Thursday, January 31, 2019

Many ways to skin a plutocrat

The billionaires convoked their version of a kangaroo court – call it the country club court – and pronounced sentence upon Elizabeth Warren’s wealth tax proposal: unconstitutional! Well known legal scholar Michael Bloomberg, atop his pile of 3 billion dollars, was particularly scornful of such doings by the plebes far down below.
And so the word went forth. But the word is, to say the least, a bit confused. For why, one might ask, is a federal tax on the wealth of the living unconstitutional, but an estate tax on the wealth of the dead constitutional?
Here we have a truly marvelous structure founded on split hairs.
Federal, as opposed to state, inheritance taxes have a long history. They were first implemented in the Civil War. Even then there were voices raised – voices rich with port, steak, and oysters, voices that were filtered through cigar smoke – that such a tax was a direct tax, and thus unconstitutional, under the provision of the tax and spend provision of the Constitution in Article one, section 8, which reads that Congress has to the power : “to lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common defence[note 1] and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States.”
The rub, here, is twofold. On the one hand, are there taxes that discriminate against certain states – that violate the uniformity condition? And are the taxes indirect – for instance, duties, imposts and excises – or direct? Direct taxes seem to be limited by section 9, which reads: ” no capitation or other direct tax shall be laid, unless in proportion to the census or enumeration hereinbefore directed to be taken.” And so we have some rather abstruse questions to deal with in this matter of direct vs. indirect – or as one scholar has put it, taxing a measure as opposed to taxing a substance. This question is as delightful to tax lawyers as the old question about the heads of pins and angels was to your medieval theologian. It is through the notion of excise – which has been taken to mean any tax that can be construed as indirect, such as corporate income tax – that much of our modern system was driven. Historically, the Court has sided as much as it dares with the country club – in the gilded age and down through the thirties, the Court hated to see Mr. Moneybags burdened with pesky national taxes. This is, in fact, why income tax had to come into our world through a constitutional amendment.
The Supreme Court of the thirties, as is well known, viewed New Deal legislation with horror, and sought to limit Congress’s power to impose regulatory taxes – for instance, on child labor, or as part of a scheme to pay farmers to produce less. Though Roosevelt never succeeded in creating more members of the Supreme Court – which, in spite of the term “packing”, was a common occurrence, as the Supreme Court originally started out with six members. The number nine has no mystical signification. In any case, the SCOTUS has never set itself athwart the current of history and yelled stop – for too long. Thus, in the wake of the New Deal, the Court grudgingly allowed Congress to increase the scope and intention of taxes. In fact, even back in the days of the progressive movement, a famous case, McCray vs. U.S. (1904) endorsed a principle that rules most legal decisions about taxes today:
“The judiciary is without authority to avoid an act of Congress lawfully exerting the taxing power, even in a case where, to the judicial mind, it seems that Congress had, in putting such power in motion, abused its lawful authority by levying a tax which was unwise or oppressive, or the result of the enforcement of which might be to indirectly affect subjects not within the powers delegated to Congress; nor can the judiciary inquire into the motive or purpose of Congress in adopting a statute levying an excise tax within its constitutional power.”
Every major national tax has, it should be noted, been greeted by a chorus of apologists for the wealthy, claiming that it isn’t constitutional. For instance, national corporate taxes, which were enacted as an “excise”, were called no such thing by various distinguished writers in the press back in the 1900-1909. The question for Warren’s tax on the wealth proposal is where it falls in the meshes of previous tax legislation. This is a question that should make us think back – in an extended flashback, a very exciting sequence! – to the Estate Tax of 1916, and its successors.
There is an excellent article by our foremost tax historian, W. Eliot Brownlee ( The proceedings of the American Philosophical Society, 1985) on the forces that came together to push through the tax on estates in the 1916 Congress. Among those forces were the progressives and the single-taxers – the latter being convinced that a single land tax, as advocated by Henry George, should produce a leveling affect that would cripple monopoly power. It was towards the question of monopoly power and its attendant ills – most notably, a widening gap between the wealth of the wealthiest and that of the working man – which powered the reforming tax legislation in that session of Congress. On the other hand, there was Wilson’s attempt to prepare for war, with massive new military expenditures. Meanwhile, the Republicans were pitching for a decreased income tax, increased sales taxes, and raising the tariff. If we look back from our own kaleidoscope of ideological preferences and blindly match them to these actors in the past, we will get the general pattern wrong. Remember, the Republicans of that time were split between the Western wing, which was progressive, Rooseveltian, and ardently opposed to war, and the Eastern wing, which was pro-big business. On the Democratic side, many were as opposed to war. However, they blamed the conflict on monopoly capitalism. Progressive taxes, for this sector, seemed to work not only against monopoly, but ultimately for peace.  John Dewey, Amos Pichot, and some other created a group called Association for an Equitable Income Tax that proposed 50 percent taxes for all income in excess of one million dollars. This is a higher marginal rate than we have today.
All of this came together in the estate tax bill of 1916, which maintained its status as an excise by emphasizing wealth transfer. And so, too, in some way, Warren’s surtax on wealth will surely be presented, if it ever succeeds in passing Congress, in such a way that it taxes the measure of wealth. This could be done in a number of ways – in particular, by taking apart the tax exemptions that usually make family trusts so sweet.
There are many ways to skin a plutocrat. That is the lesson of tax history.
See other articles at Willett's Magazine

