Yesterday’s Times discussed the development of a new class of the super rich. “One in every 825 households earned at least $2 million last year, nearly double the percentage in 1989, adjusted for inflation.” They interviewed one man who instead of using his medical degree to cure cancer, went on to Wall Street and made a fortune as a managing director of health care investment banking.
The article was very sympathetic towards this new class. They live modestly, or relatively modestly, in four bedroom suburban homes and apartments on Park Avenue. And they dabble in philanthropy.
In an earlier Gilded Age, Andrew Carnegie argued that talented managers who accumulate great wealth were morally obligated to redistribute their wealth through philanthropy. The estate tax and the progressive income tax later took over most of that function — imposing tax rates of more than 70 percent as recently as 1980 on incomes above a certain level.
Now, with this marginal rate at half that much and the estate tax fading in importance, many of the new rich engage in the conspicuous consumption that their wealth allows. Others, while certainly not stinting on comfort, are embracing philanthropy as an alternative to a life of professional accomplishment.
In a break between getting my Masters and going on for the PhD, I worked for a year in a small art museum. I so enjoyed being around art all day that I considered making it my profession. After watching the director at work, I reconsidered. Her primary efforts were not looking at the paintings and sculptures. In fact, she rarely entered the gallery. She spent most of her time sucking up to rich people to get their stuff. She flattered these old rich people who were lucky enough to enough to inherit money from their grandfathers who invented things like the window envelope or the jiffy bag. When they did hand over an old painting that they didn’t care about, there were given a plaque, applause, and a tax write-off.
Sucking up to rich people is an enormous waste of time. Why reward the accident of wealth in this manner? It is so much more efficient and fair to tax the super rich without fanfare and then distribute the wealth to various causes (some may be too unglamorous to gain the attention of the super rich) and with central planning. As our fortunes improve, we’re giving much more to charity and have discussed the best way to donate. As much as I like philanthropy, I think that the ego should be taken out of it. The super rich should not be portrayed as Mother Theresa for their “modest” Park Avenue suites or for getting rid of their excess cash that should have been collected at tax time.
Apt. 11d 
Back in the day, when the top income tax rates were so high, how much was actually collected? Likewise, how much money did the estate tax bring in?
Jane Galt, where are you?
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University presidents are mostly fundraisers now too, from what I hear, which may be why the don’t seem to stick around as long.
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Whoa, Laura! Release the hounds!
You’re really looking for a debate here, aren’t you? 😉
I agree that a progressive tax system will allocate social resources more effectively than individual philanthropic decisions. So does Warren Buffett.
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Finally, something I totally disagree with you on!
Two key things to keep in mind:
1) Incomes are not a good measure of wealth. Earning $2 mm a year for your entire career would even put you in the ranks of the wealthy, but is still not a serious family fortune (which I’d define as “no descendant ever has to work again to be in the top 5% of the income distribution”). (That said, despite the fact that I’ll be lucky to earn $2mm in the next 20 years).
So my preferred system would be a flat tax that counted inheritances and gifts (above some reasonable small amount) as income.
2) It is more efficient to just tax and redistribute than for various causes to try to attract giving–but with a “tax and distribute” system, some causes that are very important to certain groups would get no funding. I think the world would be worse off without the Olin Foundation and Human Rights Watch; I can’t imagine either of them being effective if they were tax-funded. Similarly, I suppose taxes COULD fund malaria prevention research–but they aren’t doing so nearly as generously as the Gates Foundation.
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1. SamChevre has a good point–government spending will get directed to areas that have a US constituency (cancer research, Parkinson’s research, Alzheimer’s, etc.) but will not flow so readily to projects without a vocal US constituency. (I would also note that the louder the voice one has politically, the less likely it is that one is actually all that needy. So those who’ve got already will tend to get more from the government–note our government’s continuing trend away from poverty programs and toward middle class welfare programs.)
2. I think that we do have a greater responsibility for the welfare of those close to us (family, residents of the same locale, countrymen), but there is something problematic about subsidizing a a “poor” American (comfy doublewide, cable TV, new truck, and whatever the urban equivalent of that is) rather than a truly poor foreigner.
