The Best Way to Spread the Wealth Around Is to Abolish the Estate Tax
Is the capital accumulated by the labor and abstinence of all former generations of no advantage to any but those who have succeeded to the legal ownership of part of it? And have we not inherited a mass of acquired knowledge, both scientific and empirical, due to the sagacity and industry of those who preceded us, the benefits of which are the common wealth of all?
—John Stuart Mill, Principles of Political Economy
Paris Hilton rocketed to fame and fortune in the early 2000s not because she won a Best Actress Oscar, started a successful software company, or created a successful hotel brand. She attained global renown and a big income for, well, being Paris Hilton.
The young, and sometimes the old, found themselves oddly attracted to the comely great-granddaughter of Conrad Hilton, the founder of the international chain of hotels that bear his name. Paris starred in the reality television show The Simple Life, and the release of a sex video perhaps surprisingly enhanced her personal brand. While Miss Hilton can perhaps look forward to a large inheritance, her present notoriety nets her an annual income in the millions.
The attention lavished on Miss Hilton’s every erratic (and erotic) move has aroused the interest of some sectors of the public in, of all things, the tax code—specifically, the estate tax, which they think should be increased to disinherit wastrels like her. But if the heiress’s detractors considered the matter more carefully, they would come to the opposite conclusion.
Everyone knows that “you can’t take it with you,” but the federal government wants to make sure that you don’t leave it behind either—at least not to your friends and loved ones. Uncle Sam therefore helps himself to 45 percent of your worldly goods if you die moderately well off. So why not spend with abandon before you die? Half of what you’d otherwise leave to your family will instead be shoveled into Leviathan’s maw as soon as you’re six feet under.
Politicians like to argue that wealth should not be concentrated in the hands of those who did not earn it. President Obama put the matter bluntly to “Joe the Plumber” during his 2008 campaign for president: Society is better off when politicians work to “spread the wealth.”1 Obama might have been a little too candid, and his advisers were probably horrified that he made his views so public. Nevertheless, President Obama revealed a deep misunderstanding about what happens when the government is not confiscating wealth.
The best way to “spread the wealth” around is to leave it in the hands of the wealthy. That sounds counterintuitive until you consider someone like Larry Ellison, the founder of Oracle, who can measure his wealth in the tens of billions. Ellison literally has more money than he can spend. That doesn’t matter, though, because there is no such thing—short of stuffing it in the proverbial mattress—as idle money. When you deposit your money in the bank, the bank lends it out at a higher rate of interest than it pays you for the privilege of holding your deposit.
Us Weekly chronicles the affairs of the famous and the infamous, and Paris Hilton has been featured in the glossy innumerable times. One section of the magazine includes pictures of famous people doing things that regular people also do. Celebrities are just like everyone else, Us Weekly assures its readers. They pump their gas, they go to the store. They also have bank, money market, and brokerage accounts. Their accounts are quite a bit larger than yours and mine, but that’s the point. The rich have a lot more money in savings.
Regardless of the size of one’s account, however, no act of saving ever subtracts from demand or investment in job-creating businesses. One man’s saving merely shifts consumption to someone else. Deposits in the bank are immediately lent to someone who needs the money to buy a car or pay college tuition. When Paris Hilton puts her money in a bank account, her fortune is redistributed to people who need that money for all manner of purchases, or a business start-up.
On the other hand, when Congress taxes away inherited wealth, money that would have been available to all at the market rate of interest falls under the control of legislators and an army of bureaucrats—the very characters the American public most despises.
The story does not end there. You’ve read it many times already, but it bears repeating—there are no companies or jobs without investment first. The ability to borrow and spend the money that Paris Hilton does not spend on private jets and clothes, along with the millions she will inherit, can become the seed of future Microsofts. This nation of entrepreneurs is brimming with ideas about how to get rich by creating products that everyone will enjoy. These ideas must match up with investment in order to help everyone. Imposing high taxes on the people who, by virtue of being rich, will provide the capital for these ideas doesn’t just punish sybaritic heiresses—it punishes everyone.
To see what I’m talking about, let’s revisit the 1970s. Back then, television was pretty bland. There were only three networks, a PBS channel, and, if you lived in a big city, a few more local stations. People called the television set the “idiot box” (the flat screen was decades into the future) because of the low-quality shows produced by a market with little competition. Americans were as sports-mad then as they are now, but the menu of televised sports was limited to what three networks decided to fit into their broadcasting schedules.
