Although capitalist are frequently depicted as ruthless profit seeking individuals, it is nevertheless true that most philanthropists are businessmen. That is, they may be unforgiven when making money but generous when bequeathing it. How can we explain this apparent paradox? It is a matter of self-interest, the result of guilt, vanity or is it the result of institutional constraints? I shall explore these issues with special reference to the USA where philanthropy is more widespread.
According to the Giving USA Foundation, Americans gave $358.38 billion in 2014, a 7.1% increase from 2013. Of these, corporate giving amounted to $17.77 billion (a 13.7% increase from 2013). The total given was equivalent to 2.1% of gross domestic product in 2014, of which about half goes to religious and educational projects. It largely exceeds the $148.18 billion contributed by the US as international net official development assistance in 2013.
These figures suggest that, when encouraged, the private sector is capable of contributing substantial amounts of money for redistribution on a non-profit basis. Whether, it is also more efficient on its allocation and use than the government it is an open question. Common sense dictates that each sector has its own comparative advantages in relation to specific groups of beneficiaries, and therefore the state and private roles should be complementary rather than competitive.
Another important issue is whether capitalists should be free to bestow their giving to whom they wish. Each individual has its own set of priorities and should be free to select them. Regardless of what each individual thinks, we cannot say that Bill Gates is more philanthropic than Rockefeller was simply because the first gave money to fight malaria in Africa while the second gave a villa in lake Cuomo to be used as a retreat by academics.
Obviously, the state should not follow the wish of individual politicians without bearing in mind the priorities of society as whole expressed by free voting. Moreover, the state priorities should not be imposed on private donors. All that authorities should do is to encourage through co-financing or tax breaks the allocation of private donations to certain objectives.
A more controversial issue is whether the donors generosity should be left to each individual or if a minimum rate should be applied. For instance, if at the time of death they should be subject to an inheritance tax on all wealth not bequeathed to charities. In chapter 13 we explain why inheritance taxes provide a powerful restraint on wealth concentration required to preserve market capitalism. However, this only applies to large fortunes. All the others should be left to be masters of their own generosity.
Indeed, although there are some scrooges among capitalists, it is important to notice that most of them are only greedy when making money and not when giving it away. So, in general, philanthropy not only supports capitalism but it also complements it by supporting those that by misfortune or careless were left out by the wealth produced under capitalism. This said, philanthropy should be an individual decision, not something that should be practiced by corporations, for the reasons I gave in another post.
Showing posts with label inheritance taxes. Show all posts
Showing posts with label inheritance taxes. Show all posts
Thursday, 26 November 2015
Friday, 30 May 2014
Piketty, the 0.1% debate and the backdoor return of class warfare
Recently economists got very excited by a book on wealth inequality (Piketty, 2014), which reminded me of how economics is still mostly an ideological debate and how far it is from being the queen of social sciences.
We see again the old left wing anti-capitalism rhetoric and its denial by the traditional adulation of the rich by the usual ass-kissing right wing. Economics can claim to be the science of many things, but apparently it is unable to be a science of common sense.
If economists relied more on common sense, they would immediately realize that the rise in inequality is hardly news. There has been plenty of studies showing that. Meanwhile, the focus on the share of the top 0.1%, apart from creating an “identifiable” common enemy, tried to create a stereotype equivalent to the XIX century top hat capitalist depicted by Marxists.
Remember that the later began by focusing on the 1%, but probably this group was too large to provide the necessary stereotype. Note also that the debate relies largely on the Gini coefficient and ignored the different weightings that society may put on inter-group income transfers using the metric suggested long ago by Atkinson.
Yet the greatest failure is on understanding why inequality is rising, and the reason may be quite plainly related to the failure to correct a well-known feature of capitalism.
Capitalism is the most efficient economic system ever devised by humankind that replaced a largely hereditary class system (nobility, clergy and serfs) based on predatory (conquest) economics by a system mostly based on social mobility through free enterprise and trade.
Yet, its central feature, the free accumulation of private property has two limitations. On one hand some ventures require large amounts of capital which are beyond individual means and require institutions (such as governments and institutional investors), and on the other hand the law of compound interest would allow such long-living institutions to ultimately own the entire capital stock and self-destroy capitalism itself. As we have shown in this post, the solution to this feature is easily achievable through reasonable levels of progressive taxes and the taxation of inheritances.
We add here that the survival of capitalism should not rely on artificially curbing the return on capital (Piketty’s r/g) or opportunistically expropriate the rich from time to time as some on the left advocate. There may be some reasonable curbing of executive compensation in listed companies where shareholders are basically powerless, but that is a different governance matter.
Let us exemplify with one of the richest man in the world. Would it make sense to have limited Warren Buffett’s wealth? If we had done so, he would not have created so many jobs and profits through his smart investments and society would be poorer without his $300 billion company. However, he is a very wise man and has decided on his wisdom to donate most of his fortune to charity.
Some will dispute whether that is the best use of his wealth. Some would prefer that he had given his money for research, environment, sports, culture or whatever, while others may say that the government should decide, not him.
