New at Reason

David Weigel | July 5, 2006

J. Peter Friere asks why the prime beneficiary of Warren Buffett's charity or good works is so often... Warren Buffett.

Comments

Captain Holly|7.5.06 @ 1:59PM|#

Reminds me of a line in Fiddler on the Roof:

Tev'ye: If wealth is a curse, may G-d strike me down with it!

|7.5.06 @ 2:05PM|#

The estate tax weighs heavily on those who have asset-rich businesses, typically family businesses that have taken years to break even and accumulate value. When the owner dies and the children take up the reins, the estate tax comes into play, sometimes costing as much as the business itself. The heirs are then forced to sell the business before losing any more money.

This is a hollow bit of repeating the same mantra that was as inaccurate 10 years ago as it is today.

There are dozens of ways to transfer an estate whereby the estate doesn't get gobbled up by the tax man upon the death of the founder. It's called (get this) "Estate Planning".

Trusts, corporations and other vehicles have been in use for decades to just these ends. The types of estates lost to estate taxes when mommy or daddy die aren't Dairy Queens and The Buffalo News.

Largely speaking, they're farms and small, sole proprietor-ships that were never structured properly to begin with - probably because of bad (or no) legal or accounting advice.

Of the other large business that change hands, many of them get bought because that's what the surviving family wants. After sluggin' it out for years with the old man, when daddy finally kicks it, the ol' asset laden cash cow starts looking ripe for the slaughter.

|7.5.06 @ 2:27PM|#

Ethically, there is the question of how to justify having more money than can be consumed in a profligate lifetime while children in the developing world die of preventable diseases

I find it terribly ironic that someone could say that at the saem time as praising Warren Buffett. He got rich in great part by helping businesses be well run. If Warren Buffett (and others like him) is a big enough dolt to keep creating new wealth long after he has more money than he can possibly spend on himself, then that is all the ethical justification one needs.

The US and the world need job creators. Those who get extremely rich by creating businesses did so by creating jobs, even though this may have been an afterthought to them.

To the extent they are incredibly rich because of this, this strongly implies they hired those most in need of a job (lowest possible pay for any given skill), they bought the least expensive inputs for their final product (the least scarce "resources" on the planet), and they created products that are higher quality or of equal quality but cheaper than previously existed, or we would not have bought them.

We should hope there are more such incredibly generous people who the Left labels greedy. And this generosity is even before they get around to figuring out what to dispose of their wealth when they can no longer be as generous via job-creating and needed/desired product-creating as they were when they were getting rich.

There is no doubt in my mind that the Gates Foundation will do a fabulously efficent job of disbursing that wealth to help the needy, leaps and bounds better than if the Left had their way and redistributed it via government long ago.

|7.5.06 @ 2:28PM|#

Somebody explain the problem here:

When Paris Hilton's daddy dies, she will inherit a corporation worth severl billion dollars. She will have to pay an estate tax on that inheretance.

If she doesn't have the cash on hand to do so, she will put some fraction of the corporation up for sale, probably as common stock, in order to raise the money.

At the end of the day, the ownership and control of corporation will, in part, have been shifted from Paris Hilton to several thousand investors and fund managers.

I can understand, though disagree with, the waah waah poor Paris Hilton, she's entitled to $4 billion, not just $3.5 billion. But I always see the claim that such events are bad for the economy.

Why?

Gimme Back My Dog|7.5.06 @ 2:31PM|#

madpad,

for a brief, shining moment before the dot com bubble burst, I had to worry about estate tax and it is not so easy to get away from paying. I ended up buying a life insurance policy to cover the cost of the expected estate tax.

I don't know about DQ or the paper, but I know the Washington Redskins were sold because the family could not come up with the cash to pay the tax. Not only did the family want to keep the team, they tried to buy the team when it was auctioned off, but could not come up with enough money.

