Buffett: Wealth, Estate Taxes, and the Ovarian Lottery
mymoneyblog.com
mymoneyblog.com
Even when you make decisions, take action, seize opportunities, the grit and courage and insight and endurance that enables you to do so originally came from somewhere else. Someone taught you that. Something made you that way.
I am the sum of the curses and blessings and happenstances of history. You cannot factor them out of my identity. There would be nothing left. Asking who I would be had I been born in Bangledesh is like asking what a square would be if it had been a circle. The question is wrong-headed. I would be someone else.
And asking whether the son of Sam Walton deserves wealth is like asking whether Audrey Hepburn deserves to be beautiful. It's the wrong question. Gifts--from parents or forefathers or strangers or the universe--are never a matter of deserving. They are not to be worked for or worked off. They are to be embraced with gratitude, and cherished with an earnest effort to make the most of them.
The idea that gifts should be received with guilt, that jealousy on the part of those who don't receive them justfies taxing or destroying them to make things a little more fair, is the attitude I find repugnant.
Perhaps Albert Einstein does not deserve to be so intellectually creative, but that does not mean half of his intellectual energies belong to the state. Perhaps you or I do not think the son of Sam Walton deserves wealth. It is irrelevant; it only matters that Sam thinks he does. What he does with the wealth is his responsibility, as what you do with your gifts is yours. The fact that these things are gifts does not in any way change the fact that they are ours.
However, simply being handed a pile of money as an inheritance rarely helps anyone other than you. If the government had taken 90% of Alice Walton's fortune, who would be worse off? Alice? Not likely; even a billion dollars is more than you can practically spend during a lifetime. Most Americans? No, most Americans would be better off, because they would have to pay less income tax. Wal-Mart customers? Nope; Wal-Mart would almost certainly still be there, since there's no way in hell Sam Walton would have just given up just because his kids would only inherit one billion each instead of ten billion each. So who, exactly, would be worse off?
Your gifts belong to you. Spent or given back or squandered, they are yours to do with what you will. It is repugnant to me to claim that because The Gifted are not going to use their Wealth optimally for the Common Good, the State is entitled to seize it and spend it more Wisely. The idea stinks of jealousy and avarice; it is an excuse to take, not an appeal to justice. It does not matter how people use their gifts; the gifts are theirs.
You can scale the idea right down to Christmas morning. All the same arguments still work, but the fundamental injustice is clearer. If I want to give my brother a bike, anyone could object that he did not work for it and does not deserve it. He will probably use it foolishly in childish revelry and break it in some ill-advised stunt. He only got it because he had the good fortune of being my brother; there are strangers I don't know who need and deserve a bike far more. Certainly he isn't going to create wealth with it, in fact, for all we know it's just going to collect dust in the garage. Surely the state is entitled to take it and give it to someone more deserving, and leave my brother a skateboard in its place?
Ptui.
My money is mine, and who I choose to give it to is my business. If I choose to enrich friends and family who I love, that is up to me--and is one of the main points of having money in the first place. You can criticize my choices or appeal to me for the common good or explain to me why it's okay for you to help yourself to what, in your opinion, I'm not using. It's all irrelevant. The point of ownership is that I still have the right and responsibility to use my gifts as I best see fit.
Furthermore, I have never found Buffet's malinvestment in lucky scions argument convincing. Yes, they were born lucky, but you shouldn't handicap them for that reason. Morover, clearly some very wealthy people do chose to give most of their money away as opposed to giving it all to their heirs. Buffet and Gates have both pledged to do so with most of their money.
Merging the two ideas: if the government is collecting assets to prevent malinvestment in unworthy heirs after the proven patriarch dies, why shouldn't the government chose to confiscate the wealth of those who they deem to be making bad investments while they are alive?
However, it is true that being able to pass on wealth to one's children can be an incentive to produce more, so that on the other hand points to the benefit of a lower estate tax.
So, I think the best compromise is somewhere between the pro-meritocracy 100% tax and the pro-short-term-productivity 0% tax; that way there is still a significant incentive to earn for one's offspring, but if 1/x of the money is taxed away in each generation (and the important thing is not where it goes, but that it is taken out of the hands of the rich family), there is an exponential-decay curve for the wealth and power of the family. However, it's important that the tax is high enough to counteract the interest gains that even uninspired investing can bring. I won't venture to propose a sweet spot, but I think that approach should provide the most balance and social benefit overall.
However, I do agree with you that it might be a robust guard against the inherited wealth class gaming the system. I would prefer to intervene when such injustice is committed, but admit that that is not always easy to do. The argument you use for curtailing that risk is similar to the argument I would make in favor of term-limits.
