TCS Daily


The Perils of Unearned Wealth

By Jerry Bowyer - March 29, 2007 12:00 AM

Charles Koch built the largest private corporation in the world, and then wrote a book about it. His publicist mailed it to me this week. It's a great read. It just so happens that at the same moment I was reading about how Koch and J. Howard Marshall banded together to take control of Great Northern Oil Company, a newsflash appeared in my in-box announcing that Marshall's widow is now known to have died of a drug overdose. The book in my lap contained the story of how J. Howard Marshall's great fortune was created in life. The PDA in my hand told the story of how that great fortune destroyed a life. Then I realized something: Anna-Nicolle Smith died of a sudden and massive injection of unearned wealth.

Koch's book describes the way it's supposed to work. Dad builds the business from zero to mid-size. Junior sees it happening, works hard, and eventually takes over. He takes the business from medium to large. He makes mistakes - crude oil gathering? Home run. Farming? Strike one. Fertilizer? A triple. Two steps forward and one step back and viola, its 50 years later and Koch's a billionaire. That's the way the Bowyers are trying to do it. Every one of my seven children works for the family business. Every one is paid in stock. They accumulate a little more each year. "Those shares could be worth a lot someday," I tell them, "or they could end up completely worthless. It's up to you."

Anna Nicolle's way is the way it's not supposed to be. Be born reasonably pretty and adopt a flexible attitude towards cosmetic surgery and public disrobement. Shake your tassels into the right face and viola, you're Mrs. Billionaire. Her husband poured his heart into oil; she poured silicone into her chest. He took almost a century getting there; she took less than a decade. He died in his nineties; she died in her thirties.

The thing about wealth creation is that it requires certain virtues, like patience, thrift and diligence. Jefferson taught us about this. It's why he wanted a nation of owners. There are certain tests an entrepreneur has to pass in order to go from mild affluence to millionaire status. The next test is not losing the first millions. I have a friend who made it in his 20s, then lost it all to gambling. He didn't get there again until his 50s. By then he learned how to keep it. Going from millionaire to deca- or centa-millionare is a different set of trials and temptations. Buy the jet too early or expand too fast and it's all over. It's like a video game. If you skip from Zelda level one to Zelda level five, you're going to get whooped. If you go from being the sheikh of a Neolithic Bedouin tribe to an oil billionaire status in one generation, you're heading for destruction. If you go from the trailer park to unlimited wealth, chances are good that you will overdose on something - food, booze, or (in this unfortunate case) sleeping pills.

Scarcity is a tutor and when it is no longer there to restrain our appetites, only character remains. If character was never developed... well, just watch today's news and you'll see.

Jerry Bowyer is an economic advisor for Independent Portfolio Partners.


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168 Comments

Winners of big lottery payoffs are another example
I guess it's possible that all the stories like this http://abcnews.go.com/GMA/story?id=2941589&CMP=OTC-RSSFeeds0312 you read about lives being ruined after winning big lottery prizes could be anecdotal and that the majority of lottery winners live happily ever after, but I doubt it. Yet another reason why state sponsored lotteries should be ended.

Nice Article
This is exactly why I've never given in to the fear of a static wealthy class in America. A lot of people whine about trust-fund babies and such, but give them all a generation or two and they'll either deserve to be where they are or they won't be there anymore. Wal-mart and Microsoft fall squarely in this category for me as well.

So what's the argument against the estate tax again?
Are we really against the children of the weatlhy developing a little character by reducing slightly their bequests, lowering taxes for the rest of us working folk?

Rich kids in college
College is where we find out a trust-fund kid's real stripes. They can all afford to go and usually their family influence gets them in even if they don't have the grades. But once there, some wind up creme of the crop because of their family upbringing and encouragement, whereas others flunk out because they know they don't have to get through since they have their family inheritance. They don't need to ever work so they just go to college for the fun. I'm curious if there's any statistics on what percentage of millionaire kids flunk out.

Principle
It' not YOUR money or the STATE's money.

The nanny state has proven it cannot build character.

