, and 'value transference' however, are comically uninformed.

I agree this post makes no sense and reeks of the same "tax everyone wealthier than me" mindset that infects most of the socialist Left.

However, I'm surprised that no one has raised the obvious point - even if it was feasible for the government to steal everyone's inheritance, how much revenue would it even raise? A hundred billion a year, at most? That's a band-aid on a bullet wound at this point.

Finally, I'd like to note that this idea brought to mind all kinds of hilarious "Brewster's Millions" scenarios, with the aging wealthy and their heirs running around trying to blow their fortunes before Uncle Sam takes it away.

HS: Higher estate taxes means lower income taxes for regular people.

Not it doesn't, it just means higher taxes for more people.

HS: Those libertarian economists who argue against the estate tax will say it’s discouraging value creation.

Show us exactly how "value creation" occurs when the government gets the money; if your answer depends on your first statement above, how about an example, just one, of anyone's taxes being lowered.

Half Sigma - I bought a Canon S90 and am happy with the results so far. However, I want to hear more about the settings you use to do street photos at night. Do you use "night snapshot" mode or "night scene" mode or "low light mode"

How do you decide which of the three above to use when doing street photography?

"Do you think we should have police and a military? They will not work for free. How do you propose to pay them? Since you think taxation is theft should they be funded by bake sales?"

The police are irrelevant to the discussion of the estate tax, because local taxes pay the police and the estate tax is a Federal tax.

That aside, the actual use to which tax money is put ("good" or "bad") does not alter the fact that taxation is immoral, period. Taxation is armed robbery. Morally, we should have ONLY the government that individuals are freely willing to pay for - and that means privately operated police forces, firefighters, and schools, among other things.

One reason why Half Sigma's value transference theory doesn't have much appeal is due to the general personality profile of a "member" of the "HBD" movement. This is my perception of the stereotype, but it does explain why Half Sigma's ideas on value transference were received with much antipathy. Most of the HBD movement consists of individuals who have a low openness to experience given, not just their disagreement, but overt hostility and contempt to some of his ideas, and low agreeableness given their contempt, not only for NAMs, but even white proles who do share their concerns about immigration. My hypothesis of low agreeableness should not be seen as a derogatory remark necessarily since I also have low agreeableness too. The notable exceptions in the HBD community, such as Half Sigma and Randall Parker, make great bloggers because of their high openness to experience allowing them to have a unique perspective and immunity to the groupthink within the HBD community. Lastly, to say something positive about the general HBD movement, it is obvious to me that the average IQ of this group is in the 120s based on the low readability and high-grade level of the comments and the complexity of the ideas that the posters discuss and explore.


One reason why post-Marxist value-transference theory is hard to accept among HBDists since it states that the proletarian classes are NET value creators, and given the contempt with white proles mentioned above, this is hard to accept for the HBD demographic. Since the proletarian classes are net value creators, this also provides some superficial credence to the Marxist labor theory of value and the Marxist's grievances about that proletarians being exploited by the capitalists. However, the theory is obvious incompatible with politically correct economic theories since one class is referred to derogatorily as a "parasitic class." Half Sigma does not even attempt to argue that the misfortunes of this class are due to the environment or oppression which would be a standard left-wing response.

A flagrant example of value transference to the eponymous value transference class is recapitalization of banks: the banks can borrow at below market short-term interest rates while using that money to lend long-term to the Treasury thus pocketing a very nice “risk-free” spread. (This strategy is not immune to rising long-term interest rates though as this would decimate the value of high-duration fixed income products.) Furthermore, Half Sigma also points out that market activities need not create value as discusses the effects of Chinese gold farmers on MMORPGs. Lastly, since corporations are agents of the financial interests of their shareholders, they do not necessarily have a mandate to create value as he points out one case of IBM suppressing a rival that threatens its market share.

Half Sigma's theory also states that two groups are NET value creators, and the other two are net value extractors: proletariat and the college graduate classes, and the parasitic classes and the value-transference classes respectively. This might be a shortcoming of the theory because it implies that the value transferred to the latter classes equals the value extracted from the former classes. This accounting identity might be invalid because it only accounts for intersocial value transference, but it does not consider potential intertemporal value transference. Remember the etymology of the word "credit" is derived from the Latin word “credere”, that is, to trust, to believe. When one extends credit to another, the party extending credit does this on the assumption that he believes in the ability of the borrower to repay the loan with interest, and likewise, the borrower believes in his future capacity to repay the loan. Taking a college loan, for example, means one is extracting value from the future by taking on a future liability to finance present educational "investment" since it is believed that investment will satisfactorily pay off the loan. (One could make a reasonable argument that education spending is generally not an investment and should be properly viewed as consumption.)