How the inheritance money should be spent is an interesting question to debate but not relevant to decide whether to like or dislike capitalism or to bring back through the backdoor a destructive class warfare as advocated by Marx.
In conclusion, common sense suggests that governments should exercise moderation on taxing inheritances and give the taxpayers enough say on where governments will spend their wealth. We do not need to go back to the old divide.
We see again the old left wing anti-capitalism rhetoric and its denial by the traditional adulation of the rich by the usual ass-kissing right wing. Economics can claim to be the science of many things, but apparently it is unable to be a science of common sense.
If economists relied more on common sense, they would immediately realize that the rise in inequality is hardly news. There has been plenty of studies showing that. Meanwhile, the focus on the share of the top 0.1%, apart from creating an “identifiable” common enemy, tried to create a stereotype equivalent to the XIX century top hat capitalist depicted by Marxists.
Remember that the later began by focusing on the 1%, but probably this group was too large to provide the necessary stereotype. Note also that the debate relies largely on the Gini coefficient and ignored the different weightings that society may put on inter-group income transfers using the metric suggested long ago by Atkinson.
Yet the greatest failure is on understanding why inequality is rising, and the reason may be quite plainly related to the failure to correct a well-known feature of capitalism.
Capitalism is the most efficient economic system ever devised by humankind that replaced a largely hereditary class system (nobility, clergy and serfs) based on predatory (conquest) economics by a system mostly based on social mobility through free enterprise and trade.
Yet, its central feature, the free accumulation of private property has two limitations. On one hand some ventures require large amounts of capital which are beyond individual means and require institutions (such as governments and institutional investors), and on the other hand the law of compound interest would allow such long-living institutions to ultimately own the entire capital stock and self-destroy capitalism itself. As we have shown in this post, the solution to this feature is easily achievable through reasonable levels of progressive taxes and the taxation of inheritances.
We add here that the survival of capitalism should not rely on artificially curbing the return on capital (Piketty’s r/g) or opportunistically expropriate the rich from time to time as some on the left advocate. There may be some reasonable curbing of executive compensation in listed companies where shareholders are basically powerless, but that is a different governance matter.
Let us exemplify with one of the richest man in the world. Would it make sense to have limited Warren Buffett’s wealth? If we had done so, he would not have created so many jobs and profits through his smart investments and society would be poorer without his $300 billion company. However, he is a very wise man and has decided on his wisdom to donate most of his fortune to charity.
Some will dispute whether that is the best use of his wealth. Some would prefer that he had given his money for research, environment, sports, culture or whatever, while others may say that the government should decide, not him.
How the inheritance money should be spent is an interesting question to debate but not relevant to decide whether to like or dislike capitalism or to bring back through the backdoor a destructive class warfare as advocated by Marx.
In conclusion, common sense suggests that governments should exercise moderation on taxing inheritances and give the taxpayers enough say on where governments will spend their wealth. We do not need to go back to the old divide.
Sunday, 16 May 2010
Why constitutional liberalism is consistent with progressive taxation and inheritance taxes
Constitutional liberalism does not require the state to provide exclusively pure public goods like defense, policing and justice or to act only as a neutral referee. All it requires is that the state strives to act exclusively in a subsidiary manner and to be minimalist in its activities, including those of wealth redistribution.
However, many who consider themselves liberals or libertarians often believe that the financing of such activities should be funded only by taxes, and preferably by a flat tax rate. Therefore, they tend to consider any progressive and inheritance taxes as unfair and inefficient redistribution of wealth that discourages the hard-working members of society.
But, in contrast to classical liberalism (or laissez faire), constitutional liberalism has no problems in relation to fair inheritance taxes and a progressive tax system. Indeed, both are even indispensable in a system based on constitutional liberalism for two simple reasons: to prevent an unfair free-riding redistribution of wealth in favor of the rich and to preserve market capitalism. We shall demonstrate the first in the case of progressive taxation and the second with reference to inheritance taxes.
The reason why in the absence of progressive taxation wealthy people would enjoy an unfair free ride is easily understood if we use a parallel with insurance cover. Even hard-line laissez-faire adepts accept that the state has a duty to protect people and property against domestic and foreign predators. So paying for that protection with taxes is similar to paying for an insurance premium based on the risks and amount of capital covered. Using a flat tax rate based on wealth would apparently achieve a fair result since everyone would pay proportionally to the amount of capital they have at risk. But this would be misleading.
Just as insurers charge premiums on the basis of both capital and risk (e.g. a one-million dollar house in a quake-prone area pays more insurance) so should the state tax differently citizens that add more risk to the community. Since greater wealth attracts more predators and consequently adds more risk, it follows that those with higher wealth should pay more than proportionally to their capital. On the contrary, since crime often breeds on poverty it also follows that it pays to reduce poverty to fight crime. So, without any social concerns in mind, on pure economic grounds we can see that to be fair taxation must be progressive.
The case for inheritance taxes is not so straightforward. These taxes work as a brake to the accumulation of wealth and since saving and accumulation are necessary to promote growth it seems that such brakes would be counterproductive. Moreover, while we can justify limiting the size of corporate wealth to prevent oligopolies and to preserve the competitive markets needed for market capitalism there are no similar argument to limit private wealth. So, the argument for inheritance taxes has to be found elsewhere.