3. The truly rich can always escape taxation if they really want to, so we can only squeeze them so hard.
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You’re so fun Laura. But, let’s put some more parameters on your suggestion: tax those 1/825 who make over 2M? or tax those who make over 1M? Tax them at what rate?
I completely agree that marginal tax rates on high earners should be higher. But, there are costs (folks have listed the cost of government allocation of resources v private allocation of resources, tax avoidance among the risk, the poor correlation of income with assets). I would add another, which is the democratic decision to spend other people’s wealth — This is an argument conservatives make: that if you tax one group of people, but give another the power to spend it, it’s easy to make bad spending decisions.
I think all those problems can be answered. A few have used the example of the Gates foundation and their involvement in Africa as an example of a potentially more noble use of resources than the government. But, much philanthropic giving is “glamour” and “privelege” giving; for example, in the same NYT article, they quote someone at Yale saying that it’s “shocking how many 100 million dollar gifts they’ve been getting these days”. So, although private & public giving will have different priorities, I think it’s naive to imagine that one will generally be better than the other. And, although income is not perfectly correlated with wealth (especially one year’s worth of income), people who earn 2 M/year have substantial assets, as well(I think the correlation is better for those earning >2M). Income also has the benefit (unlike assets, that it is there, cash ready to be given to the government, as opposed to something tied up in an assett like art, which would require it’s sale).
I do think it’s possible to pick a marginal rate that doesn’t remove incentives for getting rich, while still raising government funding. That marginal tax rate could be higher than it is, and we need the money, to finance our country’s needs.
We watched “Molly, An American Girl on the Homefront” yesterday during our snow/ice day. I kept being struck by how completely gone the notion of shared sacrifice is at this moment, compared to other times in American history. True, we are not in World War II right now; But, is it really right that our society (including taxes & wages) are structured so that reps from Nieman-Marcus say their doing really well because the demand for $1000 dollar shoes has never been better; and, that this demand coexists with a war?
So, yeah, I want to milk more from the rich, too, and I think we can without substantially damaging the incentives that create value for society (i.e. I think we can incrase taxation, and still have the marketplace that created the internets and the ipod).
bj
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i agree with the assessment of the super rich and philanthropy… however i disagree with the taxes all together… and here’s why in reality the taxes income taxes that is are ILLEGAL you may have heard this before but when you research the law you find IT’S TRUE!!
ck out http://www.givemeliberty.org and http://www.freedomtofascism.com the Federal Reserve Bank is A PRIVATE BANK owned by the richest (5) bankers in the world amongst them JP Morgan.. as soon as this bank prints the money we INSTANTLY owe interest on it … as i said this is a PRIVATE BANK … ALL of our income tax is going to pay off the debt on this loan.. this is DEPLORABLE!!
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“We watched ‘Molly, An American Girl on the Homefront’ yesterday during our snow/ice day.”
My second daughter desperately wanted to see that, BJ; Molly is the American Girl doll she wants (her older sister–we made a rule that there will be no American Girl dolls before the age of eight–has Samantha). Unfortunately it was on the Disney Channel, and we don’t have cable right now. Was it any good? We’ll have to rent it sometime.
“I kept being struck by how completely gone the notion of shared sacrifice is at this moment, compared to other times in American history….[I]s it really right that our society (including taxes & wages) are structured so that reps from Nieman-Marcus say they’re doing really well because the demand for $1000 dollar shoes has never been better; and, that this demand coexists with a war?”
No, it is not right. Not that I can imagine our society ever again fighting a war the way we fought WWII, at least not without it having been preceded by some terrible cataclysm: as it is, the economy has changed too much, living patterns have changed too much, and the family has changed too much, for such a sense of “shared sacrifice” to be experienced across the whole breadth of society. Still, there are a lot of little ways, and not so little ways, that what society-wide commitments could still be made today have been undermined. Unions are in decline, the draft is gone, corporate income taxes have been slashed–so many policies that had a least an inkling of “social/collective responsibility” to them have been eliminated or replaced. Their replacements have often had many good results; I agree with Sam that you wouldn’t want to lose the Olin Foundation. But then again, I’m not sure Olin and others like it are entirely a creation of our low-tax, super-rich, consumer-happy world; I suspect something like them (though probably not as independent or wealthy) would have nonetheless existed if marginal tax rates had remained high and other changes hadn’t occured. Maybe that’s a trade off that would have been worth making.