Same arguement in Zimbabwae
Take a country that is exporting food and turn it into one that is starving.

Ancient truth affirmed: The bread of idleness is a curse..
The ancient proverb notes "The bread of idleness is a curse.", meaning wealth not earned by work is profoundly risky and dangerous to one's soul.

Exactly, PRINCIPLE
It's a tax. Taxes are never YOUR money or the STATE's money

And this isn't about building character: that's a job for parents. It's about raising money for public purposes. So, since this is true and as the essayist points out, unearned wealth creates perils, why is this tax particularly bad, rather than unusually good?

Taxes are not the state's money? Since when?
Why impose a death tax?

To increase revenue for the state or to teach those ingrateful silver spooned kids a lesson?

To claim the latter is pure BS.

The state will use any excuse to gain revenue.

How much of the "sin" tax pays for treatment of the "sin"?

Unearned wealth may create perils for the recipient of such wealth but not for society.

The "news" media is making a fortune off of Anna Nicole's death.

Why is a death tax bad? It forces capital intensive family business to sell assets to pay the tax.

And, Eric, I know you wouldn't understand, but it is bad on principle.

Principles (of Economics)
Here's an opportunity to prove you are actually know something about that branch of economics you comment on so frequently- define a "public good".

Seem to have a reading difficulty
I did not claim that the estate tax was therapy for spoiled brats, I did not claim sin taxes were against sin. I just said:

This isn't about building character: that's a job for parents. It's about raising money for public purposes. So, since this is true and as the essayist points out, unearned wealth creates perils, why is this tax particularly bad, rather than unusually good?

You say "it forces capital intensive family business to sell assets to pay taxes," and this may happen 5 percent of the time.

>it is bad on principle.
So you say, without any backup. What's the principle behind Paris Hilton doesn't just inherit a huge amount, but an enormously huge amount, while (for example) the national parks are laying off rangers?


Hey, why don't you tell all of us: you claim to be the expert
but please make it about 'the public good," not 'a public good."

But it isn't the government's business to save souls.
And it isn't the government's business to tell me by confiscation how much I can leave to my family.

The Arguments & Honesty
1.) The Ultrawealthy routinely avoid the estate tax. Its simply a matter of knowing the secrets of the tax code. Its ineffective and inefficient.

2. It captures assets that are residuary of already taxed income. Its unfair.

3.) It provides very little income to the government-its immaterial. The IRS actually announced it was going to cut loose estate tax specialists recently-so they can dig where there are taters.

4.) Its not your money. Having less doesn't teach character, that comes from the people that influence your upbringing. I can see however how (Kennedy, Kerry, Pelosi, etc.) would lead to the conclusion that ample wealth produces a deficient character. Its ineffective at producing social outcomes and its theft.

5.) Given the above, it is nothing but a tool of the worst type of politician, the class warrior (with an iron clad estate plan) who peddles it to the eager throngs of the ignorant and envious.

6.) The Argument For:

I wannnt it, I wannt it.. wahhhh, I want the government to take the other guy's money so I can feel good... wahhhh..


Top Estate Tax Rates were well in excess of 50% at their peak, you are really proving your stupidity if you think that qualifies as a slight reduction-you should be institutionalized if you think that argument flies on this board. If blatant disingenuousness was a capital crime-you'd be swinging in the wind.

Noted: Lemming Can't Answer.. We aren't robots, there is no "the public good".
Putz

Difficulty Making Up Your Mind
or Schizoid tendencies? You wrote both below:

"Are we really against the children of the weatlhy developing a little character by reducing slightly their bequests, lowering taxes for the rest of us working folk?"

"And this isn't about building character: that's a job for parents. It's about raising money for public purposes. So, since this is true and as the essayist points out, unearned wealth creates perils, why is this tax particularly bad, rather than unusually good?"