Such argument can be found by considering the importance of credit in a capitalist system and the availability of quasi risk-free investment opportunities in debt financing. Unfortunately, after a sufficiently long period, if unchecked, debt financing together with the power of compound interest would lead to the concentration of all earthly wealth into a single family or institution. To check this out consider the case of a long lasting institution like a religious congregation and calculate the real rate of interest required for it to acquire all of today’s world wealth.
For instance, we can carry out such calculation for the priests at the Temple of Jerusalem who paid 30 pieces of silver (about USD 15,000 in today’s money) for Judas betrayal of Jesus. If instead they had invested that sum in risk-free debt, and ignoring the practical impossibility of lending at a risk-free rate after a certain level of capital accumulation, we can calculate that an interest rate of 1.28% per year would be enough for them to own now the entire world wealth estimated at almost 2000 trillion US Dollars.
However, if they were charged an inheritance tax of 20% every 50 years they would need to wait another 1000 years to own the same amount of wealth. This would not eradicate the problem of wealth concentration. But, it clearly demonstrates that inheritance taxes act as a powerful restraint on wealth concentration, without the negative consequences of the usual alternatives of war and confiscation.
For today we limit our case merely under the assumption of tax neutrality, but we shall return later to discuss if the use of taxation as a social and economic tool is compatible with a system of constitutional liberalism. Note also that, regardless of the fundamental principles that interest us, in the field of taxation the disputes over the tax pie and the practicalities of the various tax options are of vital importance. That is, we should never forget the old say that “the art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing”.
However, many who consider themselves liberals or libertarians often believe that the financing of such activities should be funded only by taxes, and preferably by a flat tax rate. Therefore, they tend to consider any progressive and inheritance taxes as unfair and inefficient redistribution of wealth that discourages the hard-working members of society.
But, in contrast to classical liberalism (or laissez faire), constitutional liberalism has no problems in relation to fair inheritance taxes and a progressive tax system. Indeed, both are even indispensable in a system based on constitutional liberalism for two simple reasons: to prevent an unfair free-riding redistribution of wealth in favor of the rich and to preserve market capitalism. We shall demonstrate the first in the case of progressive taxation and the second with reference to inheritance taxes.
The reason why in the absence of progressive taxation wealthy people would enjoy an unfair free ride is easily understood if we use a parallel with insurance cover. Even hard-line laissez-faire adepts accept that the state has a duty to protect people and property against domestic and foreign predators. So paying for that protection with taxes is similar to paying for an insurance premium based on the risks and amount of capital covered. Using a flat tax rate based on wealth would apparently achieve a fair result since everyone would pay proportionally to the amount of capital they have at risk. But this would be misleading.
Just as insurers charge premiums on the basis of both capital and risk (e.g. a one-million dollar house in a quake-prone area pays more insurance) so should the state tax differently citizens that add more risk to the community. Since greater wealth attracts more predators and consequently adds more risk, it follows that those with higher wealth should pay more than proportionally to their capital. On the contrary, since crime often breeds on poverty it also follows that it pays to reduce poverty to fight crime. So, without any social concerns in mind, on pure economic grounds we can see that to be fair taxation must be progressive.
The case for inheritance taxes is not so straightforward. These taxes work as a brake to the accumulation of wealth and since saving and accumulation are necessary to promote growth it seems that such brakes would be counterproductive. Moreover, while we can justify limiting the size of corporate wealth to prevent oligopolies and to preserve the competitive markets needed for market capitalism there are no similar argument to limit private wealth. So, the argument for inheritance taxes has to be found elsewhere.
Such argument can be found by considering the importance of credit in a capitalist system and the availability of quasi risk-free investment opportunities in debt financing. Unfortunately, after a sufficiently long period, if unchecked, debt financing together with the power of compound interest would lead to the concentration of all earthly wealth into a single family or institution. To check this out consider the case of a long lasting institution like a religious congregation and calculate the real rate of interest required for it to acquire all of today’s world wealth.
For instance, we can carry out such calculation for the priests at the Temple of Jerusalem who paid 30 pieces of silver (about USD 15,000 in today’s money) for Judas betrayal of Jesus. If instead they had invested that sum in risk-free debt, and ignoring the practical impossibility of lending at a risk-free rate after a certain level of capital accumulation, we can calculate that an interest rate of 1.28% per year would be enough for them to own now the entire world wealth estimated at almost 2000 trillion US Dollars.
However, if they were charged an inheritance tax of 20% every 50 years they would need to wait another 1000 years to own the same amount of wealth. This would not eradicate the problem of wealth concentration. But, it clearly demonstrates that inheritance taxes act as a powerful restraint on wealth concentration, without the negative consequences of the usual alternatives of war and confiscation.
For today we limit our case merely under the assumption of tax neutrality, but we shall return later to discuss if the use of taxation as a social and economic tool is compatible with a system of constitutional liberalism. Note also that, regardless of the fundamental principles that interest us, in the field of taxation the disputes over the tax pie and the practicalities of the various tax options are of vital importance. That is, we should never forget the old say that “the art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing”.
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