
Buffett: Wealth, Estate Taxes, and the Ovarian Lottery - wheels
http://www.mymoneyblog.com/archives/2009/06/buffett-wealth-estate-taxes-and-the-ovarian-lottery.html
======
Dove
Sure, a large inheritance is undeserved. But when you get right down to it,
everything you have and everything you are is undeserved. You can't choose
your parents, you can't choose your DNA. You can't choose the country you're
born in, the ideology you're raised with, the opportunities you'll have, the
events in your life that shape your psyche, the friends and enemies that
taught you who to be.

Even when you make decisions, take action, seize opportunities, the grit and
courage and insight and endurance that enables you to do so originally came
from somewhere else. Someone taught you that. Something made you that way.

I am the sum of the curses and blessings and happenstances of history. You
cannot factor them out of my identity. There would be nothing left. Asking who
I would be had I been born in Bangledesh is like asking what a square would be
if it had been a circle. The question is wrong-headed. I would be someone
else.

And asking whether the son of Sam Walton deserves wealth is like asking
whether Audrey Hepburn deserves to be beautiful. It's the wrong question.
Gifts--from parents or forefathers or strangers or the universe--are never a
matter of deserving. They are not to be worked for or worked off. They are to
be embraced with gratitude, and cherished with an earnest effort to make the
most of them.

The idea that gifts should be received with guilt, that jealousy on the part
of those who don't receive them justfies taxing or destroying them to make
things a little more fair, is the attitude I find repugnant.

Perhaps Albert Einstein does not deserve to be so intellectually creative, but
that does not mean half of his intellectual energies belong to the state.
Perhaps you or I do not think the son of Sam Walton deserves wealth. It is
irrelevant; it only matters that Sam thinks he does. What he does with the
wealth is his responsibility, as what you do with your gifts is yours. The
fact that these things are _gifts_ does not in any way change the fact that
they are _ours_.

~~~
wheels
Everything you say is correct, but I believe it misses the point. This isn't
about what's deserved, it's proactive: it's about things that Buffet thinks
are good actions to take for a better running society. It's split into two
parts: build up some barriers to the establishment of an entrenched American
aristocracy and try to increase the opportunities for those who weren't graced
by as fortunate of a birth.

~~~
auston
dude I just upvoted you& it's not counting it!

------
chasingsparks
I don't have kids, but I am reasonably sure that when I do, I might choose to
work harder than otherwise in hopes of providing a better life for them. That
includes leaving them money after I die. I might be gone, but the money is a
product of my labors. It was still mine to spend.

Furthermore, I have never found Buffet's malinvestment in lucky scions
argument convincing. Yes, they were born lucky, but you shouldn't handicap
them for that reason. Morover, clearly some very wealthy people do chose to
give most of their money away as opposed to giving it all to their heirs.
Buffet and Gates have both pledged to do so with most of their money.

Merging the two ideas: if the government is collecting assets to prevent
malinvestment in unworthy heirs after the proven patriarch dies, why shouldn't
the government chose to confiscate the wealth of those who they deem to be
making bad investments while they are alive?

~~~
v3rt
The purpose of the estate tax is not so much to ensure that the capital being
taxed is put to better use (which I'm not sure would be the case on average;
the government would surely be a better entity to entrust with the money than
a profligate son, but those are not the norm from what I can tell, and wiser
offspring could be better investors than Uncle Sam), as to ensure the
continuation of the meritocracy in our society. By their inherited wealth,
scions of prominent families can exercise significant power over the rest of
the nation, and this power will tend to be exercised to the detriment of
meritocracy, since a system that rewards talent and energy runs exactly
contrary to the interests of the inherited-wealth class. (Humans care about
_relative_ wealth and power socially, even though absolute wealth production
is not a zero-sum game)

However, it is true that being able to pass on wealth to one's children can be
an incentive to produce more, so _that_ on the other hand points to the
benefit of a lower estate tax.

So, I think the best compromise is somewhere between the pro-meritocracy 100%
tax and the pro-short-term-productivity 0% tax; that way there is still a
significant incentive to earn for one's offspring, but if 1/x of the money is
taxed away in each generation (and the important thing is not where it goes,
but that it is taken out of the hands of the rich family), there is an
exponential-decay curve for the wealth and power of the family. However, it's
important that the tax is high enough to counteract the interest gains that
even uninspired investing can bring. I won't venture to propose a sweet spot,
but I think that approach should provide the most balance and social benefit
overall.

