Brad DeLong's Semi-Daily Journal (2004)

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The most plausible explanations for the facts are perhaps the development of progressive income and estate taxation ...
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Oops.

According to the SCF (via Ed Wolff), in 1995 the median quintile of households held 4.5% of aggregate wealth in 1995 and 3.9% in 2001. The richest 5% of households held 83.9% in 1995 and 84.4% in 2001.

Maybe it's just me and the fact that I've had a lot of Vicodin in my system - and am about to have more - because of my oral surgery yesterday, but I'm not exactly sure what those guys are trying to say in the abstract.

This ignores the fact that a large percentage of Americans in the early part of the 20th century were subsistence farmers, whose dollar contributions to the economy were minimal and thus distort the "gilded age" measure. There are no subsistence farmers left in America today. They've been driven off the land by a variety of factors, such as increasing land values, mechanization of farms (meaning that the amount of investment needed to produce commodities at a competitive price is beyond the subsistence farmer), etc. If we dropped the income of today's lower class to the income of 1900's lower class, we'd have starving people in the streets. Instead, 1900's subsistence farmers were generally well fed, thanks to better seed than their counterparts in other countries and improvements such as the iron plough and mule harness that made their productivity as great as that of commercial farmers of their era.

Comparing income between a modern commercial/industrial nation and a pre-industrialization nation of subsistence farmers is comparing apples and oranges. It's just hard to make a comparison. What dollar value, for example, do you assign to the ability of the subsistence farmer to grow all his own food with minimal inputs other than his own labor? The "fuel" costs for his farm machinery (hay) is even self-grown!

Credibility Caveat: One of the co-authors of this study shared, with a different collaborator, the 2001 Ig Nobel in Ecconomics "...for their conclusion that people find a way to postpone their deaths if that that would qualify them for a lower rate on the inheritance tax. REFERENCE:"Dying to Save Taxes: Evidence from Estate Tax Returns on the Death Elasticity," Wojciech Kopczuk and Joel Slemrod, National Bureau of Economic Research Working Paper No. W8158, March 2001."

Take this for what it is worth.

Comparison by means of estate-tax returns, unless you subject the returns to incredibly complicated (and probably inaccurate) adjustments, doesn't tell you squat about the relative real wealth of the rich now versus a century ago. The availability and audacity of schemes for moving wealth out of a decedent's visible/taxable estate today makes Jay Gould look like a piker. Any rich person who starts estate planning more than about six months prior to death can reduce their visible estate to a level arbitrarily close to the non-taxable level without substantially impairing the ability of their children or grandchildren to benefit from their wealth.

These measures do clobber some of an estate's value for the third generation or beyond, but if estate planning starts 20 or 30 years before death, that obstacle can be overcome as well. (The rich person has to trust his or her heirs not to blow everything on hookers and smack, but such is life...)

With modern estate planning, anyone who dies leaving a visible/taxable estate of more than a couple million dollars is doing so either by choice or out of negligence. I don't know exactly how many estates that is these days, but it would probably take weeks of analysing previous-year tax returns for each one to ferret out the real value being passed on.

(Meanwhile, the "Yet" in the title is a crucial caveat -- it will be at least another 10 years before the bigger beneficiaries of the past few decades' increase in inequality start dying in numbers large enough to make really useful comparisons possible. Whee.)

Am I missing something or is using federal estate tax returns for study data, as "paul" implies, stupid beyond belief.

Did the authors adjust for the 15-20 year lag? Very few of those dying in 2000 accumulated the bulk of their assets in 1990-2000. Err? How old was Bill Gates in 2000? Your kidding. He's not dead?

BradTux,

You beat me to it. The economy is monetized to a much greater degree than it was a century ago. Back then, there were still significant holdovers from the so-called "natural economy": subsistence, informal exchange, etc. There are a lot fewer people with independent access to means of production or subsistence, and the average producer is much more dependent (not to say enserfed).

If 1930s-level unemployment ever returns, I suspect it will mean an end to most absentee ownership--and good riddance. Most people who are unable to make mortgage or rent payment will simply continue to squat, and band together to resist the sheriff. Most Americans don't own their residences free and clear, and I don't see them being meekly evicted if a quarter of them suddenly become unemployed. A repeat of the Great Depression might well lead to a mutualist system of land tenure based on occupancy and use.

Paul made the point that needs to be made. I work in the industry and my understanding is that if you've planned correctly the real effect on your estate is minimal up to about the 70 million mark. After that things get dicier, but there are still ways out for up to a few hundred million. Then you reach the point where wholesale removal of money from the country is needed, a dubious enterprise.

In other words, Kopczuk and Saez are telling us the way not to go all the way back to the gilded age... Thank you for your great work Emmuanuel, I wishrf every ecconomist's work (humbly, including mine) was so true to and relevant to our time. Way to go, really.

Ian -- maybe you can answer my question.

I have always looked at the inheritence tax as
largely a voluntary tax.

Is that attitude very far off-base?

Kevin, the Depression drove the "Okies" off their lands after the banks foreclosed on their mortgages, and they largely meekly picked up and drove to California rather than fight their evictions with force of arms, yet you're saying that the situation would be different now?

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