Pedigrees and Mutts

Without any doubt, the blog with the most refined and respected intellectual pedigree is The Becker-Posner Blog, co-authored by a Nobel-prize winning economist, Gary Becker, and Richard Posner, perhaps the leading public intellectual on any judicial bench. In a recent posting by Becker entitled Should the Estate Tax Go?, Prof. Becker makes an argument cobbled out of several assertions of fact that, to be charitable, are dubious. In order, they are as follows:

1. There is no convincing evidence that . . . the degree of social mobility across generations [] has been falling during the last couple of decades.

Well, yes and no. According to an article by David Wessel in the May 13, 2005 WSJ (subscription required), "[O]ver the last 10 years, better data and more number-crunching have led economists and sociologists to a new consensus: The escalators of mobility move much more slowly. A substantial body of research finds that at least 45% of parents' advantage in income is passed along to their children, and perhaps as much as 60%. With the higher estimate, it's not only how much money your parents have that matters -- even your great-great grandfather's wealth might give you a noticeable edge today." Strictly speaking, this does not necessarily contradict Becker's assertion, which is that the rates of social mobility are relatively unchanged, but it certainly puts a different spin on it.

In essence, Wessel is saying that we (and here he points to Becker by name) have overestimated the rate of social mobility. (Interestingly, Wessel quotes Becker as follows: "Even . . .Prof. Becker is changing his mind, reluctantly. 'I do believe that it's still true if you come from a modest background it's easier to move ahead in the U.S. than elsewhere,' he says, 'but the more data we get that doesn't show that, the more we have to accept the conclusions.'" The quote seems at odds with Becker's position in the blog posting.)

2. The estate tax brings in only $24 Billion in revenues, but generates costs in professional fees alone of $6 Billion.

Joel Schoenmeyer does a good job of demolishing this assertion. ("There may be 20,000 estate planning attorneys in the country, but very few of them devote all of their time to estate tax issues (in fact, from what I've seen, very few of them devote all of their time to estate planning issues).") As I noted previously, there is already a substantial body of academic study that indicates that the compliance and enforcement costs of the estate tax, while higher than those of the income tax, are not nearly as great as Becker estimates. See here.

3. The estate tax also makes it harder for families to pass successful businesses on to their heirs. Yes, and alligators roam the sewers in New York City. Again, see here.

4. Becker finishes with a real howler: The energy and political capital spent on supporting high estate taxes is better spent on trying to raise opportunities to children from poor families by improving their education, training, and health. Let me see, if we abolish the estate tax, I'll bet that at least half of the $6 Billion in the professional fees paid to avoid the tax will be directed to trying to "raise opportunities to children from poor families." Right.

Judge Posner in his response sees the issues much more clearly, pointing out the faulty "social mobility" assumption that underlies Becker's argument. Posner suggests, for instance, that gift tax rules be tightened to impose a gift tax on private school or college tuition paid by Grandpa or Grandma. (I've often wondered what percentage of high tuition private college charges are paid by the students' grandparents.) He also comments on two points I've previously discussed, namely the effect of the repeal of the "pick-up" tax credit and the effect of the repeal on the basis step-up rules. (However, he does not point out the regressive result of the repeal.)

Let me make a couple of suggestions for reform:

1. The proceeds of policies of insurance in insurance (or Crummey) trusts ought to be subject to estate tax. The current law warps investment decisions away from those that would be dictated by the market to investment in life insurance. Here, I'm ready to trust the market.

2. The rules with respect to discounts applicable to family limited partnerships or family limited liability companies ought to be formalized via statute. Under current law, there is too much incentive to game the system by taking an agressive approach to discounts and then negotiating the issue with the audit agent.

3. The rules with respect to income tax deductibility of charitable deductions if the donor is relatively young (say, below 62) could be loosened. As currently structured, there is too much incentive to wait until death to dispose of assets via charitable donations. This proposal would create incentives for early donation and would assist in reaching a result that Posner favors, to foster "the creation of centers of private power . . . as an offset to growing governmental power."

4. Outlaw dynasty trusts. A full discussion of dynasty trusts is beyond this posting. Suffice it to say at this point that the concentration of income and wealth in this country is growing rapidly and the last thing we need is a new vehicle to accelerate that trend.

Just one mutt's view.