~~~
chasingsparks
I think wealth decays naturally anyway; especially if the descendent are not
fit. Inflation and the exponential growth of offspring are already pretty good
tools of attenuating growth. Moreover, it is easier to lose a fortune than to
make one.

However, I do agree with you that it might be a robust guard against the
inherited wealth class gaming the system. I would prefer to intervene when
such injustice is committed, but admit that that is not always easy to do. The
argument you use for curtailing that risk is similar to the argument I would
make in favor of term-limits.

~~~
fnid
You would be surprised how hard it would be to lose billions of dollars. That
kind of wealth is usually locked up pretty tight such that access is only
available to some trickle of dollars coming out of the interest, trust funds,
etc...

If a trustee loses everything then the next year, they have access to another
annuity distribution.

~~~
chasingsparks
Which is to say, they are well diversified. With increasing diversity and
massive assets it becomes more and more difficult it to earn exceptional
rewards. Does most paths of asset returns exceed inflation and familial
growth?

This is actually an interesting experiment. I'll run a crude test this weekend
bootstrapping against the S&P500 to see how likely it is for wealth to
propagate X generations into the future and report on Monday.

~~~
fnid
That is interesting. Warren has a bet out against someone that a portfolio of
hedge funds will not outperform the total market returns after accounting for
taxes, management fees, etc.

as diversity approaches 100%, performance approaches market returns.

The question is, how long can extreme wealth remain extreme wealth?
Considering the wealth gap is increasing, I would suggest forever unless there
is a "market correction" like socialism or something.

~~~
chasingsparks
If that was the case, you would expect there to be a few hundred-billionaires
out there.

~~~
Retric
There are a few hundred billionaires out there. 5 billion barely get's you
into the top 100.

~~~
chasingsparks
Hundred-billionaire as in an individual with greater than 100 billion; not a
few hundred people with greater than 1 billion.

------
apsec112
How in Cthulhu's name does this not mention that Warren Buffett's father was a
Congressman, Howard Buffett of Nebraska
(<http://en.wikipedia.org/wiki/Howard_Buffett>)? Probably, I think, because it
would sound bad. It sounds modest to say "I didn't get here entirely by my own
efforts; I was lucky to have been born in the US, instead of Bangladesh." It
doesn't sound modest to say "I didn't get here entirely by my own efforts; my
father was a Congressman who had a strong personal friendship with Murray
Rothbard, one of the most famous economists in history."

~~~
byrneseyeview
Buffett didn't get any benefit from knowing Rothbard. But yes, his family's
influence probably helped him out, as he has repeatedly acknowledged.

~~~
apsec112
He didn't? I'm highly skeptical of that. Buffett's business strategy and
general beliefs are largely based on Austrian economics.

~~~
byrneseyeview
He owns lots of maturity-mismatched assets. He hasn't done much with gold.
He's bought into lots of highly regulated companies. And he advocates
punitively high income taxes on some activities, and high income taxes on most
other activities.

So no, I don't think Buffett is a Rothbardian. He's similar only in the sense
that he understands economics very well.

------
rgrieselhuber
One of the commenters on this post made the salient point that the existence
of the estate tax is probably one of the biggest drivers for the life
insurance industry.

~~~
mattmaroon
Every tragedy benefits someone. Right now the makers of Purell and other
instant hand sanitizers are having banner years due to swine flu. That isn't
an argument in favor of epidemics. Oil companies made a fortune due to
increased demand when people started flying less after 9/11. That isn't an
argument in favor of terrorism.

~~~
netcan
I think the point is more then this. It brings up a question: can you really
stop people from leaving wealth to their children in some way? How many loose
ends will you need to chase down. Inheritance is intertwined with property &
ownership.

Life insurance is one way around estate taxes. I'm sure there are others.

------
lionhearted
> The odds were fifty-to-one against me born in the United States in 1930. I
> won the lottery the day I emerged from the womb by being in the United
> States instead of in some other country where my chances would have been way
> different.

This isn't true - the odds of Warren Buffet being born in America, given that
his parents were American and had him, were 100%. There's no random chance
associated with where you're born - it was the result of what your parents and
their parents did. They worked hard to get over to the States, or wherever
else, and to make a good life for their kids.

Actually, that whole viewpoint that's come into fashion these days worries me
a little. Before, one of the biggest ethics to live for was "making life
better for your children" - you'd work hard, and sacrifice, knowing your kids
would have a better life than you did. It's what my Great-Grandparents did,
what my Grandparents did, what my Parents did. All came up poor, I came up
lower middle class, my kids will probably come up reasonably wealthy.

But nowadays, a lot of people write that off as the "birth lottery", or luck,
or chance, and think that happiness in your own life, right now, is the
highest virtue. They even _almost_ look at it as a bad thing for parents to
work very hard for their kids specifically to have the best life they could,
calling it things like a birth lottery or random chance. There's nothing
random about why I was born in the States, or why my kids will be - it was a
direct result of five or six generations of slogging towards a better life
from miserable conditions elsewhere.