Enter Bill Rasmussen. A serial entrepreneur and master salesman, Rasmussen happened on the idea of buying transponder time on newly emerging cable satellites to create a twenty-four-hours-a-day, seven-days-a-week sports channel.2 The new channel, originally named ESP-TV, evolved into the largest cable channel in the United States—the now much-loved ESPN.3
Entrepreneurs grow rich by solving problems or, as in the case of ESPN, providing something that people don’t even know they want. And they often do this in the face of great skepticism. Today ESPN occupies a large campus in Bristol, Connecticut. But skepticism about the venture’s prospects when it started back in 1979 confined it to an office the size of a living room. Rent was a hundred dollars per month, and the founders’ “desks” were made from plywood nailed to old doors.4
When we think of the rich and successful, we usually focus on the “seen”—the big houses, palatial offices, and features in magazines like Vanity Fair. That’s the end result. The “unseen” is what was there before all of the success. When Rasmussen announced the rollout of his cable sports channel to the four reporters who showed up at a Holiday Inn in Plainville, Connecticut, Bill Pennington, a future New York Times reporter, was “one of the people laughing. I thought, ‘This is the stupidest thing I’ve ever heard.’”
Investors at the time apparently agreed. Michael Freeman, the author of ESPN: The Uncensored History, reports that “ESPN was hemorrhaging so much some at the network feared it wouldn’t survive beyond 1980.”5 Rasmussen’s son Scott emptied his bank account to come up with the ninety-one dollars for the incorporation fee, and Rasmussen himself took a $9,400 advance from his Visa card to pay the bills that were piling up.6 The financial challenges were only beginning.
Even though Rasmussen was one of the first to appreciate the potential of satellites to reach television viewers, the cost of access to just one satellite was exorbitantly expensive for a cable network that was running on fumes. But entrepreneurs like Rasmussen have one thing in abundance—confidence in their idea. So in the absence of financing, Rasmussen cut a deal with RCA to rent one of its twenty-four-hours-a-day satellites for the then princely sum of thirty-five thousand dollars a month.7 How he managed to honor that contract is a reminder of why trying to confiscate inherited wealth through the estate tax is so counterproductive.
John Paul Getty was the founder of an eponymous oil company. It was so successful that Fortune magazine named him the richest living American in 1957.8 Getty died in 1976, leaving an estate valued in the billions. Stuart Evey was the man in charge of Getty Oil’s nonoil investments.9 The master salesman Bill Rasmussen found a believer in Evey, who was backed by the massive Getty estate. After much negotiation, Getty Oil invested ten million dollars in ESPN. Rasmussen’s vision, which had attracted such ridicule, became a reality.
Proponents of the estate tax will scoff that ten million dollars was a pittance for Getty, and that successful businessmen pass plenty of wealth down to heirs. We need the estate tax, they say, to reduce the obscene concentration of wealth. It is a fair point, but the modest size of Getty’s investment in ESPN is actually an argument for abolishing the estate tax.
Because ten million dollars meant so little to the Getty family, a brilliant cable network was created. ESPN, as Rasmussen’s difficulty in finding backers showed, was the definition of a risky investment. It got funding because the Gettys had so much money that they were willing to take major risks with their substantial excess. If ESPN was funded with J. Paul Getty’s chump change, how many more intriguing ideas could attract investment if rich people’s estates weren’t pillaged when they die?
Currently, estates worth five million dollars or less are untaxed, while estates larger than five million are taxed at the federal level of 45 percent. On its face, this system might seem fair. Since the vast majority of us will leave behind far less than five million dollars, our heirs will never have to worry about writing a big check to Uncle Sam. Only the really rich will have to deal with the IRS.
But it’s not really fair at all. The non-rich don’t benefit from the government’s confiscation of large fortunes, and they’re denied access to that money through the financial system to buy cars, build houses, and start businesses. A popular British television program shows what I mean. Downton Abbey chronicles the lives, loves, and drama of the aristocratic Crawley family at their Yorkshire estate in the early twentieth century.
When the series opens, Downton is in good financial shape thanks to the marriage twenty years earlier between the head of the family, the Earl of Grantham, to Cora, an American heiress. Marriage has long had an economic component that romantic Americans would perhaps rather not acknowledge. While the earl and countess appear happily married, it is understood that the marriage was, at least, initially, based on financial considerations. Cora had the money without the pedigree. Robert had the title but lacked the money to keep Downton Abbey in his distinguished family. The spouses were perfect complements to one another.
Among the series’ many storylines is the persistent concern for how to keep Downton Abbey financially secure so that it can remain within the Crawley family. At end of the third season, the heir presumptive and co-owner of Downton, Matthew Crawley, dies, triggering the British death duties. In the fourth season, the Crawleys must figure out a way to pay the taxes without selling off some of the farmland on which the livelihood of many families depends.