Stuporbreather, meet James Madison
But he should tell the founders, such as James Madison that the phrase is meaningless:

Madison:
Complaints are everywhere heard from our most considerate and virtuous citizens, equally the friends of public and private faith, and of public and personal liberty, that our governments are too unstable, that the public good is disregarded in the conflicts of rival parties, and that measures are too often decided, not according to the rules of justice and the rights of the minor party, but by the superior force of an interested and overbearing majority.

This is about taxes:

No man is allowed to be a judge in his own cause, because his interest would certainly bias his judgment, and, not improbably, corrupt his integrity. With equal, nay with greater reason, a body of men are unfit to be both judges and parties at the same time; yet what are many of the most important acts of legislation, but so many judicial determinations, not indeed concerning the rights of single persons, but concerning the rights of large bodies of citizens? And what are the different classes of legislators but advocates and parties to the causes which they determine? Is a law proposed concerning private debts? It is a question to which the creditors are parties on one side and the debtors on the other. Justice ought to hold the balance between them. Yet the parties are, and must be, themselves the judges; and the most numerous party, or, in other words, the most powerful faction must be expected to prevail. Shall domestic manufactures be encouraged, and in what degree, by restrictions on foreign manufactures? are questions which would be differently decided by the landed and the manufacturing classes, and probably by neither with a sole regard to justice and the public good. The apportionment of taxes on the various descriptions of property is an act which seems to require the most exact impartiality; yet there is, perhaps, no legislative act in which greater opportunity and temptation are given to a predominant party to trample on the rules of justice. Every shilling with which they overburden the inferior number, is a shilling saved to their own pockets.

It is in vain to say that enlightened statesmen will be able to adjust these clashing interests, and render them all subservient to the public good. Enlightened statesmen will not always be at the helm. Nor, in many cases, can such an adjustment be made at all without taking into view indirect and remote considerations, which will rarely prevail over the immediate interest which one party may find in disregarding the rights of another or the good of the whole.

But what did those guys know, compared to a universal genius like the Stupe?

I was accepting what the essayist said for the sake or argument
If you thnk the essayist is wrong, argue with him, not me. My positing regarding the tax was "it isn't about bulding character, it's about raising money for public purposes."

And this is your decision why?
Why is this different from any other tax? Why is what you can leave to your family less subject to tax than what you can use to buy your family goods & services while you're alive? Why does it only become sacred when you die?

I love it when eric wants to take other people money away, for their benefit of course.
...

public purposes
in eric's mind, there will never be enough govt programs to support him.

Funny thing. In eric's mind being given money that you didn't earn is bad, when that money is coming from your parents. But it's good, when that money is coming from the govt.

Does the peril of unearned income also include money given to you by the govt?
Or does the taint of the unearned disappear when the money passes through the magic hands of govt?

what's funny is eric refering to himself as being "working folk"
...

eric disproves the claim that not having money builds character.
On the other hand, he is quite a character, even if he has none of his own.

because they earned it, and most of us don't believe that everything and everyone belongs to the gov
...

Nothing to say on topic, as usual
stop wasting everyone's time, Mark.

It is principle.
Again, to whom does the wealth belong?

You must believe all wealth belongs to the state and we serfs are just borrowing it?

You imply a death tax will protect those rich kids from all that unearned wealth so we MUST do it for the children?

Too bad the government didn't take all of Joe Kennedy's money when he died. His children didn't have to work very hard.

While it is tempting to confiscate all the wealth of everyone who dies to force their children to work for a living and prevent them from becoming career politicians, that damned prinicple of private property rights keeps getting in the way.


Just imagine the USA political landscape without Bush, Gore, Kennedy.

Yes!
The perfect response to the lemming's litany. Thank you. This is why you are known as MarkTheGreat.

Well, for one...
that wealth has already been taxed at least once.
For two... it just smacks of getting one last kick in the groin.
For three... there is no just reason.
For four... there are other legit mechanisms by which to voluntarily direct "excess" wealth to the needy.

nothing to say on topic, again
stop wasting everyone's time

Taking each in turn
from one to 6:

>1.) The Ultrawealthy routinely avoid the estate tax. Its simply a matter of knowing the secrets of the tax code. Its ineffective and inefficient.