~~~
Retric
Ignoring the argument is silly, you don't chose your parents. So, you don't
chose the single largest impact on your success but, that's not the issue. The
question is "Do we want a society primarily controlled by those who inherited
money?" The reason we had huge numbers of smart people become investment
bankers was the fact that conning stupid wealthy people is profitable. But,
it's also a zero sum game that does little to help society at large. It's far
better for society when the most efficient method for gathering wealth is
generating it.

~~~
lionhearted
> The question is "Do we want a society primarily controlled by those who
> inherited money?"

There's a Dutch expression, "Clogs to clogs in three generations." It means
the first generation, who wears clogs (regular people's shoes), they work hard
and make money, they know struggle, they're frugal.

The second generation doesn't know about making money and struggling, but
their parents explain what it was like and teach the kids how to manage money
and keep the fortune alive.

The third generation doesn't learn these things from their parents, because
their parents don't really know either, and the third generation wastes the
money and winds up back in clogs - regular people's shoes.

So - will society be controlled by people who inherit money? Not unless
there's government backed heredity privilege, like European nobility, the
Japanese samurai system, or the Indian caste system. If not, things balance
out over time. How many of the astoundingly wealthy families from 1850 are
controlling society now without having added anything? Not many.

> The reason we had huge numbers of smart people become investment bankers was
> the fact that conning stupid wealthy people is profitable.

I would rebut this, but I don't think it's a well thought out view. Some
investment bankers moved money around without doing anything of value. Many
did incredibly valuable things. They built and developed real estate, ports,
railroads - heck, I know a guy who put the money together for researching
technology for non-government spaceflight. Pretty cool stuff.

> But, it's also a zero sum game that does little to help society at large.

First, I think it's very easy for someone not inside an industry to claim that
their work is useless/easy/unimportant while maybe missing the intricacies in
it. Second, I'm not sure what this has to do with my comment, which is that I
think the mental concept of "birth lottery" and de-emphasis on family is a
scary thing. It seems to say that people should support and even things out
for everyone irrespective of what their parents do, while parents working hard
to give their children a better life is a huge motivator and has been for
almost all time, much more so than improving the common good. If you look at
history, for instance, whenever farming was nationalized under a war economy
or communism, output fell. People working to feed the nation work less hard
than people working for themselves and their children. This has been borne out
in many different places, throughout ancient and recent history.

> It's far better for society when the most efficient method for gathering
> wealth is generating it.

Agreed. Getting back to your original point, I'm not ignoring the "birth
lottery" argument - I think it's flawed, and I'm addressing that flaw. The
question isn't about who gets to control society, it's about what is the
fundamental unit of society? Is it the individual? The family? The community?
The nation? The whole planet? The prevailing Western view seems to be focusing
on things on a national level. I don't think that's a good thing. I think a
mix of individual choice, strong family support structures, and entire planet
development is the answer. I think, arguably, the nation is one of the worst
places to work on developing humanity.

That's my opinion based on my reading and research into behavior and history,
but it seems like societies that empower individuals do well, it seems like
societies that promote family do well, and it seems like societies that
promote the whole planet do well. It seems where things are controlled by the
nation more than by the individual, family, and whole planet do more poorly.

I'm not worried about inherited money controlling the planet, because it
really only has a heavy influence in the next generation, many of whom do
great things and make their own contributions. After that, without
contributions it burns itself out. I am worried about national level
empowerment, because it grows on itself and doesn't burn out unless it
collapses in a bad way.

This is my opinion based on my readings and research, and I'd be happy to hear
others' opinions who agree or disagree.