Gimme Back My Dog|7.5.06 @ 2:40PM|#

joe,

because the $2B (estate tax is around 50 percent) raised to buy the shares from Paris Hilton would be removed from the productive part of the economy and given to the government.

|7.5.06 @ 2:44PM|#

J. Peter Friere asks why the prime beneficiary of Warren Buffett's charity or good works is so often... Warren Buffett.

I thought Reason was a libertarian publication. The answer is enlightened self-interest, and last I checked libertarians were for it.

Incidentally, I would also have thought libertarians would generally be against the notion of accumulated holdings exceeding the life of the accumulator, though I guess I could see this argument going both ways. Is there a standard libertarian rebuttal to Friere?

Anon

|7.5.06 @ 3:04PM|#

Anon,

I don't know about anybody else, but this libertarian thinks that, if you want to give your property to your kids, you should be allowed to do so. Does that mean "accumulated holdings exceeding the life of the accumulator?"

|7.5.06 @ 3:06PM|#

Gimme Back,

Thanks for the info...I'm not saying there aren't problems with having an estate tax. My point is that the article is a typical overstatement about the impact. Many of the estates opponents claim would be affected, aren't.

Also, the author claims a study by JEC - a committee chaired by Republicans for whom this is a hot button issue - shows the tax harmful to charitable giving.

Aside from the fact that the JEC study flies in the face of logic, sense and basic math, a 2004 report by the Congressional Budget Office (a less partisan and, arguably, more credible source) found that eliminating the estate tax would reduce charitable giving by 6-12 percent.

Decisions on this should probably not be made on the basis of how much charity comes out of it. But this article is hardly balanced or fair in the subject matter.

|7.5.06 @ 3:08PM|#

Gimme Back,

Thanks for the info...I'm not saying there aren't problems with having an estate tax. My point is that the article is a typical overstatement about the impact.

Also, the author claims a study by JEC - a committee chaired by Republicans for whom this is a hot button issue - shows the tax harmful to charitable giving.

Aside from the fact that the JEC study flies in the face of logic, sense and basic math, a 2004 report by the Congressional Budget Office - a less partisan and, arguably, more credible source - found that eliminating the estate tax would reduce charitable giving by 6-12 percent.

Decisions on this should probably not be made on the basis of how much charity comes out of it. But this article is hardly balanced or fair in the subject matter.

|7.5.06 @ 3:11PM|#

Joe,

Read GimmeBackMyDog's first paragraph.

for a brief, shining moment before the dot com bubble burst, I had to worry about estate tax and it is not so easy to get away from paying. I ended up buying a life insurance policy to cover the cost of the expected estate tax.

Now imagine you are a successful entrepreneur who is creating "good jobs", and, in addition to spending money on yourself, you also want to leave your kids enough to spend a lot on themselves too. Maybe Warren Buffett is correct this is a bad idea for the kids, maybe not. But if the entrepreneur decides to engage in estate tax avoidance, such as buying copious life insurance for his kids, then that is money that he can't use to create the "good jobs" he is so good at creating.

He may in fact do something worse, such as sell his business to someone who creates fewer "good jobs", and use that money in some absurd economically dubious tax avoidance scheme that has no positive externalities.

This is how the estate tax hurts the economy. Also, the amount of money and otherwise productive brainpower wasted on tax avoidance of theestate tax is considerable, and so the tax is highly inefficient. It would not surprise me if we reduced the estate tax to 15% from ~50% that we might even collect more tax revenue as a result of less tax avoidance. Although the libertarian in me is not fond of generating more revenue for the government....

|7.5.06 @ 3:59PM|#

I don't know about anybody else, but this libertarian thinks that, if you want to give your property to your kids, you should be allowed to do so. Does that mean "accumulated holdings exceeding the life of the accumulator?"

Yes it does. Look, why should anyone get huge amounts of money without paying taxes on it just by having the dumb luck to be born to a rich person? As long as regular folk have to pay taxes on every single dollar they earn, the rich should have to pay too. End all taxes on income and THEN eliminate the estate tax. You have to be a seriously evil person to think that it's fair to eliminate the estate tax while still taxing the income of the poor.

