Only In America

19 February 2001

Please Tax Our Estates

This week, according to the New York Times, “dozens” of the wealthiest Americans signed a petition opposing the Bush Administration’s proposal to eliminate the federal inheritance (estate) tax.

Though their families, by far, would be the greatest beneficiaries of such a tax cut, the signatories oppose it on two grounds:

· One (which I believe is incidental since the signatories do not seem to mind cuts in other taxes) is that the money will do more good if spent on programs benefiting needier segments of our society;

· The other, more important one, is that the signatories believe such large estates would hurt their heirs’ chances of leading worthy and fulfilling lives. This attitude, I believe, is uniquely American.

Such a petition would be unthinkable in France, for example, where patrimonies are both jealously guarded by the old and anxiously awaited (with a sense of entitlement) by the young. In addition, fairly rigid “forced-heirship” laws in several European countries determine who (in addition to the government) will get your money when you die.

As advisers to wealthy families in different countries, we believe that the decision to bequeath or not to bequeath is less a matter of fairness than one of family tradition and each individual’s sense of priorities and responsibilities. Whatever our clients’ decision on principle, our role is to help them plan a smooth generational transition in practice.

As an entrepreneur, however, I understand the petitioners’ concerns over the legacy of large estates. In fact, these are anything but original. As early as 1891, steel mogul Andrew Carnegie wrote in an essay that “the parent who leaves his son [!] enormous wealth generally deadens the talents and energies of the son, and tempts him to lead a less useful and less worthy life than he otherwise would.”

Carnegie’s statement has been widely studied and debated over the years. For example, a 1992 paper, The Carnegie Conjecture: Some Empirical Evidence(1), documents the fact that people receiving large inheritances are more likely to drop out of the work force.

Another study, Inherited Wealth, Corporate Control and Economic Growth(2), copes with a broader aspect of this issue. It argues that “countries in which billionaire heirs’ wealth is large relative to GDP grow more slowly, show signs of more political rent-seeking, and spend less on innovation than do other countries at similar levels of development. In contrast, countries in which self-made entrepreneur billionaire wealth is large relative to GDP grow more rapidly and show fewer signs of rent seeking”.

However, one fundamental element of the debate over legacies of large estates somehow seems to have been left out: the definition of a “useful and worthy life”. This has kept the debate unnecessarily narrow – to the disadvantage of many deserving heirs.

We live in a society where almost every type of achievement has come to be measured in monetary terms: not only business success, which is natural, but also sportive, artistic and scientific success. Even charitable and religious organizations are now measured by their fund-raising abilities. Yet, we all know there are non-monetary endeavors in life that are both worthy and fulfilling. The good news is that, after a period of unprecedented wealth creation, these endeavors may be coming back into favor.

In his book “The Hungry Spirit”, Charles Handy speaks of two hungers in life. The lesser hunger is for the things that sustain life -- the goods and services that we all need and the money to pay for them. The greater hunger is for understanding what life is for. This, in turn, leads the author onto a search of what to do with our lives after we have accumulated “enough” – whatever “enough” may mean for each of us.

Heirs to a large fortune are unlikely to work with enthusiasm to satisfy a lesser hunger that has already been sated by their parents. But if we recognize the existence of a greater hunger, then large legacies can open new worlds of opportunities – from aesthetic or charitable pursuits to intellectual ones.

The challenge, as always with wealth transmission, is to instill into one’s heirs the right balance of empowerment and responsibility, while unleashing their capacity for enthusiasm and commitment.

François Sicart

© Tocqueville Asset Management L.P.
February 19, 2001


(1) Harvey Rosen of Princeton University, Douglas Holtz-Eakin of Syracuse University, and David Joulfaian of the US Treasury; National Bureau of Economic Research – July 1992.

(2) Randall K. Morck of the University of Alberta, David A. Strangeland of the University of Manitoba, and Bernard Young of the University of Michigan; National Bureau of Economic Research – November 1998

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