Some do, many can't. That's an argument for tightening the code, not for doing away with the tax.

>2. It captures assets that are residuary of already taxed income. Its unfair.
It was taxed when the bequeather received it, but now it's moving into the hands of new recipients. That's income. That's taxable. Second, much of such bequests consistes of never-taxed capital gain.

>3. >e IRS actually announced it was going to cut loose estate tax specialists recently-so they can dig where there are taters.
This is truly pathetic. The estate tax auditors are the most purductive in the IRS. The cutback is a payoff to rich cat avoiders to make avoidingeasier.

>4.) Its not your money.
The same can be said about any tax. As for the character issue - that's what the essayist said, not me.

>5.) Given the above, it is nothing but a tool of the worst type of politician, the class warrior (with an iron clad estate plan) who peddles it to the eager throngs of the ignorant and envious.
empty rhetoric

>6 I wannnt it, I wannt it.. wahhhh, I want the government to take the other guy's money so I can feel good... wahhhh..
Totally empty rhetoric.

"The debate sometimes revolves around which estates are affected by current law. The effects of the law on small business owners and family-owned farms (entities which, conservatives argue, are hardest hit by the estate tax) was studied in an analysis undertaken by the Tax Policy Center. A study of the 18,800 taxable estates taxed in 2004 found 7,090 which had any farm or business income. Of those, there were 440 estates in which half or more of its assets were the value of farms and/or businesses. The effective tax rate on the 440 estates studied in detail never averaged more than 23%.


Nobody cares what you believe, Mark. You can't back up anything you say.
stop wasting everyone's time.

each in turn
regarding double taxation:

>that wealth has already been taxed at least once.
if it's stock or other instrucments that have appreciated, no it has not. It would be subject to capital gains if sold.

The rest of the reasons are just "I don't like it."

You're just making noise
stop wasting everyones time

Yes, it is principle.
I mean, what's special about an estate?

>Again, to whom does the wealth belong?
To whom does any revenue taxes belong? That's what taxes are.

>You imply a death tax will protect those rich kids from all that unearned wealth so we MUST do it for the children?

That was just what the author said. The estate tax doesn't take enough out of rich heirs ppckts to protect anyone inheriting from an estate big enough to owe estate taxes from being quite wealthy, with whatever effects.

>Too bad the government didn't take all of Joe Kennedy's money when he died. His children didn't have to work very hard.

Substitute George Bush. So what?

>While it is tempting to confiscate all the wealth of everyone who dies to force their children to work for a living and prevent them from becoming career politicians, that damned prinicple of private property rights keeps getting in the way.

Again: taxes always invovle money. Why are estates special?

>Just imagine the USA political landscape without Bush, Gore, Kennedy.
Sure. Democrats are the only party that have wealthy dynasties. Do you ever read what you write before you post it??

More noise
stop wastinging everyone's time.

Fine --
pass the stock certs. on through and let the heirs or benificiaries pay cap-gains when sold. Let them make the choice. You're focused on only the end and not the means. The money used to purchase the stock was taxed; any dividends earned on stock was taxed; net profits earned with money you invested is taxed. Money is never "not taxed". It is taxed at every transaction.

Now, how about all other forms of assets that would be subject to the death tax?

The author says nothing about taxes.
You are the one who suggests the solution is government confiscation of wealth.

Individual behavior...
We seem very focused on individual property with our social paradigm. When a talented individual builds an entity that creates wealth that company should continue growing when he steps away but it might be liquidated by his heirs. Into their own, individual portfolios.

If the entity is converted into a public company then it has a better chance of enduring. The heirs might simply sell their shares without breaking up the operation.

But I think the problem is more fundamental. As I create my business I should not owe the wealth I am accumulating to my children. In fact, our girls are passive investors in this operation. They do not work for us. They pursue their own, unrelated interests. They assume they will be well provided for without any skin in the game.

The people who really depend on me work for us. Most of them have thrown in fully and their daily livelihoods are in my hands. Their children rely on me far more than my own kids do.