Wednesday, January 30, 2019

the guiding myth of social mobility at the top: dont believe it!

Excerpt from Willetts Magazine: On the social function of fat cats 2: inherited wealth

...So whenever some purported study of showing that fortunes don’t last down the generations is pumped through the system, the media jumps for it. For instance, this study: the American Enterprise Institute, that stalwart engine of plutocratic reflection, published the findings of two of its researchers, Kaplan and Rauh, in 2014, which purported to show that there was a vast socially mobilizing churn that we can see by looking at the Forbes 400.
Kaplan and Rauh have divided the individual who find places in the Forbes 400 from 1982 to 2012 into three categories: that that come from wealthy families, those that come from upper middle class families, and those that come from working or middle class families. The claim to discern a distinct change from 1982 to 2012 – the number of individuals coming from wealthy families declines, while those from upper class families increases. Thus, there is churn at the top, due to the meritocratic structure of American capitalism.
This study was approvingly cited by Larry Summers in a speech patting American capitalism on the back for its meritocratic form and substance. So: is it true?  
Granting, for the moment, that the categorization, although a bit fuzzy, does actually represent three different kinds of individuals, we have to trust Kaplan and Rauh on their judgments as to which class individuals fall. They don’t include the list of all individuals on the list – in Peter Bernstein’s book about the list, All the Money in the World, there were 1302 people on the list from 1982 to 2006, which makes it likely that there might have been fifty to one hundred more in the six years after 2006 – but instead give us representative names – which is how we know that they included Bill Gates in the upper middle class group, because his father was a well known lawyer. This tells us a lot about the laziness and bias of the authors. Even a cursory glance at the numerous profiles of Bill Gates over the years would tell you that he was endowed with a million dollar trust fund by his maternal grandfather, who owned a Seattle bank. A million dollars back in the sixties was a figure to reckon with. According to Google’s inflation calculator, that sum is worth 7million dollars today. If Kaplan and Rauh truly think 7 million dollars only puts you in the upper middle class, they need to get out more. And if one can’t trust the authors about Gates, one of the five names they mention, how are we to trust them about the rest?
Of course, family money is a tricky subject. Carl Icahn definitely came from a middle class family. On the other hand, when Icahn was 32 and wanted to buy a seat on the NYSE, it was certainly convenient that he had an uncle, Elliot Schnall, who was a Palm Beach millionaire and who could loan him the money without questions.
This leads us to a much larger criticism concerning how well the 400 represents dynastic wealth. In fact, the very framework seems to occlude it. In 1987, CBS news reported that, curiously, there was not a Dupont on the list, even though the Dupont family was worth an estimated 10 billion dollars. CBS resolved this enigma by pointing out that if each of the 1500 Dupont relatives got a share of that money it would come to 5 million apiece. However, this is a deeply misleading. The Dupont fortune operates as a unified entity through family trusts. As an entity, it is as unified as the ‘Gates’ entity. In a list of individuals going from 1982, sheer mortality and reproduction would naturally diminish the part of the inheritors, but this would not really give us an idea of how much money is under dynastic control. In Lundberg’s 60 families, for instance, there are names that seem foreign to us, who are used to reading about tech barons and hedgefunders. But because they have receded from the press spotlight doesn’t mean that they have “lost their fortunes”. This fact is easy to disguise, because few journalists or economists are going to really try to find where the money goes.  