If a trustee loses everything then the next year, they have access to another annuity distribution.
This is actually an interesting experiment. I'll run a crude test this weekend bootstrapping against the S&P500 to see how likely it is for wealth to propagate X generations into the future and report on Monday.
as diversity approaches 100%, performance approaches market returns.
The question is, how long can extreme wealth remain extreme wealth? Considering the wealth gap is increasing, I would suggest forever unless there is a "market correction" like socialism or something.
There might not be decay at all if you account for the exponential growth of investments.
The advantage of a large (40+%) estate tax is to avoid creating an old money aristocracy. There is a long history of the problems created when people who never earned it get great wealth. Granted some people build upon inherited wealth, but it's far less common than you might think and looking at the net worth of people who inherited 100+ million you find few examples of people that did much better than investing in mutual funds.
Bill Gates might be considered a great CEO but he also inherited money and exploited family connections to sell an OS he never developed to IBM. None of which would have been impacted by estate taxes.
PS: Consider the Walton family the five of them all have about 15.3 - 15.7 billion because none of them are using it to actively generate more wealth. Even though they inherited it 15+ years ago it's just stagnating.
I also bet a majority of their wealth is still in that stock, as major sell-offs of insider holdings suggests a company may not continue to produce growing profits - which hasn't been the case. However, I'm sure some still have quite a bit with extremely capable money managers.
I would not call that wealth stagnating in the least bit.
I expect they are all playing around with side investments of one sort or another, but they have had plenty of dividends to work with and little to show for it. It's not that I think the government would do all that much better, rather taxing society more to help maintain such wealth has zero benefit from what I can see.
So no, I don't think Buffett is a Rothbardian. He's similar only in the sense that he understands economics very well.
Because he's trying to make a general statement about estate tax in the United States, so talks about the general condition of being born in the US. If he talked about his specific childhood, it wouldn't have the same generality. I doubt it has to do with modesty.
Life insurance is one way around estate taxes. I'm sure there are others.
This isn't true - the odds of Warren Buffet being born in America, given that his parents were American and had him, were 100%. There's no random chance associated with where you're born - it was the result of what your parents and their parents did. They worked hard to get over to the States, or wherever else, and to make a good life for their kids.
Actually, that whole viewpoint that's come into fashion these days worries me a little. Before, one of the biggest ethics to live for was "making life better for your children" - you'd work hard, and sacrifice, knowing your kids would have a better life than you did. It's what my Great-Grandparents did, what my Grandparents did, what my Parents did. All came up poor, I came up lower middle class, my kids will probably come up reasonably wealthy.
But nowadays, a lot of people write that off as the "birth lottery", or luck, or chance, and think that happiness in your own life, right now, is the highest virtue. They even almost look at it as a bad thing for parents to work very hard for their kids specifically to have the best life they could, calling it things like a birth lottery or random chance. There's nothing random about why I was born in the States, or why my kids will be - it was a direct result of five or six generations of slogging towards a better life from miserable conditions elsewhere.
There's a Dutch expression, "Clogs to clogs in three generations." It means the first generation, who wears clogs (regular people's shoes), they work hard and make money, they know struggle, they're frugal.
The second generation doesn't know about making money and struggling, but their parents explain what it was like and teach the kids how to manage money and keep the fortune alive.
The third generation doesn't learn these things from their parents, because their parents don't really know either, and the third generation wastes the money and winds up back in clogs - regular people's shoes.
So - will society be controlled by people who inherit money? Not unless there's government backed heredity privilege, like European nobility, the Japanese samurai system, or the Indian caste system. If not, things balance out over time. How many of the astoundingly wealthy families from 1850 are controlling society now without having added anything? Not many.
> The reason we had huge numbers of smart people become investment bankers was the fact that conning stupid wealthy people is profitable.
I would rebut this, but I don't think it's a well thought out view. Some investment bankers moved money around without doing anything of value. Many did incredibly valuable things. They built and developed real estate, ports, railroads - heck, I know a guy who put the money together for researching technology for non-government spaceflight. Pretty cool stuff.
> But, it's also a zero sum game that does little to help society at large.
First, I think it's very easy for someone not inside an industry to claim that their work is useless/easy/unimportant while maybe missing the intricacies in it. Second, I'm not sure what this has to do with my comment, which is that I think the mental concept of "birth lottery" and de-emphasis on family is a scary thing. It seems to say that people should support and even things out for everyone irrespective of what their parents do, while parents working hard to give their children a better life is a huge motivator and has been for almost all time, much more so than improving the common good. If you look at history, for instance, whenever farming was nationalized under a war economy or communism, output fell. People working to feed the nation work less hard than people working for themselves and their children. This has been borne out in many different places, throughout ancient and recent history.