The "single family household" is an artificial construct of the sovereign in our society. This makes civilian workers easier to manage. However, in our natural, biological tribes the effective families were much larger.

Furthermore, a company is people. People constitute the operation and take ownership of the process that creates wealth. People are not human resources in our business. They are partners with us. They are partners with each other. The company is an economic tribe if not a residential entity.

Our people work together as capitalists. We create wealth by doing business in the global economy. The fact that one of us (my wife) is the Big Boss does not in any way diminish the nature of this partnership. She is the Partner in Charge.

After I am no longer able to work with my partners this business will continue to thrive and to grow if I have done a good job enabling the culture of decision making. Most of my guys do their jobs much better than I ever could. And I have every confidence that many of them will be far better leaders than I am. It is my job to build this vehicle. Twenty years from now someone else must drive it.

Warren Buffett worked very hard his whole life long and in the end he is giving away his $30 billion to charity. That money is, indeed, his to spend. But this is ridiculously more than any one man could ever actually consume. So what is the point of so much individual wealth if it is not going to remain engaged as working capital? The model is flawed. The obvious symptom is that we are willing to pay $100 million to a CEO.

$30 billion could have underwritten an immense operation that might have continued to create great wealth while solving social problems if that was what Warren Buffett intended. However, he summarily gave those funds away as charity. Well, there are 6 billion of us. So that is $5 each. And then it will be gone.

Actually the government does own everything...
And the politicians will take away as much as they want. If we let them. And they will redistribute our money mostly into their own paychecks or to perpetuate their own interests.

It is important to have a strong central government if they are going to fight a war for us that we might actually lose.

Otherwise, this is rather like having a vicious dog in the yard. He should keep the neighbors away. But if there is nothing better to do then he might just maul the kids.

Fixing what's not broken
The estate tax only applied to big inheritances, and the minimum size has been adjusted upward. Worst case, people have to liquidate some assetst. Why is this so tragic? Why the stretching and bending over backwards to make sure that Paris Hilton get's a bigger payoff?

Not everything, according to self-made millionaire Ben Franklin. However...
"All the property that is necessary to a man for the conservation of the individual and the propagation of the species is his natural right, which none can justly deprive him of: But all property superfluous to such purposes is the property of the public, who by their laws have created it, and who may therefore by other laws dispose of it, whenever the welfare of the public shall demand such disposition. He that does not like civil society on these terms, let him retire and live among savages."

Solution??? Where did I say the estate tax was the "solution" for the author's issue
If I had advocated the tax as a solution, I'd have said raise it to 90 percent or more. I didn't and don't. all I did was to note that as taxes go, the authors observation offered additional support for those who think it's hardly the worst or most unfair tax in the world.

That is not what you said or meant.
"Name: Lemuel
Subject: So what's the argument against the estate tax again?
Date/Time: 29 Mar 2007, 8:47 AM

Are we really against the children of the weatlhy developing a little character by reducing slightly their bequests, lowering taxes for the rest of us working folk?"

What I wrote speaks for itself
What's do you find objectionable in the (obviously ironic) sentence you quoted, which took off from the essay and put it into the context of the estate tax?

Was the phrase "reducing slightly" difficult to understand? how about "a little character?"

Ever hear of Howard Hughes Medical Institute?
What is great about the USA is that smart wealthy people can use their money to build institutions that will benefit people forever.

How many universities are endowed by dead rich people?

How many chuches?

How many libraries?

How many museums?

Would Carnegie Hall have been built if all his moeny went to the government?

How about Ford's?

Again, it is their money to spend as they wish.

Maybe they should follow the Viking example and be burned with all of their money.

To save the rich children from themselves, increase the estate taxes?
The reason to oppose this is the same reason to oppose ANY death tax.

Thanks for expressing your opinion
Sorry you can't coherently back up your opinoin.

Notice that was a question.
I was repeating what you implied.

Why do you care what Paris Hilton inherits?
Don't patronize Hilton hotels if you care so much.

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