Your children are not you! They are individuals who should have to pay taxes on any income they receive, just like everyone else.

|7.5.06 @ 4:15PM|#

This wouldn't be a problem if we had some sort of consumption tax instead of income tax. That way, rich kids who inherit assets that are productive investments don't have to have a fire sale, but those who do spend away their parents' wealth do get fucked over by the government like the spoiled fucks deserve.

|7.5.06 @ 4:15PM|#

any here read James Buchanan, that public choice guy? Isn't Buffet just avoiding a 100% estate tax in libertarian theory?

|7.5.06 @ 4:22PM|#

...while children in the developing world die of preventable diseases

Funny, I didn't realize it was possible to actually be poor enough to help all of those needy kids.

|7.5.06 @ 5:09PM|#

The Real Bill,
The estate tax repeals have been coupled with an elimination of stepped up basis, so repeal doesn't mean the dollars received by heirs aren't getting taxed.

|7.5.06 @ 6:20PM|#

Next time my son asks for $20, I'm going to give him $13 and point him to The Real Bill for an explanation. Incidentally, in order for me to have $20 to give, I already had to earn and be taxed on $30. The boy can either spend his $13, or leave $9 for his children. From each according to his ability...

|7.5.06 @ 6:58PM|#

OK, let me get this right. There's nothing wrong with the estate tax because, if you plan things right, you can avoid it anyway. So, what exactly is the point of the estate tax then? Are you saying it's been put in place in order to create an industry of tax planners who can charge you to help you to structure your estate in such a way as to avoid taxes?

|7.5.06 @ 7:11PM|#

I called this upon announcement of the "donation". Non-modest self-congratulations to me! ;)

That's right. More fingers in the pie along the way.

Speaking of pie:

Little Jack Horner rhyme

Little Jack Horner sat in the corner
Eating his Christmas pie,
He put in his thumb and pulled out a plum
And said "What a good boy am I!"

Excerpt from linked page:

16th Century History origin of the Little Jack Horner story?
Little Jack Horner was reputed to have been the Steward to Richard Whiting (1461 - 1539) the Bishop of Glastonbury. The Steward had an important role and was responsible for managing the household, collecting taxes and keeping accounts.

|7.5.06 @ 7:16PM|#

No, the estate tax exists to penalize those who are too dumb to prevent their wealth from being passed on to their (presumably also dumb) kids. So it's just a matter of the gov't helping Darwin out.

And joe, you can put away your hoary old Paris Hilton reference. Paris Hilton is in no way representative of the people being whacked by estate taxes. Think more in terms of mom-and-pop shops being destroyed utterly by the gov't upon the death of mom and/or pop. There's your compassionate gov't at work.

|7.5.06 @ 7:29PM|#

Forget the government issue for a second. One man accumulating far more money than he could ever spend while millions (billions?) suffer in poverty is certainly a legitimate moral issue. How anyone could not recognize that is beyond me. Clearly Buffett recognizes it, to his credit.

I'm with The Real Bill. We all recognize that, even under a Libertarian regime, there would still have to be some level of taxes to support a small government, yes? Well I'd say all the other taxes should go first, before we drop the estate tax. You want money? Work for it.

Of course, if we were under a Libertarian regime, I'd vote that the first thing to go is the "pot tax."

|7.5.06 @ 8:01PM|#

Inherited wealth should be treated the same way as income, because that's what it is. That being said, income tax should be replaced by some sort of consumption tax for the reasons I said above.

|7.5.06 @ 8:18PM|#

I would rather see Paris Hilton's money supporting bartenders, drug dealers, artisan clothiers and various and sundry other private parties, than the same money, confiscated by the government, being used to support Archer Daniels Midland and General Electric.

Wealthy heirs, on their own initiative, and by free choice, redistribute their wealth to vast armies of builders, craftsmen, artists, and others. They even invest their money in ways which create new jobs and wealth. That is how it should be.

