Collateral Damage to the Poor

Steve Landsberg, author of The Armchair Economist (a worthy read) writes in The Wall Street Journal How the Death Tax Hurts the Poor – It encourages the rich to pick extra fruit, leaving the trees a little barer for the rest of us. 10/29/11

Excerpt:

The death tax sends a powerful message to rich people: “You can’t leave everything to your heirs, so spend now, before it’s too late. Burn more fuel. Demand more timber for your mansions, more steel for your private planes, and more fiberglass for your yachts.”

Then all those resources—the fuel and timber, the steel and fiberglass—become unavailable to build factories, so the rest of us get worse jobs at lower wages. Those resources are unavailable to build farm equipment, so we all pay higher food prices. They’re unavailable to build roads and schools and hospitals.

I don’t begrudge anyone the fruits of his labor. But the death tax encourages people to pick extra fruit, leaving the trees a little barer for the rest of us.

Every tax discourages work, and every tax discourages risk-taking. That’s sad but true, and it’s a reason to hesitate before you raise any tax. But the death tax is a double whammy, compounding the damage by encouraging overconsumption. (The same is true, incidentally, of taxes on interest and dividends.) So my message is this: If you must tax the rich, please do it in a way that minimizes the collateral damage to the poor.

HKO comments:

Please read the whole article. It is a gem.  (You may find it requires a paid subscription- which I also encourage.)

Stewards of family wealth do not look at it as if it is only theirs.  But even if they did, if they had the choice to enjoy it now or give it to the government later, you can easily guess the choice.  Even the super wealthy prefer to leave it to private foundations because a) it avoids estate taxes and b) because it will be spent more wisely.

Inflation also encourages a shift of assets from taxable financial resources to appreciating  assets such as  jewelry, land and collectibles.  One of the engines that drove the stock market boom of the 1980’s was the shift from non taxable tangible assets to taxable financial assets. This shift also distorted the perceived divergence in income growth.  What was perceived as unbalanced growth in the wealth of the upper class was actually partially a shift of income form nonreportable to reportable income.

A consumption tax may be more consistent since spending habits, especially among the rich, vary less than income.  Creating incentives to invest will do much more to create the jobs we so desperately need than this failed effort to create only short term stimulus to demand.    Long term investment will not respond to short term stimulus.