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bj writes In the same NYT article, they quote someone at Yale saying that it’s “shocking how many 100 million dollar gifts they’ve been getting these days”.
That is another problem with letting the free market distribute charity, rather than the government. Why is Yale getting all this money? They already have a huge endowment. They don’t need another student center or cushier dorms. State and city colleges need that money so much more. Giving money to Yale is not philanthropy. It is buttressing the class system. It makes the rich richer.
Really liked bj and Russell nostalgia for a time of shared sacrifice. Whatever happened to, “ask not what your country can do for you, but what you can do for your country?”
Amy and Sam — Yes, in a democracy, money goes to charities and projects with an organized constituency. That may not be perfectly fair, but it is more fair than rich people giving to projects that garner the most press coverage or suit their fancy of the moment. If there were a higher tax rate, there would still be extra cash to fund groups like the Olin Foundation. Malaria research would still be funded. Maybe not at the same level, but money might go to other diseases that hadn’t popped up the radar of the Gates foundation.
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Just a quick note to make my position clear.
I’m not arguing that the government shoudl do NO re-sistribution. I’m arguing that there should be a mixture of government funding and private funding; tax rates should be such as to permit both. Some things (like Medicaid) are unlikely to be funded privately; other things (like government watchdog groups) are unlikely to be funded governmentally. Having a mixture is best.
And yes–funding from private sources may go to Yale, or art museums, or… Funding from the government may go to $500 hammers and wrong-headed performance art. Neither of those seems to be an argument against the existence of that form of funding.
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Hi Laura,
I disagree with regards to your comments about YALE. Letting the free market distribute charity protects the rest of us from the cronisims seen by people in positions of power to distribute it as a central source(see: Congress).
BTW–there is a pill for malaria and I’d argue that the solution is to create a simple way to clean water and teach clean drinking methods/sustainability rather than to try and come up with a solution to malaria.
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Before I start getting too nostalgic (I’m a sucker for WWII homefront stories), I have to note that I’m talking about nostalgia for the movie version, and not the reality. One of the “shared” sacrifices made in WWII was the internment of Japanese-Americans. They’ve recovered, but as a brown person, I can’t help but worry that that’s the only sacrifice we’re being asked to make now (i.e. the liberty of a subgroup of folks).
I actually believe that the Gates Foundation is doing good, solid work, and not glamour work. The insider scoop is that they will eventually hit a wall, when they face the intractible problems, but that they are being effective right now at picking the tractable problems. And, that there is real value to the fact that they are a foundation, without _government_ bureacracy in their initial forays.
Laura — foundations can have problems, but I don’t think they do the worst of the “vanity” giving. And, although I work a big research U (public, though), and think that we can do good with some private funds, the Harvard/Yale giving is getting ugly. I wish they’d stop.
bj
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Oh, sure. A mixture of public and private philanthropy is probably best. Tax rates have be set a certain point to milk the rich as much as we can without breaking their little wills to acquire more. What level should that be? I don’t know. But I think if Yale has more donations than they know what to do with, then there is more room to tax.
There may be some corruption or cronyism that comes out publicly distributed charity, but the alternative is much worse.
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If there were a higher tax rate, there would still be extra cash to fund groups like the Olin Foundation.
Well, maybe.
Alfred Brooks has just come out with an book on charity and politics that suggests that redistributive government programs actually drive out charitable giving disproportionately, perhaps due to an odd version of the “I gave at the office” effect.
There’s a well-balanced (if poorly worded) piece on it at the Chronicle of Philanthropy.
Criticisms are here, here, and my own here.
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Even two years ago I was all for higher taxes and more government oversight. Expanding Medicaid, socialized medicine, I was all for it. But Katrina really shook my faith that, even accepting some inefficiencies, the government can be effective at all. I really just wonder if the government can do the job.
