Mankiw, Piketty, and Wealth Taxes

June 23rd, 2014 at 10:09 am

While he acknowledges its diminishingly small probability of occurring, Thomas Piketty’s idea for a global wealth tax falls neatly out of his model wherein wealth accumulation amidst slow growth relentlessly leads to higher inequality.

Some have raised objections to the underlying model—it assumes, for example, that the wealthy save rather than spend much of their wealth—but in a piece in yesterday’s NYT, economist Greg Mankiw speaks in defense of allowing the wealthy to keep their wealth in the interest of the greater good.

With respect—I’ve found myself on a couple of panels with Greg recently and enjoyed mixing it up with him—I didn’t think he made much of a case.  Some of his points—rich people care about their kids, people need to save to smooth consumption over tough times—are truisms that are not at all inconsistent with a wealth tax.  For one, and I’ll get back to this in a moment, no one, including Piketty, is talking about a confiscatory tax on inheritances.  Second, remember that Greg’s self-proclaimed topic is the well-being of the nation, not an individual rich household.  It is easily arguable that the nation’s children and its families’ ability to consume in tough times can be improved, not diminished, by a progressive inheritance tax.

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%.

The increased power and influence of the wealthy in politics have significantly weakened the estate tax in recent years.  The Bush tax cuts in the early 2000s scheduled the expiration of the tax in 2010, but the fiscal cliff deal at the end of 2012 reinstated a weaker version of the tax, leading to a 10 year revenue loss of $370 billion compared to the pre-Bush parameters.

What about Greg’s argument that taxing wealth will rob the economy of savings that can be channeled into investments?  That’s actually warmed over supply-side doctrine: give the rich a tax break and we’ll increase the amount of loanable funds, reducing interest rates, and boosting growth such that it will trickle down to all.  Revealingly, Greg makes this argument through the productivity growth channel, evincing a lack of awareness that even if you believe his chain of events re savings, investment, and productivity, wages and productivity have gone their separate ways in recent decades.

Moreover, as CBPP reports:

A Congressional Research Service report found that the estate tax’s net impact on private saving is unclear — it causes some people to save more and others to save less — and that its overall impact on national saving, a critical determinant of the amount of capital available for private investment, is likely negative.  “[I]f the only objective [of eliminating the estate tax] were increased savings,” the report concluded, “it would probably be more effective to simply keep the estate and gift tax and use the proceeds to reduce the national debt.”

In an era where spending cuts are most deeply threatening the part of the budget that supports the least well-off, and evermore accumulated wealth has increasing political influence, a moderate increase in the estate tax, as proposed in the President’s Budget, is thus smart policy both in fairness and fiscal terms.  And that’s true regardless of whether r > g.

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16 comments in reply to "Mankiw, Piketty, and Wealth Taxes"

  1. Peter K. says:

    “That’s actually warmed over supply-side doctrine: give the rich a tax break and we’ll increase the amount of loanable funds, reducing interest rates, and boosting growth such that it will trickle down to all.”

    What has happened is that they use the extra money to lobby on behalf of their particular interests. They use the money to set up political institutions and think tanks. This distorts public policy as their money carries more weight than the average citizen’s opinion or vote. And as we have seen, politics has moved to the right in the economics sphere in recent decades (see the lowering of the effective estate tax). Inequality has increased. Labor hasn’t shared in productivity gains.


    • markg8 says:

      Distorting the political process is not the only way they use their accumulated wealth to everybody else’s detriment. Speculation by the wealthy in commodities drives up the price of food and fuel we all need and hamstrings economic growth. It’s way past time to tax the idle rich to not only bring down the debt and pay for needed government programs but to keep them from skimming profits from the rest of us for the basics we have to buy to survive.


  2. Mark Jamison says:

    You are being far too kind to Dr. Mankiw. As someone who has been recognized as an accomplished economist in the past, Mankiw seems to have committed the greatest of academic sins, trading any semblance of intellectual honesty for pure advocacy.
    His latest efforts strain credulity and are little more than apologies for the wealthy.


    • Larry Signor says:

      You are quite right about Mankiw. It was an insufferable, poorly reasoned diatribe of the equality cohort. Today’s poor people used to save when we were middle class. What is his point?


  3. save_the_rustbelt says:

    Some other thoughts:

    1. the estate tax is a welfare plan for lawyers and life insurance companies, two groups with very powerful lobbies
    2. the estate tax is an affront to personal liberty and private property
    3. the resources needed in Treasury could reap more revenue enforcing the income tax (personal and corporate)
    4. this is an envy tax
    5. the really smart people (like the Kennedy’s and Clinton’s) evade most of it anyway

    One provision we do need, heirs receiving public stock with market value higher than basis should pay on the gains calculated on the date of death, with a new basis.


