Protecting heirs from unearned wealth and sloth

Some thoughts from Berkeley’s Mike O’Hare, stimulated by my earlier reflections on the taxation of inherited wealth:

Estate and inheritance taxation

I don’t think there’s any tax so few people pay that so many people don’t understand. A few years ago artists were in a major huff because their works were valued at paint-and-canvas only when they donated them to museums, but at full value in their estates. One fellow had his fifteen minutes when he claimed to have burned a bunch of paintings in order not to bankrupt his heirs by bequeathing them.

Artists may be unfairly treated by the tax code, but not by these rules. Materials-only value is the right tax deduction when anyone gives her own work to a charity, whether it’s art or heart surgery or serving soup at a shelter; the deduction is supposed to give you back the tax you paid on what you gave (for example, money earned as taxable salary), and a painting you made but never sold has never been taxed.

The issue of artists’ taxable estates is the same issue that faces farmers and small businesses whose owners have chosen to keep no other assets. While it is not possible for anything in an estate to decrease the net value received by the heirs and assigns, it is true that an estate consisting of nothing but paintings, if it’s above the very generous floor at which the tax kicks in, can’t be inherited without selling some of them to pay the tax, but this is also true of an estate consisting entirely of beloved family heirloom stocks and bonds. Family firms need to set aside some cash to pay the estate tax with, rather than reinvesting everything, just as they have to set aside money to pay annual income and payroll taxes.

Certainly waving the bloody shirt of family farms and businesses, given the very accommodating rules that actually govern these inheritances, is one of the most cynical mendacities of an administration that can’t go a week without topping itself in that department.

Taxing large estates in any case has benefits your post didn’t mention, and these benefits flow, ironically, mostly to the heirs themselves. It’s almost always morally and psychologically damaging to be in control of a lot of unearned resources: one possible reason American dynasties seem to grow weeds in the third-or-so generation. The exceptions to this rule, like the Adams family, never had enormous wealth; their main bequests from generation to generation were expectations, duties, and education for service.

This poisoned chalice afflicts societies as well as individuals. It was bad for Spain to have American extractive wealth in the 16th and 17th centuries without having to work for it, and bad for Argentina to have built its 20c culture on cattle-raising for export, an activity much like mineral extraction. It was bad for the antebellum US South to construct its culture on a plantation economy. [Ironically, that choice carried the seeds of its own destruction. Cattle-raising can go on for a long time in the same place with minimal labor inputs, but cotton, corn, and tobacco are the three most nitrogen-hungry crops. The plantations, operated more like nitrogen mines than real sustainable agriculture, and kept moving west as the soil was ruined. The whole system would eventually have crashed against the 100th meridian where the rain stops, and died of thirst.]

Latin America continues to suffer from the tragic “hidalgo mentality” that holds “not working” as an ideal for which to strive. It’s been bad for Kuwaiti and Saudi society to have all that oil it didn’t make or find, bad for lottery winners…and usually bad for the children of the very rich. These last even have a national support group to help the ones who understand their situation cope with it.

Someone said, “If America had been settled from west to east, New England would still be a howling wilderness.” That’s not all: if our national myths hadn’t been created where a grasshopper can’t make it through the winter–where the soil is thin and rocky and the ocean dangerous, so you have to be an ant to have a future–what would we be like?

Eden, and the idea that being thrown out of it to work for a living was a punishment, is the most toxic myth of human history. My interpretation of that story is that “When Eve finally got Adam to be a mensch and think about good and evil and matters of morality, God gave them his greatest blessing by allowing them to go forth and create value like grownups.”

People who have accumulated wealth rarely understand how much they damage their children by setting them up so they don’t need to do anything. It’s good to raise children in an environment of security and trust (though making it impossible for them to fail by treating everything like a success isn’t such a great practice), but it’s not good to treat grownups like children or incompetents, and that’s what a big trust fund does. Is Mr. Hilton proud of Paris?

It’s also bad for society that a lot of resources should be commanded by people who have been thus morally and psychologically damaged, and bad that such people should have lots of resources with which to exert influence on it. The British landed aristocracy managed several centuries of creditable public service by (i) strict primogeniture inheritance that forced all sons but the oldest to be useful, and made it clear to the heir that he was steward of an ongoing institution and (ii) heavy servings of noblesse oblige with the porridge. But that’s an exceptional case and not a guide for American tax policy. We would be well served by cranking up the estate tax, not trashing it.

Author: Mark Kleiman

Professor of Public Policy at the NYU Marron Institute for Urban Management and editor of the Journal of Drug Policy Analysis. Teaches about the methods of policy analysis about drug abuse control and crime control policy, working out the implications of two principles: that swift and certain sanctions don't have to be severe to be effective, and that well-designed threats usually don't have to be carried out. Books: Drugs and Drug Policy: What Everyone Needs to Know (with Jonathan Caulkins and Angela Hawken) When Brute Force Fails: How to Have Less Crime and Less Punishment (Princeton, 2009; named one of the "books of the year" by The Economist Against Excess: Drug Policy for Results (Basic, 1993) Marijuana: Costs of Abuse, Costs of Control (Greenwood, 1989) UCLA Homepage Curriculum Vitae Contact: Markarkleiman-at-gmail.com