If Buffett wants to stiff his kids, that is his right. I can't help wondering how much money the lawyers will end up with when the old man croaks. As for giving the money to the Gates Foundation, it's probably more economically efficient than giving it to the government of Zimbabwe, but not by a lot.

|7.5.06 @ 8:23PM|#

I'm wholeheartedly against feeding the beast at this point but if the government is small enough, it should take a lot to run it so the taxation wouldn't be as obscene as it is now.

How should the rate of taxation be calculated? The heir(s) might be taxed as if all the wealth were made in the year they inherited the estate.

|7.5.06 @ 8:26PM|#

And Herrick-

I'm with you on the consumption tax, all the way. Incentives really do matter, so why do we punish production and reward consumption?

|7.5.06 @ 8:41PM|#

Punishment is punishment pure and simple. How does it matter which end of the pipe the money gets taxed? How would money not taxed until spent work better for those holding it? What sorts of goods and services should be taxed and which not? What about money put back into production instead of consumption, should the consuption to that end be a writeoff? I suppose my ideas/questions are potentially contradictory to my first statement.

The first taxes to go should be property taxes since you cannot truely own land that you have to essentially keep paying rent on.

|7.5.06 @ 9:19PM|#

M',

I'm inclined to think that all investment taxes ought to be the first to go. The US corporate tax rate is 35%, and various states have their own on top of that.

Imagine it is 33 1/3% instead for easy math, and no state taxes. Abolishing the federal corporate tax would then increase profits of corporations by 50%. (66 2/3 is base, and 22 1/3 is half of that= 50% increase in after tax profit).

The bulk of corporate profits is reinvested, and on an economy wide basis it has been amazingly at a steady rate of profits. Thus companies would be creating more wealth and more jobs. More low skill jobs for the needy, and more "good jobs" as well. With an income tax these jobs will result in an increase in taxe revenue much greater than implied by an abolishment of the corporate tax, although it is not likely to exceed that number. Thus a smaller amount of government revenue is "lost", especially over time as the economy grows.

But more importantly is the massively increased demand for workers this tax cut would entail. Retirees and those saving for retirement would also do well with their investments being worth significantly more.

|7.5.06 @ 9:22PM|#

Hmmmmm.

I also meant to add that as government revenue rose over time we could also abolish more taxes, or at least cut their tax rates. My biggest problem with Laffer Curve advocates is they seem(ed) to think that government revenue was a good thing. I was always hoping they'd result in less tax revenue. :)

But again, the booming economy is the main good thing accomplished by abolishing the corporate tax and other investment taxes.

|7.5.06 @ 9:30PM|#

I would think that there would have to be a resultant increase in demand for the products and services as well. Noone I know would want to hire more workers unless production demanded it.

Franklin Harris|7.5.06 @ 9:38PM|#

I hadn't realized that Peter Buffett was Warren's son. I think I have some Narada CDs containing songs of his. And the fact that I only think this, as opposed to know, means his music probably isn't very good.

I blame Warren Buffett's crackplot plan to "upgrade" Dairy Queen with the closing of two local restaurants, which were both marginal and couldn't afford to pay for the new equipment Buffett demanded they install. Thanks to Buffett, I have to drive 20 miles for decent onion rings. Bastard.

|7.5.06 @ 9:58PM|#

To say that they need new customers to expand their business if they have new capital may be a mistake. Many businesses have no problem finding new investments to make, it is the capital they have a problem with getting more of at whatever debt ratio they are comfortable with. With these expansions come new employees. Maybe a restaurant expands into two restaurants in different towns. Or an existing chain of some sort of retail expands. Or a manufacturer decides to develop and manufacture a new product that he couldn't afford to do before.

Nevertheless, if the companies didn't reinvest their new profits, they'd pay them out in now tax free dividends to their shareholders. They view this as investment money, and they reinvest it somehow. Initially it would mean higher share prices due to the increased demand for investments. But those higher share prices would inspire new entrepeneurs, or existing entrpreneurs to become serial entrepreneurs. All of these new businesses would be creating jobs. Institutional investors like pension plans would increase their venture capital investments etc.