Sometimes, the journalistic disinterest in where the money goes turns into outright journalistic malfeasance. For instance: in 2015 the Williams Group wealth consultancy put out a publicity release that stated that 70% of wealthy families lose their wealth by the second generation, and 90% by the third. This was regurgitated in the business press as a fact, rather than fact-checked. Then regurgitated again, as though it originated not in a company pushing its songbook but in some serious journalistic investigation. So, for instance, Atlantic Magazine’s Ester Bloom (September 2015) quoted this stat as originating from  Time Magazine, and went on to survey some of the gilded age families with a hasty dab of research. Nobody checks these stories. So to demonstrate the thesis, Bloom presses the Gould family, with a fortune derived from Jay Gould, the famous robber baron, into the confines of the Gone with the Ritz narrative.  I’m going to quote the entire passage because it is so egregiously sloppy, so incredibly refutable, that it would not pass by the merest 15 minutes worth of factchecking if it didn’t adhere to the contours of a well-beloved myth:
Jason “Jay” Gould, the original 19th-century robber baron, is one of the richest American citizens of all time and possibly one of the richest people, ever.* He made his money in railroads, by attempting to corner the stock market, and by being what CNBC has called one of the worst CEOs ever:
Gould sold out his associates, bribed legislators to get deals done, and even kidnapped a potential investor. He duped the U.S. Treasury, pushing up the price of gold and prompting a scare on Wall Street that depressed all stocks. After hiring strikebreakers during a railroad strike in 1886, he was reported to have said, “I can hire one half of the working class to kill the other half.”
Where did his billions go?
Jay had several children and, among them, they married a Tallyrand, a Baron Decies, and a Drexel. Jay’s oldest son, George, inherited the family fortune. George had seven legitimate and three illegitimate children, all of whom he recognized in his will. But more of George’s money went to creditors than to his offspring: He had $30,000,000 to bequeath when he died, according to his obituary in the Times, down from his father’s peak of $77,000,000 (not adjusted for inflation). Yet even that was later revised down by the Times to only half as much. After the creditors were paid off, George’s children were said to collectively receive a little over $5 million in 1933 dollars.
In other words, the fortune of the man who once helped collapse the stock market didn’t survive the 1929 collapse.
None of Jay’s various children or grandchildren seems to have done anything with the great financier’s remaining money except spend it on polotennis, and litigation.”
Now of course this is an ultra-screwy description of the Gould family fortune. Since one of his daughters married into one of the richest families in France, and their combined fortune is powering descendants to this day, I could go in that direction. The key role played by marriage, and by daughters, in the preservation and transmission of family fortunes, is overlooked by reporters because of: sheer sexism.
But instead, let’s look at the poor Goulds with their 5 million dollars in 1933 currency – which in today’s terms is 94 million dollars. This is why Ester Bloom did not calculate that money in today’s terms. But is it true that it was all spent on polo, tennis, and litigation?
Ask Kingdon Gould III. Ester Bloom should have. His father, who didn’t dissipate his money on polo but spent it on becoming a parking garage king, was an ambassador to the Netherlands, and made the list of 400 wealthiest Americans in 1986. Not bad for the second generation.  Did his children spend their money on polo, and are their grandkids living in trailer camps? No. Kingdon Gould III expanded on the real estate kingdom that his dad created and is often listed as one of the wealthiest denizens of D.C. His company is currently building Konterra, a three billion dollar mixed us center in Laurel, Maryland.
So: why did Ester Bloom look up the NYT archives to see how much Jay Gould left at his death, but ignored the easily available evidence of the continued wealth of family members, which is even now leaving a big mark in the D.C. and Maryland real estate space? I don’t think it is just that she is a bad journalist. This is the result of a story line that is as firmly in place as the one about how America only intervenes in the affairs of other nations to promote democracy. It is a guiding myth.

