Inherit The Windfall, Ctd

Jared Bernstein “didn’t think [Mankiw] made much of a case” in his defense of inherited wealth:

In fact, in an article based on nervousness over a wealth or inheritance tax—they’re not the same thing but their differences are not germane to what follows—there was a conspicuous lack of any discussion of such taxes in practice.  As with any tax, the question is: given its magnitude and scope, what is its distortionary impact on behaviors relative to the benefits its revenues provide?

In the US case, the current estate tax—a tax on the value of estates at death—is tiny.  As we point out here, because individuals and couples can exempt $5.25 million and $10.5 million, respectively, “fewer than 2 of every 1,000 estates will owe any estate tax in 2013.”  In other words, “everybody dies, but only the richest 0.14% of estates pay the estate tax.” Though the top statutory rate on estates is 40%, because of the exemption and other provisions that to reduce the liability of heirs to the estate, the effective rate—the average share of the estate paid in taxes—is about 16%.

Danny Vinik also knocks Mankiw:

[A]ll of this misses a fundamental argument against substantial sums of inherited wealth: fairness. Kids from wealthy families already have numerous advantages over low-income children, including receiving a better education and having access to more social capital. Huge inheritances only exacerbate those advantages.

A particularly strong point from Vinik:

Not only are these huge disparities unfair, but they also reveal a double standard among conservative policymaking.

Republicans often argue that giving people money – or health insurance – will disincentivize them from working and reduce economic growth. … If [Paul] Ryan is so concerned about Obamacare discouraging low-income Americans from working, he should have the same qualms about huge inheritances discouraging kids from wealthy families from working. But you never hear that argument from Republicans.  Apparently, free money – whether from the government or your parents – only acts as a disincentive to work when poor people receive it.

Krugman joins in:

[T]he larger criticism of Mankiw’s piece is that it ignores the main reason we’re concerned about the concentration of wealth in family dynasties – the belief that it warps our political economy, that it undermines democracy. You don’t have to be a radical to share this concern; not only did people like Teddy Roosevelt openly talk about this problem, so (as Thomas Piketty points out) did Irving Fisher in his 1919 presidential address to the American Economic Association.

A few readers get their say:

Mankiw’s argument that inherited wealth is not something to worry about is dubious at best. The argument assumes that investing in productivity, and the storing of wealth necessary to make those investments (“financing capital”) are desirable pursuits. And I think many of us would agree that this is the lynchpin of civilization. But what is not at all clear from Mr. Mankiw’s argument is that a system of inheritance is an efficient way to both save and invest this wealth in capital. Are those who inherit money more likely than any other entity to invest it in capital, and to do so wisely?

The part about rising wages is even worse. Mankiw’s writes, “[H]eirs induce an unintended redistribution of income from other owners of capital toward workers.” Now, I’m not a professional investor, but I believe the point of investing in capital is to yield a better return on your money then you would get from labor. I mean, sure, some people’s wages will increase. But that will be more than offset by the number of man-hours saved. So in the end there is a smaller share of money going to workers as wages and a larger share going to owners of capital. That is the whole point of owning capital.

Historically, labor has done OK because new capital has created a larger demand for skilled labor. But as automation becomes increasingly sophisticated and better able to replace skilled labor, it is not at all clear that this will continue to be the case. And if the rate of labor replacement outstrips the rate of job creation, what do we do with all of these unemployed people? Wealth that is locked into blood lines by inheritance sure isn’t going to help them.

Another objects to Mankiw’s characterization of Capital in the Twenty-First Century:

He dismisses Piketty’s book as “provocative speculation.” It might be speculative in the sense that it makes some broad assumptions about the future (with equally broad caveats), but its predictions are supported by data. Manikaw’s article is mostly a series of unsupported assertions. For example, he says that “because increased capital raises labor productivity, workers enjoy higher wages,” which is obviously not true if you observe the last 20 years or so – the gains from increased worker productivity don’t necessarily go to workers, especially in an environment of ever-increasing pay for executives.

Mankiw also talks about how the “regression toward the mean” is some sort of natural enemy of inequality. However, part of Piketty’s point is that we’re returning to the historical “mean” rates of growth and return on capital: something like 1-2 percent growth and 5-7 percent on capital annually (with larger fortunes getting higher gains). He goes on to show how this basic mathematical inequality resulted in economic inequality throughout recorded history. For now, we’re still waiting for a rebuttal of Piketty’s book that’s based on data and actual research.