To reiterate for the fifth time, one of my favorite narratives of the financial crisis is Peter Thiel’s assertion that it primarily a crisis of innovation. This view has intellectual allure (and factual veracity) because it is a contrarian, yet elegant, point of view. Unlike other narratives such as the Austrian narrative which states that the crisis is due to Central Bank and government distortion of the free markets, or the risible Steve Sailer “diversity recession” thesis, Thiel’s ideas are not promulgated at venues like Seeking Alpha and are not integrated by groupthink (yet). (My main criticism of the Austrian school perspective does not assail its factual validity as it does adequately explain some macroeconomic phenomenon, but that simply it doesn’t have contrarian appeal anymore. For example, look at the number of visitors to Mish Shedlock’s blog). A common narrative presented by financial services people as an argument to get people to invest is that the stock market had enormous positive returns over the long-run for two hundred years. Over the long-term, the real return on financial assets is directly linked to economic growth, and the primary factor behind economic growth is technological innovation as one could easily argue about prodigious innovation in the last two decades. Since there doesn't appear to be immense innovation and economic growth last decade, people had to compensate by using leverage -- borrowing from the future -- to generate high returns. Of course, since credit is a claim on the future, and since those future claims cannot be paid off since the requisite growth from technology did not occur, this strategy of increasing leverage would fail eventually. Much of the purported "prosperity" during the boom of the 2000s was the gross gains from value transferences and from borrowing from the future. (The latter can be shown quite elegantly with a graph showing the growth of the US debt to GDP ratio.) Without innovation, capitalism because a social Darwinian zero-sum game.

Ash - so many words, so little to say...

This is an interesting argument but I fear that it is deeply misconceived. The question is not what the estate tax does in theory or is supposed to do in theory. The question is what the estate tax does in practice.

In practice, the estate tax does not operate against the value transference class at all. This is simply because the value transference class runs the government and they are not going to create laws that hurt them. After all, Nancy Pelosi did not become Speaker of the House to raise taxes on herself.

This is why the estate tax fails to do its stated mission: to reduce the concentration of wealth across generations. The people with Senate levels of wealth can easily work around them without any trouble. It is the people with middling wealth who get screwed.

The estate tax, like progressive taxes and regulations, are not taxes on being rich. They are taxes on becoming rich. Like progressive taxes, the estate tax is designed to prevent the accumulation of capital that can be used to create competing businesses against the existing wealthy...only in this case, operating against how people spend money on their kids.

There is a reason why the estate tax starts at $1-2 million. That is the accumulated capital of someone who earns an average income and works and saves all of their lives. It is someone who buys a house and pays off a mortgage over 30 years. It is someone who starts a small business. It is these people who get pinched by the estate tax because they lack the connections and the resources to shield themselves from the estate tax compared to someone like Jon Corzine or John Edwards.

So the Republicans are right in this case to oppose the estate tax. They know that most people with substantial assets can get around paying any substantial portion of this in taxes. They know that the estate tax operates against the little guy. The broken clock that is the Republican Party at least gets it right in this matter.

If you want to go after the value transference class, then the way to do that is to push for repeal of the tax-exempt status of non-profit organizations. The non-profit organization is the primary vehicle used by the rich to get around the estate tax. Charitable deductions are one of the ways (along with gifts and marital property transfers) that estate taxes are avoided.

The rich set up charitable trusts whose family members are made directors of the trust and who then draw a salary from the estate. Token amounts need to be given every year, but as long as the income of the charity exceeds giving (minus expenses) then that is okay. These charitable trusts are, effectively, non-profit hedge funds.

The system of non-profits that dot the landscape are the greatest scam of the smart, educated and connected pulled against the stupid, ignorant and clueless.

[Re: "It is the people with middling wealth who get screwed."

HS reply: This is incorrect. The 2010 rules screw people with middling wealth more than than the 2011 rules. Under the 2010 rules, the threshold level for losing the upward basis adjustment is much lower. The estate tax truly only affects the very rich--having millions of dollars in assets is way above "middling wealth."]

There is something else to keep in mind: people do not start businesses for the purpose of innovating or providing jobs. They start businesses to make money. Any job creation or innovation is purely a happy accident of the pursuit of profit.

Re: "It is the people with middling wealth who get screwed."

HS reply: This is incorrect. The 2010 rules screw people with middling wealth more than than the 2011 rules. Under the 2010 rules, the threshold level for losing the upward basis adjustment is much lower. The estate tax truly only affects the very rich--having millions of dollars in assets is way above "middling wealth."]

Half, this is not correct. It is not the cutoff that matters. It is what the estate tax computes as heritable assets that is the problem. The estate tax greatly inflates what is considered an asset and thus exposes more average people to its provisions than most people realize. In other words, an estate tax is not merely a tax on the probate-able estate.

For example, the estate tax adds the following items that are not owned by the decedent at the time of death. The list is not comprehensive.

# The value of property to the extent of an interest held by the surviving spouse as a "dower or curtesy"[3];
# the value of certain items of property in which the decedent had, at any time, made a transfer during the three years immediately preceding the date of death (i.e., even if the property was no longer owned by the decedent on the date of death), other than certain gifts, and other than property sold for full value[4];
# the value of certain property transferred by the decedent before death for which the decedent retained a "life estate", or retained certain "powers"[5];
# the value of certain property in which the recipient could, through ownership, have possession or enjoyment only by surviving the decedent[6];
# the value of certain property in which the decedent retained a "reversionary interest", the value of which exceeded five percent of the value of the property[7];
# the value of certain property transferred by the decedent before death where the transfer was revocable[8];
# the value of certain annuities[9];
# the value of certain jointly owned property, such as assets passing by operation of law or survivorship, i.e. joint tenants with rights of survivorship or tenants by the entirety, with special rules for assets owned jointly by spouses.[10];
# the value of certain "powers of appointment"[11];
# the amount of proceeds of certain life insurance policies[12].

