Our friends at NAM (National Association of Manufacturers) are waging a war of words with the liberal press, most often the Washington Post, concerning the Estate Tax. NAM is eloquently defending a succesful business owners’ right to pass the fruits of his or her life’s work on to the next generation without the government taking such a huge bite that the factory has to be sold, at least in part, to pay the tax bill. The liberals, predictably, view the matter as another class warfare issue and see repeal of the Estate Tax as another way for the rich to avoid paying taxes to the detriment of the poor. Both sides may be missing the essential point.
For many years I have traveled and worked in Mexico in the Maquiladora industry and have been struck by the generally dismal management of Mexican owned manufacturers. Of course some are excellent, but far too many are mired in mediocrity. I came to appreciate the wisdom of two moves that our Founders made that did much to create the ‘American Dream’. They virtually gave away all of the land in the U.S., and they created the Estate Tax. Mexico has done neither. By giving away the land to millions of Americans, the government put vast amounts of capital in many hands. They spread the wealth, which makes access to capital much easier for everyone. In Mexico, land reform has consistently failed and wealth remains in the hands of the government and the top tier of society. A young person with energy and an idea in Mexico has almost no chance of financing his dream.
The Estate Tax in the U.S. is not a money raising proposition so much as it is the great opportunity leveler. It assures that the deck gets substantially reshuffled so that every generation has a more equal chance to succeed, regardless of a person’s parents’ success or lack of it. In Mexico, with virtually no Estate Tax, that top 20 or so that controls all of the wealth passes it down intact from generation to generation. Too many Mexican businesses are owned and run by second, third, fourth or more generation folks who do not have the mental acumen or work ethic to run a taco stand, let alone a manufacturing entity. At the same time, energetic Mexican entrepreneurs either work in the factory, or hop the fence into the U.S. for the chance to fulfill their dream. My bet is that most Superfactory readers, had they been born into Mexico’s unprivileged mass, would have been over the fence and applying their energy in the U.S. long ago.
With the Estate Tax in the U.S., if Junior wants to be as rich as his father, he is going to have to earn it. Without the Estate Tax, Junior gets a grossly unfair leg up on the rest of us. As a father of four I want to pass on the ability for my children to live the good life as much as anyone, so I certainly understand the NAM point of view. I wish I could give my kids an advantage over your kids and the rest of the world. Thanks to the Estate Tax, however, the best thing I can do for my kids is to be sure that they get the best education possible and instill in them a strong work ethic. In the end, the value of the Estate Tax is that it forces us to be good parents and not simply good business people. Mexico, and many other countries, would be far better off by enacting a stiff Estate Tax themselves.
I cannot remember the last time I agreed with the Washington Post on anything and disagreed with NAM. On this one, however, for reasons the liberals will never fathom, I agree with them and hope the Estate Tax stays.
Interesting post… I hadn’t really thought of that perspective before. Coming from a family of small farmers, I have always been against the tax as it can decimate small family farmers… who have large net worth in land but relatively low income. The tax forces the sale and breakup of the farms.
I hadn’t thought of the leveling (or “reshuffling”) effect, especially in regards to more traditional business. You’re right… that could be valuable.
But as a libertarian-oriented type of person, ownership means a lot. If you own the asset and have already paid sometimes stifling taxes while creating it, why should part of it be arbitrarily taxed again? Will that tax be used efficiently?
One of the Cato Institute scholars is a Peruvian who did some fascinating studies on how ownership affects poverty. He convinced the governments of some traditionally poor countries to allow slum dwellers to actually get title to their small huts (which from the 7 yeats I lived in Peru I recall to be about US$50 of material!). The experiment was extremely successful, and created a base of new entrepreneurs.
Thanks for the new perspective. I’d be interested in finding out more about the reshuffling effect if there are any studies.
Bill Waddell says
As a descendant of a long line of farmers myself, and a resident of South Dakota for several years, I have often heard the ‘family farm’ argument. I have always found it curious that farmers tend to be libertarians when it comes to taxes, but whole hog Roosevelt Democrats in their agreement with Farm Subsidies, Federal Crop Insurance, government subsidized agricultural export programs, flood insurance and the like. They really have a prety good thing going – the government taking away all of the downside risk, and little cap on the upside. The libertarians among them seem to forget that the family farm began with a government give away program – specifically the Homestead Act. In talking to a farmer, you will also realize that he is very concerned about HIS family farm, but could care less about YOUR inability to have a family farm. I am certain he wants to protect his and give it to his children; But what about the fact that if I want to be a family farmer, I have to compete with someone who did nothing to earn it other than fall out of the right family tree and had several million dollars of government subsidized assets handed to him, while I have to raise the dough myself? Hardly seems like the sort of thing to foster real competition.
But this is a manufacturing blog and perhaps a more relevant question is why so much government (taxpayer) money goes to assuring the survival of the nation’s agricultural base, but scant regard is given to our manufacturing base?
If Junior is handed a tax free manufacturing business and proves to be an inept manager, he will, in all probability, eventually go under. If he doesn’t kill it, his children or grandchildren will.
On the other hand, if Junior is handed a tax free farm, the tax payers will eat just about all of his losses – even go so far as to pay him to not farm in some cases – and do whatever they have to in order to keep him afloat. Willie Nelson will even hold a benefit concert for him. Then us taxpayers will all assure that HIS son has the right to do the same.