> It's far better for society when the most efficient method for gathering wealth is generating it.
Agreed. Getting back to your original point, I'm not ignoring the "birth lottery" argument - I think it's flawed, and I'm addressing that flaw. The question isn't about who gets to control society, it's about what is the fundamental unit of society? Is it the individual? The family? The community? The nation? The whole planet? The prevailing Western view seems to be focusing on things on a national level. I don't think that's a good thing. I think a mix of individual choice, strong family support structures, and entire planet development is the answer. I think, arguably, the nation is one of the worst places to work on developing humanity.
That's my opinion based on my reading and research into behavior and history, but it seems like societies that empower individuals do well, it seems like societies that promote family do well, and it seems like societies that promote the whole planet do well. It seems where things are controlled by the nation more than by the individual, family, and whole planet do more poorly.
I'm not worried about inherited money controlling the planet, because it really only has a heavy influence in the next generation, many of whom do great things and make their own contributions. After that, without contributions it burns itself out. I am worried about national level empowerment, because it grows on itself and doesn't burn out unless it collapses in a bad way.
This is my opinion based on my readings and research, and I'd be happy to hear others' opinions who agree or disagree.
The Hilton family ( http://en.wikipedia.org/wiki/Hilton_family ) on the other hand, might fall into your theory.
My grandfather understood building wealth through investments as do I. However, my mother and older sisters don't. A friend of mine's grandmother had real wealth, as in her home was featured in home and gardens etc. He had a multimillion dollar trust fund and burned out on drugs until he died after his fourth or fifth motorcycle accident.
I know many young people with enough money to never work again and mostly they are fine. But, it's the people with handed great wealth that seem to be hardiest hit by it.
As for the dangerous meme of "the ovary lottery": even though it's true and useful in the context of talking about estate tax, it's a very dangerous idea. It's way too easy for that meme to inhibit the idea that "if you work hard and work smart, you can create wealth", which is at the heart of the American dream, and the work ethic of the American entrepreneur. I've known one too many upper middle class kids who slack off all the time, and feel Mr. Buffet's "ovary lottery" somehow implies that the existence of inherited wealth means creating your own wealth is pointless.
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Banded tax - versus flat rate - is not fair. But neither will your fourth million dollars be.
From society's point of view, until we have more rationality and ideality of labour-reward on the income side, I don't think fairness arguments can really be mounted to the abolishment of taxes that make it unfairly expensive to be rich.
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That said, with regards to inheritance tax, I have always really struggled to find any theoretical solution to the inconsistency I perceive in the system - children will always have unequal starts in life related to the efforts and success of their parents; be that in somewhat intangible notions like forming a great network of contacts, or right down to trying extra hard to woo a mother/father that will give the kids a great genotype. Why start - or stop - at money? Has political, social or economic science ever sought to justify that?
Not sure what you're getting at, but going all the way back to Plato's Republic, there have been proposals to engineer society with children. More recently,
Children's Societies were one of the features of kibbutz life that most interested outsiders. In the heyday of Children's Societies, parents would only spend two hours a day, typically in the afternoon, with their children. In Kibbutz Artzi parents were explicitly forbidden to put their children to bed at night. As children got older, parents could go for days on end without seeing their offspring, other than through chance encounters somewhere in the grounds.
http://en.wikipedia.org/wiki/Kibbutz
It doesn't work, of course. Nature will out.
1) the destruction of excess money 2) preservation of meritocracy
and furthermore, whether interests of children of wealthy parents are better served through
1) leaving them oodles money 2) leaving them a society where a) things are affordable because there's less money chasing goods b) meritocracy reigns c) not to peg one's identity to money alone
In the small, accumulation of money is a fine thing. In the large, you have corporations whom - in the name of profit - bribe, cajole governments and government agencies, that result in sending people to war, poisoning your food, and endorsing medicines that do not work. Setting a limit to the accumulation of a mere number means that humans can turn their attention towards other activities that are beneficial to society as a whole.
Regarding your point (a):
Things can become more affordable by innovations in technology, production and distribution. Services may not become more affordable because service is provided by human being. And by definition, the above average service always costs more than average.
I don't think in the name of profit is the cause to the problem. Lacking of political power to punish corporation corruptions and being oblivious of public wellness are the root cause.
He points out regularly injustices such as the fact that his secretary pays a higher tax rate than he does, thanks to the ridiculous capital gains laws in this country. He points out regularly that people like him should have to pay higher taxes, including the estate tax. He lives less lavishly than most people who have .1% of his wealth.