I’ll avoid a spoiler here, but let’s just say that the Crawleys survive. After all, there wouldn’t be much left of the series without Downton Abbey itself. The point is, Downton Abbey puts a human face on what happens when the taxman seizes a fortune meant for family. If part of the estate has to be sold off to appease His Majesty’s Government, the families who have tended the land for generations will be dispossessed. Just as the non-rich suffer when the rich are taxed, it’s the simple farming families of Downton who suffer the blow of a tax aimed at the wealthy Crawleys.
So who benefits from the breakup of an estate? To explore this question, let’s come back to our side of the Atlantic. George Steinbrenner, the longtime owner of the New York Yankees, died in 2010, a year when the federal estate tax was briefly at zero thanks to a broad tax deal. By dying in 2010 rather than 2011, Steinbrenner saved his heirs from a six-hundred-million-dollar estate tax bill.10 A running joke in 2010 was that old men with large fortunes should get on with dying if they were already ill. Imagine the savings!
This nation was founded by men so skeptical of government that they created one whose powers were almost solely geared to protecting the rights of individual citizens to live as they desired. It became the richest nation in the world because its constitution forbade excessive meddling by politicians in the lives of citizens. Yet by 2010, the citizens of what was the freest country in the world were reduced to hoping that certain family members would die in 2010 instead of 2011 so the government wouldn’t seize half of what they left behind.
The incredulous might respond that a man savvy enough to build a fortune like George Steinbrenner’s goes to great lengths to protect his wealth. Worst-case scenarios like selling off the Downton estate rarely come to pass because of skillful estate planning overseen by the nation’s best lawyers. The skeptics would have a point, but a poor one. Yes, the rich are able to protect their life’s work from the IRS with more or less success thanks to high-priced attorneys. But have the skeptics ever considered the economic waste involved? Estate lawyers have a real purpose in today’s economy, but do not confuse what they do with actual wealth creation. At best, they are merely expensive facilitators of wealth preservation; facilitators who would have a far smaller role under a more rational tax code that didn’t turn death into a taxable event. Indeed, the greedy hand of the political class has fostered the growth of professions that exist to prevent the expropriation of wealth.
The estate tax encourages the mistaken belief that a rich man’s wealth helps others only when he is parted from it, either voluntarily or involuntarily. In 2010, Warren Buffett and Bill Gates, the two richest Americans, popularized the “Giving Pledge,” a generous-sounding proposal for the super-rich to leave the majority of their wealth to “philanthropy” rather than future generations of their families. Buffett, Gates, and the others taking the Giving Pledge earned their money, so they have every right to dispose of it as they wish. If it makes them happiest to give it away to charity, then so be it. But it’s worth remembering what Howard Kershner wrote in his 1971 book Dividing the Wealth: “the noblest charity is to show another how to avoid charity.”11 Without taking anything away from the undeniable good that comes from charity, the reality is that the greatest gift to bestow on anyone is a job. In free economies, those jobs are abundant.
The history of the twentieth century brutally revealed that the surest way to impoverish a country is for its government to plan everything centrally, including the distribution of wealth. Americans are some of the biggest givers to causes around the world, and they can give generously because they live in a country that, for all of its modern errors, remains economically free enough to produce enormous wealth.
Gates deserves cheers for trying to make a difference, but it was his brilliance in business that made his generosity possible. Gates, like all other successful entrepreneurs, attained his wealth because someone else delayed his own consumption—and yes, did not give to charity—making available to Gates the capital that allowed him to create Microsoft.
If Gates and Buffett earn adulation for giving much of their wealth away, we should also lionize those who hold on to every penny they have earned. When the rich “hoard” their wealth, it is loaned to those who need money for cars, clothes, and college tuition, not to mention the next generation of Bill Gateses, full of ideas but in need of the capital that will abound if some of society’s richest keep most of their wealth intact so it can pass to future generations. More inherited wealth means more plentiful capital to seed the innovations of the future.
Sir Isaac Newton famously remarked, “If I have seen further it is by standing on the shoulders of giants.” Only a microscopic portion of humanity will ever come into inherited money that is traceable to Rockefeller, Getty, Gates, or Hilton. Yet everyone will inherit the fruits of their commercial genius—better universities, hospitals, and museums; cures for disease; and most important of all, better economic opportunity. They are the giants on whose shoulders tomorrow’s entrepreneurs will stand.
In his classic 1982 book, The Economy in Mind, the late Warren Brookes wisely observed, “Envy in reality is the single most impoverishing attitude of thought.”12 Envy is a waste of time, and when it becomes public policy it kills growth and jobs, hurting the envious more than the envied.