Monday, January 28, 2019

Scullery work

It is a natural law that a room tends to become dirty – and if you don’t believe me, take it up with the Second Law of Thermodynamics. This natural law has evoked a social response – or many a social response. “Dirty” is a word that seems to imply dirt – that thing we see plants grow from, and that we walk on when we go out into the woods. But like a speck of dust, “dirty” has floated away from dirt to embrace a host of ills – stains, smears, muck, grease, fingerprints, fungus, etc. It also goes with the word “stinky” – dirty and stinky belong together like a comedy duo. If you smell something foul, chances are you will find something foul.
In the 19th century, the old ways – which in the country meant embracing your sweat and never changing your clothes, and in aristocratic circles meant heavy perfumes – gave way, grudgingly, to new ways – for instance, running water and electricity. It was a long haul, and involved (gasp!) a great deal of public investment in such things as sewers. The public campaign for “hygiene” used the medical knowledge of the time to make its case – to dirty and stinky, doctors added sick-making – or, after the discovery of germ theory, germy. Davis S. Barnes, in The Great Stink of Paris, pinpoints a crucial 19th century phenomenon:
“From setting fires in the streets to burning incense or sulfur indoors, communities have attempted to neutralize disease-causing influences by chemical and other means since ancient times. By the mid-nineteenth century, the favored forms of disinfection—defined by the Larousse dictionary in 1870 as the destruction of “certain gases or certain exhalations produced by living matter, and called miasmas”—included the application of liquid chemicals, the burning of materials such as sulfur, and mechanical devices producing artificial ventilation through the forced circulation of air. Larousse’s definition also complained about the popularity of so-called disinfections that “left much to be desired,” merely masking unpleasant odors with stronger odors rather than truly “removing the harmful and stinking substances from the air.”
The legacy of that time is our comparatively bright and shining present. However, I think it is a good rule of thumb to suspect that every rational policy rides on the back of a host of superstitions – metaphors and myths that do the mental policing work. I suspect disinfecting, which after all aligns itself, when all the germ theory talk is done, with ancient methods of meeting “pollution”, has generated certain habits that are, if not irrational, at least not as rational as they seem.
Ladies and gentlemen, I give you – the dishwasher!
I have never lived in a place without a dishwasher, and hope never to live in such a impoverished space. But I have long had my doubts that a dishwasher is worth it. And surely I am not alone in my existential struggle. This morning, for instance: I get up and go into the kitchen to make coffee. Everybody is asleep – and this is how I like to begin Sunday mornings. A little pause in which I am the waking, bright little dot of consciousness, getting brighter as my eyes get used to being open (and no doubt the part of my brain devoted to vision pumps itself up), while my loved ones are in their beds, dreaming. Is there a more secure feeling than this? While making coffee, I decided to unload the dishwasher and put into it some plates and cups I found in the sink. So I did what I always do – I ran hot water on the plates and cups, I wiped them with a sponge, I made sure there was no clump of food sticking to any surface, and I popped them in the dishwasher. And as I did so I thought, as I always think, why do we have a dishwasher?
From experience and common sense I know that if you put dishes, cups, bowls, cutlery and whatnot into the dishwasher and you don’t rinse them beforehand, they won’t get washed. In 1956, the New Yorker sent a correspondent to GE to look at the new mobile “automatic dishwasher”. The correspondent, in the typical arch New Yorker style of the day (it was the heyday of E.H. White), cooked and cleaned in an “unmechanized” kitchen. In order to test the new dishwasher, she – I strongly suspect a she – brought an “unwashed earthenware pudding dish that in my own, unmechanized kitchen would have required overnight soaking and the energetic application of steel wool.” The GE people didn’t like the pudding dish – myself, I don’t know what one of those is – and sternly warned that “no automatic dishwasher should be expected to take on such a heavily encrusted utensil without a preliminary soaking”. Isn’t this what the confidence man calls a “tell”. What is this machine doing?
Read the rest here: On Washing the Dishes

olivier blanchard and the free lunch: a comedy of errors

  The neolib economist Oliver Blanchard tweeted a very funny comedy bit, in which he played the part of “social democrat”. And he wrote: “As...