I’m not sure where that leaves me. Current income inequalities are going to end very badly in this country, as are the long slow decline of our educational system, the starving of national parks, on and on it goes. Clearly the country needs to spend more resources on its own upkeep. But I don’t trust anybody to do the work. (Wow, now that I think about it, this sounds just like fixing my car.)
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I think Laura’s concerns are quite valid, and should lead her to support…abolishing the estate tax. The obnoxious $100M donations to rich universities should dry up fairly quickly. (If Jane Galt was here, she could regale us all with stories about the evils of family foundations brought into being by the estate tax.)
More seriously, as some other commentors point out, equating higher taxes with more money spent on the “right” things makes far too many assumptions with tenuous (at best) links to reality. The argument that taxing money that would be donated and distributing the proceeds through the political process would result in (a) the “right” amounts to be distributed to the “right” causes and (b) efficiency gains over having people donate money directly, is very difficult to make unless we’re talking about basic safety-net features for which the scale of government is necessary (and I’ll leave it to Jane and her fellow libertarians to discuss if even that concedes too much). To pick another, almost by definition you will have a better chance of having money spent on an obscure-but-worthy cause by virtue of many thousands of people making independent decisions, rather than expecting an obscure cause to raise enough attention to attract funding through the political process…either the cause won’t be too obscure to catch the attention of the rich, or the money required to attract enough political attention could have been given directly to the cause itself (in either case, there’s your efficiency gains!).
So I assume you’re not going to be drilling your new students in public choice theory?
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Since Jane hasn’t arrived yet, we can refer to this page and follow the links for more on the estate tax. (Also here and here.
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Jen is quite right to bring Katrina into this discussion. Local disaster-preparedness and federal emergency response should have been one of the main issues in the last election, but somehow it wasn’t.
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So, let’s just assume that you’re right. Taxes are just are inefficient as philanthropy for channeling money to good causes. OK. At least nobody has to suck up to the rich people for money. Taxes take the sucking up out of the equation.
“So I assume you’re not going to be drilling your new students in public choice theory?” I’m actually assigning a big chunk of Friedman to my public policy students. I meant to write a post on his voucher idea, but never quite got around to it.
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I wonder if one salutary effect of the Bush administration will be to instill amongst liberals a new respect for Friedman’s suspicion of the state.
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no, what the incompetance of the bush administration has taught me is that people who don’t believe in the potential of government to do good, i.e. republicans, shouldn’t be trusted to run it.
bj
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Of all the evils in the world, I don’t think “having to suck up to rich people” ranks anywhere near socialism.
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Not mentioned so far, as far as I can tell: the interaction of tax rates with charitable write-offs. To wit: if you keep the deduction for charitable donations– which the United States will do for the foreseeable future, it’s second only to the mortgage interest dudction as a sacred cow– then it’s not entirely clear what the relationship is between tax rates and charitable giving. At higher marginal rates, a donor can leverage a smaller net out-of-pocket contribution into a larger final contribution. If the marginal rate is 99%, but contributions are deductible, then the “donor” can make gifts that are leveraged 100:1– it only costs $1 to make a $100 contribution. The sucking up, and everything else in the philanthropy economy for good and for ill (and it’s both), is amplified, not dampened. Same effect as the estate tax/ foundation dynamic which was mentioned.
There are curvilinear effects to be sure. If 99% were a flat tax rate, not a marginal tax rate, then everyone would be taxed to near-bankruptcy and wouldn’t feel able to give to charity no matter how leveraged the gift. But very high, very progressive marginal rates (say, WW2-1981) probably increase huge donations from old money families.
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Kip,
Before you spend too much time proposing solutions to malaria, you should probably revisit the basics, notably the fact that it isn’t spread via unclean drinking water.
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Did you know that Alzheimer’s Disease is less common in India than any other part of the world?
Some researchers think that this is because of the everyday use of the spice Turmeric. Tumeric is a powerful antioxident which also has anti-inflammatory powers. It is good for Alzheimer’s prevention.
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