    • jonas says:

      To each point:

      1: Absent an explanation, this is meaningless.

      2. Who cares? It’s well-established that people who focus on “liberty” and “property” are only referring to their own anyway.

      3. [This assertion seems to be missing a word or two.]

      4. More emptiness (see #2).

      5. You just couldn’t avoid reminding us that there are rich Democrats, too. Are we to assume from your careful selection that you think that all Republicans are either poor or stupid?


    • SN says:

      In the absence of estate and inheritance taxes, wealth tends to accumulate in the hands of the already wealthy who in turn pass it on to their children for reasons of simple nepotism. This is the opposite of the meritocracy liberty lovers like yourself profess allegiance to. Face it. Markets and meritocracy are antithetical too each other. Only via the state (gasp), the public sector (gasp gasp) and robustly graduated taxes on estates, inheritance, capital gains and income (choke and gasp), can the basis for real competition and meritocracy be created.


      • Marvin McConoughey says:

        Markets and meritocracy are complementary, not antagonistic. The appalling quality of consumer produces manufactured in totalitarian regimes are suggestive of that. As a market economy participant, I can “fire” nearly any producer or service provider I choose, with the exception of the non-market governmental sector. Contrast that with our public education sector with its excessive teacher protection, persistent student grade inflation, and ongoing teacher opposition to accountability practices that have bite and substance.


        • cesium62 says:

          Hmmm… I can fire AT&T or Comcast… decisions, decisions… Which do I hate more…

          I can’t fire PG&E… but then, I don’t really want to either.


  4. Smith says:

    1. There is an enormous difference between estate taxes and wealth taxes.
    2. Averaging effective rates for most people hides the huge impact estate taxes has.
    3. Estate taxes are supposed to be partly confiscatory.
    4. The 1% and .1% who control so much wealth are well aware of the importance of estate taxes and wealth taxes.
    5. We have a very significant wealth taxes (property taxes) already which is very regressive.

    I’ll elaborate further, numbered as above for brevity, but these things should be obvious.

    1. Estate tax is generational and seeks to ensure equal opportunity and prevent concentration of power. Wealth tax is another tool, like the income tax and unlike estate tax, incrementally used to redress existing imbalance without waiting a generation.
    2. The exempt values on estate taxes are too high, a result of the 1% buying off the top 5%. But on a billion dollar estate, where the tax is most important in preventing kings and nobles, they still mean nothing.
    3. The point of estate taxes is that they are supposed to be confiscatory, hence 40% rate, especially for billionaires, again preventing kings and nobles (same as marginal income rates need to be 90% above $2 million)
    4. The mere fact that so many changes were made to lower estate taxes in the 21st century (and dismiss notions of wealth taxes) shows how important they are to the rich.
    5. We have a substantial wealth tax already (property taxes), but it is regressive for the middle class, and it’s used to fund education locally, creating further imbalance.

    These points should be merely the starting points for discussion. Also Piketty (and others) say top rates on income, 80% on $1 million, should be so confiscatory that they fail to collect anywhere near the revenue expected if incomes didn’t fall. That’s the point.


    • Ted Shepherd says:

      As you said, “We have a substantial wealth tax already”; in addition to property taxes, inflation assaults wealth. Inflation works to reduce the value of all our holdings, including assets in tax-deferred accounts like IRAs.


      • jonas says:

        You are right if it is unanticipated inflation that you mean. Anticipated inflation is, as they say, priced in. That is to say, the real, inflation-adjusted return should be constant for all low levels of inflation, as we’ve had for thirty years.


      • cesium62 says:

        Funny… my main source of wealth, my house, has a value that increases right along with inflation. Stocks? Oh, they increase in value along with inflation. Commodities? Oh, those too. Bonds? Hmmm, I can buy inflation protected bonds, or I can price expected inflation into the bonds.

        So, yeah, you’re absolutely right if I’m holding all of my holdings in cash.


  5. Spencer says:

    I see no one making the argument that an inheritance tax is less distortionary than an income tax.

    I would argue strongly that we would be better off if we raise inheritance taxes and used the new revenue to lower income taxes.


  6. Matthew says:

    Mankiw’s essay presumes that any intervention necessarily reduces the capital stock. That’s not true: http://www.separatinghyperplanes.com/2014/04/be-careful-how-you-wield-chamley-judd.html Published research has already shown how we can devise a progressive capital tax that redistributes from wealthy dynasties to poor ones without inherently reducing the capital stock or harming workers.


  7. Tom Cantlon says:

    “…fewer than 2 of every 1,000 estates…”. Or to put it another way, the estate tax is so generous with exemptions that not only are the 99% exempt, even most of the top 1% are exempt. It’s only the top fifth of the top 1% who pay anything. And then they typically pay a rate of 16%.


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