The greatness of the U.S. has always been that birthright means little, while hard work can get anyone ahead. I am a libertarian at heart too, but it has to be an all or none proposition. If we do away with the Estate Tax, we should do away with all of the subsidies too, in farming and manufacturing. If we are going to hand the keys to the empire to Junior, he had better be prepared to run it, or expect to lose it.
Bill Waddell says
PS: I agree with your observation regarding the Peruvian huts completely. I think that if every square foot of Africa were (1) to be broken up into plots and given to the people in a manner similar to the Homestead Act, and (2) the owners of the land were given title to all of the animals on it, and (3) all currently endangered animals were made fair game for hunting, then the population of endangered animals would explode. Every man and woman with a couple of black rhinos would go into the mating and breeding business and charge rich Americans and Europeans two arms and a leg for the right to shoot them. Free enterprise works and the Africans would not eat their seed corn. They would protect their mating resources and breed scarce, huntable animals by the arkful.
I think the same approach would save the Amazon rainforest. Take it away from the government and give title to of every square foot to the people who live there and they will turn into a Weyerhauser operation over night. They will plant ten trees for every one tree they cut down. People who can make a good living selling trees will plant more than they chop down. People who make money selling animals will breed more than they kill.
Many people do not appreciate the fact that a far greater portion of America is forested today than was on the day Christopher Columbus showed up. And the great buffalo herds disappeared when they roamed ‘public lands’ owned by no one. Now that selling buffalo burgers to tourists has proven to be a lucrative trade, buffalo can be found loitering around just about every vacant lot in the Dakotas.
Private property ownership expands assets; government ownership – meaning everyone owns it, which means that no one owns it – leads to waste. I think your Peruvian friends were on the right track.
Ron Wager says
I enjoyed the article though I have to prod the writer with this point: Great epiphany, except it’s not. Bill writes, “The liberals, predictably, view the matter as another class warfare issue and see repeal of the Estate Tax as another way for the rich to avoid paying taxes to the detriment of the poor.” Speaking as a liberal, that is horseshit. Growing up poor and smart, my sense of fairness could never quite get my head around why the kid beside me who had driven to high school in a brand new 4X4 pickup would always be able to do so simply because his father (or grandfather, most likely) was rich. Then I was told on the first day of my Estate Tax class in law school that the reason for the tax was and is because we are not an autocratic society in which inherited wealth (or poverty) is allowed to solidify socioeconomic status for generations. To work, our economic system MUST encourage individual initiative and achievement. The Estate tax is an effective way to do that. Like the current occupant of the White House, that lucky guy who was born on home plate has to be reminded that he didn’t hit a home run.
The disingenuousness of the opponents of the estate tax lies in their inability to trot up on stage any compelling people whose inheritances were decimated by the estate tax. If NAM has actual instances of factories being dismantled and folks being laid off I’d like to see them. It is my experience as a lawyer with partners who do a lot of estate planning that the same man who was smart enough and creative enough to build an estate large enough to be subject to the tax is also likely to have done some savvy planning so that the kids won’t have to sell any part of the factory (or farm). It’s called insurance, charitable trusts, gifting, and the like. Second, it’s hard to feel too sorry for some poor fella who’s crying that instead of getting all of Daddy’s $10 million, he only got $8 million.
Donald Trump is an interesting example. I think this background is reasonably accurate: His father won a huge lottery and was worth millions overnight. Donald went to the best schools and walked out of Wharton School of Business with $6,000,000 to jumpstart his real estate empire. Has he been phenomenally successful with that initial investment? I’d say he has. As smart guys ourselves, I wonder how different our lives would have been if we had started out with that kind of a bankroll, instead of starting out in the hole and having to work for others?
I don’t begrudge the man who worked hard, now has a lot of money and wants to give it to his kids. Of course, he does — what father doesn’t want to secure the future prosperity of his own family? And because he’s rich, he intrinsically has the ability to speak to power and influence tax policy. I’ll give him that, too. But at the end of the day I begrudge Junior’s belief that he is one of the Chosen and deserves every penny of the money his father earned. And I also begrudge the mindest that says Junior’s problem is my problem because I have a father or brother who works at Junior’s daddy’s factory.
Is it double taxation, punitive taxation, socialist taxation? Yes, No, Maybe. All I know is that the capitalist system that worked so well for papa occasionally has to be reset and recalibrated so that it can work well for other people, too.
Bill Waddell says
In response to Mr. Wager, I appreciate that after refering to my blog as horse s**t, he agrees with me entirely. With regard to the liberal point of view, I made it clear that I was taking my observations from the ‘war of words’ between NAM and The Washington Post. I offer the following exerpt from the Post, from a June 25 piece entitled Estate Tax Sham:
“EXACTLY HOW MUCH should the super-rich be allowed to pass on to their kids tax-free? All of it — or will a mere $8 million suffice? Incredible as it may seem when millions of lower-income Americans are losing their health insurance and appropriators are talking about cutting food stamps, that’s the pressing societal question being debated behind the scenes in the Senate.…..You’d think Democrats would not only see through this sham but be eager to pick up the fight. After all, the question is whether, at a time when the gap between rich and poor is widening, extraordinarily wealthy Americans ought to be asked to give back some of what they’ve been able to amass. But instead of seizing on the estate tax fight as a defining issue, Democrats have scared themselves into thinking that they’ll be punished for standing up against repeal.”
As much as Mr. Wager and the more level headed members of the Democratic view of life deny it, absent sound logic and facts, their side of the aisle and the debate virtually always boils down to the old tactics of class warfare.