~~~
spc476
I've heard that saying as well (only it was "Rags to Riches in three
generations, rags to rags in four"), but as far as I can tell, the
Rockefellers are still around, still rich, and are at the sixth generation (
<http://en.wikipedia.org/wiki/Rockefeller_family> \---the legacy section of
that page makes for interesting reading). The Kennedy's are still around,
still rich and are in the fourth generation (
<http://en.wikipedia.org/wiki/Kennedy_family> ). History has yet to see what
happens to the Bush family ( <http://en.wikipedia.org/wiki/Bush_family> ),
currently on the fourth generation.

The Hilton family ( <http://en.wikipedia.org/wiki/Hilton_family> ) on the
other hand, might fall into your theory.

~~~
Retric
I think what grandchildren are going to do with money is somewhat random.

My grandfather understood building wealth through investments as do I.
However, my mother and older sisters don't. A friend of mine's grandmother had
real wealth, as in her home was featured in home and gardens etc. He had a
multimillion dollar trust fund and burned out on drugs until he died after his
fourth or fifth motorcycle accident.

I know many young people with enough money to never work again and mostly they
are fine. But, it's the people with handed great wealth that seem to be
hardiest hit by it.

------
flipbrad
I find it interesting that (at least in the given extract) Buffett only
highlights one of the two sources of unfair advantage (unfair starting
conditions, but not unfair monopolies) that help people get exponentially rich
with a non-corresponding increase - or even status quo - in the level of
effort, quality of work, irreplaceability or risk to quality of life.

\--

Banded tax - versus flat rate - is not fair. But neither will your fourth
million dollars be.

From society's point of view, until we have more rationality and ideality of
labour-reward on the income side, I don't think fairness arguments can really
be mounted to the abolishment of taxes that make it unfairly expensive to be
rich.

\--

That said, with regards to inheritance tax, I have always really struggled to
find any theoretical solution to the inconsistency I perceive in the system -
children will always have unequal starts in life related to the efforts and
success of their parents; be that in somewhat intangible notions like forming
a great network of contacts, or right down to trying extra hard to woo a
mother/father that will give the kids a great genotype. Why start - or stop -
at money? Has political, social or economic science ever sought to justify
that?

~~~
mynameishere
_Why start - or stop - at money?_

Not sure what you're getting at, but going all the way back to Plato's
Republic, there have been proposals to engineer society with children. More
recently,

 _Children's Societies were one of the features of kibbutz life that most
interested outsiders. In the heyday of Children's Societies, parents would
only spend two hours a day, typically in the afternoon, with their children.
In Kibbutz Artzi parents were explicitly forbidden to put their children to
bed at night. As children got older, parents could go for days on end without
seeing their offspring, other than through chance encounters somewhere in the
grounds._

<http://en.wikipedia.org/wiki/Kibbutz>

It doesn't work, of course. Nature will out.

------
teyc
My question is whether society is better served by

1) the destruction of excess money 2) preservation of meritocracy

and furthermore, whether interests of children of wealthy parents are better
served through

1) leaving them oodles money 2) leaving them a society where a) things are
affordable because there's less money chasing goods b) meritocracy reigns c)
not to peg one's identity to money alone

In the small, accumulation of money is a fine thing. In the large, you have
corporations whom - in the name of profit - bribe, cajole governments and
government agencies, that result in sending people to war, poisoning your
food, and endorsing medicines that do not work. Setting a limit to the
accumulation of a mere number means that humans can turn their attention
towards other activities that are beneficial to society as a whole.

~~~
eugenejen
Money and wealth are different.

Regarding your point (a):

Things can become more affordable by innovations in technology, production and
distribution. Services may not become more affordable because service is
provided by human being. And by definition, the above average service always
costs more than average.

I don't think in the name of profit is the cause to the problem. Lacking of
political power to punish corporation corruptions and being oblivious of
public wellness are the root cause.

------
michaelkeenan
It is unfair that your country of birth is arbitrary. Surely the appropriate
policy to ameliorate that is to relax immigration barriers? That seems more
relevant to the problem than estate taxes.

------
jackfoxy
Another rich guy telling those not as lucky as him how lucky we are. Oh, and
btw, pay your taxes.