Yes, as noted above, life insurance benefits may be included in the gross estate (even though the proceeds arguably were not "owned" by the decedent and were never received by the decedent). Life insurance proceeds are generally included in the gross estate if the benefits are payable to the estate, or if the decedent was the owner of the life insurance policy or had any "incidents of ownership" over the life insurance policy (such as the power to change the beneficiary designation). Similarly, bank accounts or other financial instruments which are "payable on death" or "transfer on death" are usually included in the taxable estate, even though such assets are not subject to the probate process under state law.

Notice the sheer complexity of what the estate tax entails. Isn't it just like the rich and powerful to raise the level of complexity for the little guy?

[HS: Unforutnately, my family is too poor to be affected by any of this.]

This is incorrect. The 2010 rules screw people with middling wealth more than than the 2011 rules. Under the 2010 rules, the threshold level for losing the upward basis adjustment is much lower. The estate tax truly only affects the very rich--having millions of dollars in assets is way above "middling wealth."]

No, the 2011 rules screw people more. The 2010 rules has no exemption but the maximum rate is 0%. The 2011 rule has an exemption of 1 million with a rate of 55%.

A lot of people worry that the estate tax causes family businesses and farms to be sold just to pay the tax bill.

Last time I checked (about a year ago - so this could have changed), section 2032A of the Internal Revenue Code allowed for an alternative "special use" valuation (which is much lower than the FMV) to be used for certain farm and real estate property.

Therefore, the property doesn't necessarily escape the tax altogether (though it might if the special use value is low enough and there aren't enough other assets in the estate to exceed the exemption amount), but it is at least valued, and thus taxed, at a much lower amount.

All the noise made about family farms being lost is really just a way for estate tax opponents to score rhetorical points. It's actually quite a rare phenomenon thanks to the loophole in 2032A.

All that said, I still don't like the estate tax, for numerous other reasons that I don't feel like spelling out right now.

Not quite so, Steve.

The IRS clause you reference is of theoretical rather than practical value to most in the messy business of death-transfers of family farms and/or small businesses.

If you read carefully (which is impossible unless you are a tax attorney), you will find many specific qualifications that, in sum, act to substantially reduce the real-world number of entities that can actually utilize these complex amelioration procedures. Furthermore, employing the IRS regimens you reference places a number of operating constraints on a business's future which often act against sound financing, management, and growth principles.

You should investigate my claims with those who have experience in this area. I note that this unfortunately rules out Democrats, reporters, and those without the proverbial pot to piss in such as Siggy. If you or any other readers truly desire to learn the practicalities associated with the estate tax instead of pontificating on the (in)advisability of socking it to the "rich", the way to do so is quite easy. Simply consult publications that cater to small business and farming operations. Each and every one will have a monthly section concerned with the mechanics of helping small businesses survive the depredations of the estate/gift tax regime. Every trade association in the country recognizes the need to develop and publish topical material on the estate tax for the benefit of its members. This fact alone should tell you something.

Seek and ye shall find.

williakz

My simple position on estate taxes is that they should only apply to value which was not taxed at the time of its creation (so tax-free retirement accounts, interest on municipal bonds, etc.)

My more complicated position is that we shouldn't tax estates, we should tax income. The recipients of an estate should be treated similarly to the recipients of a gift: the first $10k or so is tax-free, any cash beyond that is taxable as regular income. For farms, businesses, real property, and other not-very-liquid assets, the recipient is treated as having a zero basis in those assets (or a basis equal to the costs of probate). If they keep the asset, and it produces income, they pay tax on the income. If they sell the asset, they pay capital gains tax on the amount they paid to acquire the asset, which is something close to zero.

Anthony,

As far as your dream of becoming a tax attorney - never gonna happen, my friend. Try running a till for a while - at least you'll learn to make change.

Your "complex" tax scheme allows businesses to be passed on to later generations tax-free, but cash gifts are to be taxed on transfer less some exempted amount. Fine, so what if the cash is first put into a business and then the business is transferred? For your future reference: anything taxed will find a way to become anything less taxed. Your position on IRAs and munis is silly; these instruments already have their tax-treatment built in to their market pricing. If you change their taxation, their pricing will simply change to accomodate it.

If you want to come up with some mechanisms to equalize business and gift transfers, feel free. We can go back and forth at this for a month and we will end up with the Unified Transfer Tax System (estate and gift taxes) pretty much as currently designed by Uncle Sam (prior to 2010, of course.)

The existing system did NOT just happen, Anthony; it has been forged by continual high-stakes battles between the best minds money and ideology can attract. Please keep this in mind as you consider opining further on matters far beyond your experience. Should you wish to educate yourself first, your considered opinions will then carry that much more weight.

williakz

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