All of this creates new jobs as a byproduct of expansion in stores, factories etc.

|7.5.06 @ 10:04PM|#

Also the reinvestment of dividends would be in bonds as well. Thus interest rates would go down, thus decreasing the cost of borrowing for investment. This is also a good thing.

|7.6.06 @ 1:50AM|#

Anon,

I thought Reason was a libertarian publication. The answer is enlightened self-interest, and last I checked libertarians were for it.

Enlightened self interest is one thing. What Warren is favoring is something else.

You are free to pursue your own interests, given the constraint that you do not interfere with other people's rights to do the same. Warren wants the estate tax to prey on the victims, thus violating the principle.

Incidentally, I would also have thought libertarians would generally be against the notion of accumulated holdings exceeding the life of the accumulator

Why? Your wealth is yours to do with as you please, including what's done with it after you're gone.

|7.6.06 @ 2:00AM|#

Unfortunately, too few realize that Buffett is so self-interested. As he talks about how much he dislikes inordinate wealth, he has done his damnedest to make sure no one else achieves it.

One thing we can be sure of is that Warren Buffet is not a libertarian.

But Warren Buffet isn't the first to have this attitude. JP Morgan beat him to it by at least a century. Morgan was explicit about wanting to make sure nobody else to could reach the level he was at.


Paradoxically, the very rich have historically been some of the biggest opponents of a true free market. Morgan not only wanted to make sure nobody could climb up to his level. He also wanted to control the market so as to make it more predictable -- so that he could predict his profits more easily.

In a true free market most industries are unstable, i.e. open to attack by new comers and disruptive new technologies. It's hard to predict your profits if you don't know what new kid is going to wipe out your steel mills next year, for example.

People like JP Morgan were very much in favor of a graduated income tax. It makes it much harder for the new kid on the block to ever get big enough to become serious competition.

We've got a tax system that's deliberately designed to make it hard for new comers to compete with the big industries. You can start a new restaraunt if you like, but good luck if your ambition is to start from scratch and go head to head with Ford, GM, and Chrysler.


The problem is not that the Morgans and Buffets of the world are self interested. The problem is that they stifle the self interests of others, to keep the competition under control.

|7.6.06 @ 4:43AM|#

Just to contradict some things that were said regarding the estate tax. First, the estate tax does not reduce charitable giving. According to the CBO, "increasing the amount exempted from the estate tax from $675,000 to either $2 million or $3.5 million would reduce charitable giving by less than 3 percent. However, repealing the tax would have a larger impact, decreasing donations to charity by 6 percent to 12 percent."

Regarding farms and small businesses, at the current $2 mil exemption, there are only about 250 that would have to pay any tax. And that is for amounts greater than $2 mil. One way I would change the estate tax would be to switch it to a capital gains tax when inherited assets are liquidated. So if Paris Hilton gets shartes of the Hilton stock, if she needs to sell them to get cash, that's when she pays the tax, not immediately. Same goes for farms and small businesses. Considering, 0.5% people have to pay the estate tax, it's waaaaaaay down on my list for government injustices.

According to the CBO in this article, the number of farms with insufficient funds to pay the tax is between 27 and 0.

|7.6.06 @ 6:52AM|#

I never thought I'd come to Paris Hilton's defense, but, in her role as America's Favorite Media Slut, she is hardly a member of the "idle rich." The woman if a frickin' industry. Should she ever inherit a chunk of Hilton stock unprotected from the estate tax, she'd have the cash flow to pay the thieves without selling, unlike some of her trustafarian peers. Had she retreated from the public eye after her home video...antics...were released by a boorish cad of an ex, she would be the 21st century equivalent of a gin-loving, jazz-mad flapper. Instead, she's become a Sex Goddess. A stick-thin, squinty-faced , processed-voice SG, and a minor deity compared to Langtry, Bow, West, Garbo, Turner, Monroe or Welch, of course. Obviously, the wordsip of false goddesses means the Flat Bony End Times are upon us!

Kevin

N.B. Peter Buffett and his very cute wife were frequent customers at the last retail shop I worked at. They were invariably polite and easy to deal with. Some rich folks got class....