He's already given most of his fortune (the largest single donation ever) to charity and will give the rest when he goes. He's a real-life Robinhood.
Corporate tax rates plus capital gains tax rates exceed normal income tax rates. The only way you can claim that he pays less in taxes on selling stock is if you assume that the company's profits -- the sum of which, discounted to the present, is the value of the stock -- somehow don't affect the value of the stock.
If we cut capital gains taxes to zero and added an equivalent amount to corporate profits (say, a 40% annual tax rate instead of 35%), the government would make an equivalent amount of money from the same economic activity, and Buffett's theoretical tax rate would go down. Similarly, if corporate income taxes were zero and his capital gains were taxed at 40%, he'd pay much more than his secretary, but the government would collect the same amount.
If the strength of his argument is independent of the magnitude of the problem he's arguing against, there is a flaw there.
Buffett is an admirable guy. But the line about his secretary is a rhetorical flourish, nothing more.
Your making the argument that corporate taxes reduce his personal income, and therefore should count as his taxes. Ok. But if corporations did not have to pay taxes, they would pay their employees more, including secretaries. It's impossible to say for sure that a 35% corporate tax rate reduces secretary salaries by 35%, but it is something highly significant.
In a roundabout way the secretary is paying that corporate tax too. Its effect is not as directly measurable on her as it is on Buffet, and might not be 1 for 1, but it's undeniably there and equally applicable to her tax rate.
Also Social Security reduces her pay by 12.4% (half of which is paid by her employer but again would likely go to her if not). Since its capped at $100k income, it rounds to 0% of Buffet's yearly earnings.
*I should point out that I am aware I've grossly oversimplified the effect of the corporate tax on the secretary, I trust but you get the point.
Profits and pay for workers are in competition. So raising the cost of profits actually increases the incentive to pay workers more. This is why many actual nonprofits are poorly managed; they are funneling profits to workers rather than to shareholders.
That is not how it works. When car companies start losing money, they don't give people raises; they fire them. When Goldman has a great quarter, they don't cut people's pay -- they give them bonuses.
Nonprofits are managed because they exist to spend money, not to spend it well.
I'm discussing how a fixed amount of MAE is distributed in response to changes in incentives. Each dollar of MAE can be given either to shareholders, to employees, or can be invested. If you raise the cost of distributing money to shareholders (this is what the corporate tax does), companies will divert money to employees and investments. I.e., no one will pay dividends if there is a 100% dividend tax.
And if he paid less in taxes, he'd buy more goods and services, too. In fact, he probably spends money more intelligently than your average bureaucrat -- certainly, he's able to balance the budget, and that's without even owning a monopoly on first-class mail delivery and taxation of income!
I disagree. Buffett is so wealthy that it simply doesn't matter if his bottom line is reduced by 35%. His net worth is $40 billion. It is simply impossible for him to run out of money at this point.
Think about this for a moment. At $200M each, he could have a personal Boeing 777 on call in every state in the country ($10B) and still have $30B left over. The most expensive house in the United States is a $165M compound in Beverly Hills with 72,000 square feet of living space. Why not build 100 of them around the world for $16B? There's still $14B left for the cheap stuff: Ferraris, Bugattis, servants, chefs, and whatever else you can dream up.
Barring any bad business deals, it's effectively impossible to squander away one billion dollars much less forty. A 35% tax hike or cut won't affect his spending in any way, shape, or form.
Neither of these are equivalent. The "only capital-gains tax" scenario creates incentives for foreign investors in US corporations. The "only corporate tax" scenario creates incentives for US investors in foreign corporations.
The current scenario seems to be a "get some tax revenue from whomever we can" strategy, but it might be worth tinkering with the ratios, especially to determine whether a more capital-gains-heavy, corporate-tax-light regime might increase overall tax revenue, by altering in the US's favor the flow of foreign capital, domestic capital, corporate relocations, and corporate expenditures.
"Real-life Robinhood?" Really? I think its far more likely that he is a damn smart businessman. Consider this fact:
Buffet spoke out about keeping the Estate Tax, because, as he said, rich people need to pay more. In reality, the Estate Tax generates over $ 12 Billions dollars a year for big life insurance companies, which Buffet either owns stock in or controls.
If Buffet was a "real-life Robinhood" he would say repeal the Estate Tax (as it destroys jobs and small businesses) and make ME pay more directly.
Don't agree about the Estate Tax? Watch this video http://www.youtube.com/watch?v=Urvkfi134Ew and tell me how you figure.I'm assuming you got it from us. Because we linked to it. And no one else on the web links to things.