Given the current estate tax rate of 55% applied to estates over 1 million dollars, I repost this letter I wrote to Diane Francis from National Post who suggested that the estate tax is good because it stops the heirs of rich people from spending the inherited money foolishly (full copy of her article below). As an aside it seems to me that no day passes without the democrats coming out with another really stupid idea.
Dear Ms. Francis,
I am a great fan of yours. I read your “Underground Nation” and I was really impressed by the way you can clearly see the negative consequences of government intervention in the economy.
We all know that the government does not do a good job at administering its assets and that billions of dollars are wasted annually on useless if not harmful pet projects. Second best but a close one is the use of private money for charitable purposes. However we all know that most charities, even if they are Bill and Melinda Gates' charity, are spending a sizable share of their budget on administering their funds.
Some charities sometimes spend 70-90% of their budget on administration (including these silly half an hour advertisements on TV) and the rest they give away.
This is by any definition an industry.
Setting up such a trust or charity before your death will accomplish little. Some charities (like Rockefeller’s) are growing their assets over time. Their real purpose is to provide salaries for their administrators and not to champion their causes that created them in the first place.
On the other hand any economist knows that in deciding on how much to consume or to invest, a rational citizen is trying to maximize an infinitely long string of consumption, of course discounted deepening on your time preference. You have a preference to leave some money to your family so they can enjoy themselves and grow.
An estate tax, therefore trims considerably the potential for consumptions for your offspring and in the consumption- investment balance, the tendency goes more towards consumption, therefore reducing potential production in the future. Therefore less capital will be available for the future generations. If this is the price to pay for having an elite in America, I think that it is worth it.
The estate tax is clearly a socialist invention. The tax does not apply equally to all citizens. Why should there be a $2 million dollar exemption on the value of the estate is not clear to me. How about a $10,000 exemption and a flat rate on the difference?
I want to see how many people will go out and cheer for the estate tax.
It is true that there is some positive side effect to the estate tax (like Gates or Buffet giving out their money to the public), but this a much worse alternative than no estate tax. Gates and Buffet although the first and second richest people in the world, have less wealth than Toronto produces in a couple of months, a drop in the bucket compared to the worldwide or American wealth. I don't see why other rich Americans should live their life by the ideas of Gates/Buffet. These (other than Buffet/Gates) rich Americans don't want their wealth taken away by the state or don't want to make their name "immortal" by donating their money to charity. They want to keep their money in the family.
Let's imagine for a second that there is a 100% estate tax. How much capital will there be available for the next generation? I bet that all rich people will buy annuities and spend like drunken sailors. Trillions of dollars of capital would be wasted in less than 50 years.
Clearly the estate tax is not a good thing. I am not a rich man and I probably never will, however I want a lot of people to have money around me and save them if they are so inclined. The estate tax in US in a bad thing and I hope that the Republicans will repeal it as soon as possible. Everybody would be better off.
Dear Diane, I would also want to transmit my thoughts to Bill Gates and Warren Buffet and to tell them that I laugh at their attempts to have the estate tax increased. If they don't think that the tax is high enough and that Uncle Sam, will leave them with too much money in their pocket, I can give them my banking information and I expect a deposit from them.
Diane Francis original article
Bill Gates & Warren Buffett on Estate Taxes
The Republicans, fearing a bloodbath in this fall's mid-terms, have honed a cynical compromise. Most seem ready to agree to boost minimum wages by US$2.10 an hour to US$7.25 within a decade in order to camouflage their attempt to scrap estate taxes for a few thousand super wealthy.
But the camouflage isn't working, thanks to America's two richest individuals Warren Buffett and Bill Gates. Both are totally opposed to scrapping estate taxes which, by the way, Canada scrapped in 1972 and replaced with a 25% capital gains tax upon death or departure.
The two most successful men in the United States oppose scrapping estate taxes based on the indisputable logic that such taxes are absolutely essential in order to foster free enterprise.
This is because such taxes mitigate the creation of an elite which can control the economy and politics, thus removing opportunities for new, smarter players. Look at Latin America or Saudi Arabia if you think unfettered inherited wealth builds sound economies and good societies.
Warren Buffett described the rationale behind estate taxes best: "Repealing estate taxes is equivalent to choosing the 2020 Olympic Team by picking the eldest sons of the gold-medal winners in the 2000 Olympics."
He made that statement the day he announced that his wealth was mostly going to the Bill and Melinda Gates Foundation (and four smaller foundations to be run by his three children). The Gates Foundation finances social development and healthcare projects that governments and the private sector have neglected.
Mr. Buffett and Mr. Gates not only oppose scrapping the tax but favor increasing it. Gates' father, a Seattle attorney, leads the political movement in favor of higher taxes.
Despite the compelling logic, the Republicans seem to be listening to the lobbyists on behalf of the richest families who have spent US$500 million since 1994 lobbying to repeal the taxes, according to U.S. think tanks Public Citizen and United for a Fair Economy.
By the way, these estate taxes are rarely paid to governments. The wealthy have a choice: pay the money to the government or set up a bona fide foundation and give it away.
And that's another benefit derived from the taxes. These foundations fill a void that's often missing. These foundations and families divest their wealth to build hospitals, universities or to make contributions to social development projects, foreign aid schemes, public-interest research or the arts.
It's a win-win situation for the public.
And estate taxes are one of the main reasons why Americans are roughly four times' more charitable than Canadians on a per capita basis.
Currently, the taxes in the United States are punitive and can total 90% in some regions. There is a federal estate tax of 55% on estates worth US$2 million or more and, in addition, most state governments impose a death duty.
By contrast, Canada is unique among developed nations in that it has no estate taxes.
Worse than that, Canada also allows its wealthiest citizens to pay a 25% departure tax on wealth created in Canada and then move to tax-free or lower tax offshore havens forever so they never have to pay taxes again.
This is what Canadian families headed by tycoons such as Frank Stronach, Michael deGroote and the billionaire Irvings of New Brunswick, among others, have done with their wealth.
While this is not illegal, morality is another matter. People who have made fortunes should pay back the country that gave them the opportunity to become wealthy. So should their offspring and their offsprings' offspring.
By contrast, the U.S. taxes its wealthiest citizens when they die but also wherever they live even if they have renounced their citizenship.
Mr. Buffett, who lives in a house he bought for $31,500 even though he is the world's smartest stock market investor, also articulated estate taxes as an important cornerstone of social justice.
"It's in keeping with the idea of equality of opportunity in this country, not giving incredible head starts to certain people who were very selective about the womb from which they emerged," he said.
He chose the Bill and Melinda Gates Foundation to give his US$31 billion to because he said the couple has demonstrated that it knows how to do its due diligence so that its "giving" is leveraged and provides sufficient scale to make a difference.
The Gates' Foundation has a very small staff and prefers partnerships or networks as a giving strategy. But it is selective in how to hands out funds.
For instance, the Foundation has provided badly needed technology to 11,000 public libraries in the U.S. It has given US$100 million to 8% of New York City's public high schools providing they met certain curriculum criteria. And it just announced US$237 million in grants to several research groups to come up with a vaccine against AIDs providing they all agreed to cooperate and to share their results globally for others to work on.
posted by Diane Francis @ 12:03 PM http://dianefrancisbusinessissues.blogspot.com/