~~~
mattmaroon
That's dismissive of his very valid points. Buffet is one of the most selfless
rich guys of all time. Also one of the most infamously direct and honest. He's
not saying that as part of some sort of Orwellian consipiracy to quell the
masses. He's saying that because its true.

He points out regularly injustices such as the fact that his secretary pays a
higher tax rate than he does, thanks to the ridiculous capital gains laws in
this country. He points out regularly that people like him should have to pay
higher taxes, including the estate tax. He lives less lavishly than most
people who have .1% of his wealth.

He's already given most of his fortune (the largest single donation ever) to
charity and will give the rest when he goes. He's a real-life Robinhood.

~~~
byrneseyeview
_He points out regularly injustices such as the fact that his secretary pays a
higher tax rate than he does, thanks to the ridiculous capital gains laws in
this country._

Corporate tax rates plus capital gains tax rates exceed normal income tax
rates. The only way you can claim that he pays less in taxes on selling stock
is if you assume that the company's profits -- the sum of which, discounted to
the present, is the value of the stock -- somehow don't affect the value of
the stock.

If we cut capital gains taxes to zero and added an equivalent amount to
corporate profits (say, a 40% annual tax rate instead of 35%), the government
would make an equivalent amount of money from the same economic activity, and
Buffett's theoretical tax rate would go down. Similarly, if corporate income
taxes were zero and his capital gains were taxed at 40%, he'd pay much more
than his secretary, but the government would collect the same amount.

If the strength of his argument is independent of the magnitude of the problem
he's arguing against, there is a flaw there.

Buffett is an admirable guy. But the line about his secretary is a rhetorical
flourish, nothing more.

~~~
mattmaroon
They're his words (paraphrased) not mine, and it is impossible Buffet is
unaware of corporate tax. My guess is its more than rhetorical flourish too
since he's not known for that.

Your making the argument that corporate taxes reduce his personal income, and
therefore should count as his taxes. Ok. But if corporations did not have to
pay taxes, they would pay their employees more, including secretaries. It's
impossible to say for sure that a 35% corporate tax rate reduces secretary
salaries by 35%, but it is something highly significant.

In a roundabout way the secretary is paying that corporate tax too. Its effect
is not as directly measurable on her as it is on Buffet, and might not be 1
for 1, but it's undeniably there and equally applicable to her tax rate.

Also Social Security reduces her pay by 12.4% (half of which is paid by her
employer but again would likely go to her if not). Since its capped at $100k
income, it rounds to 0% of Buffet's yearly earnings.

*I should point out that I am aware I've grossly oversimplified the effect of the corporate tax on the secretary, I trust but you get the point.

~~~
yummyfajitas
The corporate tax rate is only paid on profits.

Profits and pay for workers are in competition. So raising the cost of profits
actually increases the incentive to pay workers more. This is why many actual
nonprofits are poorly managed; they are funneling profits to workers rather
than to shareholders.

~~~
byrneseyeview
_Profits and pay for workers are in competition. So raising the cost of
profits actually increases the incentive to pay workers more._

That is not how it works. When car companies start losing money, they don't
give people raises; they fire them. When Goldman has a great quarter, they
don't cut people's pay -- they give them bonuses.

Nonprofits are managed because they exist to spend money, not to spend it
well.

~~~
yummyfajitas
You are missing the point. A company has money after expenses (I'll abbreviate
it MAE) which must be distributed. (Or in the case of GM, they have negative
money after expenses.) You are discussing the behavior of companies in
response to changes in MAE.

I'm discussing how a fixed amount of MAE is distributed in response to changes
in incentives. Each dollar of MAE can be given either to shareholders, to
employees, or can be invested. If you raise the cost of distributing money to
shareholders (this is what the corporate tax does), companies will divert
money to employees and investments. I.e., no one will pay dividends if there
is a 100% dividend tax.

~~~
kingnothing
I think you're mistaken in thinking that money will be distributed to the
average worker in this scenario. It would all be paid out to the same
shareholders as a salary instead of capital gains. The regular employees
wouldn't see an extra dime.

------
nivi
Hey babycakes, consider adding "via @venturehacks" when you post our tweets.

I'm assuming you got it from us. Because we linked to it. And no one else on
the web links to things.

