How TheDeath Tax Suffocates Innovation And Prosperity
How The Death Tax Suffocates Innovation And Prosperity
BY ROB ARNOTT AND JOHN TAMNY
10/22/2015 05:44 PM ET
In the 1970s, television was a vast wasteland. There were the three major networks, PBS, and a few local stations in larger markets. Limited choice for viewers meant light competition among the networks, so that television was a shadow of its present, high-quality self. Televisions themselves were referred to as "idiot boxes" back then, and this wasn't entirely a reference to their pre-flat-screen shape. The medium quite simply wasn't very good.
Amid this sea of mediocrity, ESP-TV formed in 1979. Readers today know it as the wildly successful sports media property worth tens of billions, ESPN.
What's perhaps been forgotten is that what became ESPN almost didn't survive. Founder Bill Rasmussen took out a $9,400 advance from his Visa card to keep the company afloat. His son Scott emptied his bank account to pay the fledgling network's $91 incorporation fee. As Michael Freeman wrote in "ESPN: The Uncensored History," the nascent sports network "was hemorrhaging so much, some at the network feared it wouldn't survive beyond 1980."
ESPN likely would have gone bankrupt if not for the Getty Oil Trust. John Paul Getty was America's richest man in the late 1950s. When he died in 1976, he left behind a huge estate. Eager to diversify the Getty family's oil-based wealth, Stuart Evey, the executive in charge of the estate's non-oil holdings, invested $10 million in ESPN. The rest, as they say, is history.
There are many arguments against the estate tax, but easily the most important one concerns capital formation. Taxes on estates shrink the amount of capital in search of entrepreneurs. The result, though unseen, is an erosion of entrepreneurial risk-bearing and an economy advancing more slowly than it otherwise would.
Supporters of the estate tax may scoff at what might seem overdone alarm at first glance. After all, for the Gettys, $10 million represented but a tiny fraction of the family's total wealth.
Some might argue that a tax purportedly meant to restrain dynastic wealth still makes sense, because the heirs could still have easily ponied up $10 million for this investment. This assertion makes our argument for us.
Obviously, the Getty Oil Trust was happy to invest $10 million in this fledgling idea because they would feel no pain if the $10 million was lost. Would this investment have "made the cut" with a smaller estate? We will never know.
Interesting about inherited wealth as the source of ESPN's early rise is how common this kind of story is. Banking heir J.P. Morgan provided Thomas Edison with the initial capital necessary to fund his electric-light invention that became General Electric. His investment in this most daring of schemes earned him his father's disappointed ridicule.
As Thomas Kessner explained it in "Capital City," a history of economic innovation in 19th century New York, Junius Spencer Morgan "wanted to have nothing to do with the eccentric inventor and his bulb experiments."
Inherited wealth was particularly crucial to Silicon Valley's rise. As Walter Isaacson noted in "The Innovators," "For much of the 20th century, venture capital and private-equity investing in new companies had been mainly the purview of a few wealthy families, such as the Vanderbilts, Rockefellers, Whitneys, Phippses, and Warburgs."
Notable here is that Venrock, the Rockefeller family's venture-capital vehicle, was an investor alongside Arthur Rock in Apple Computer.
What's too often forgotten is that when it comes to the deployment of wealth, it's very easy to invest in what is known. More to the point, an accepted strategy of wealth preservation generally involves allocating capital to the stocks and bonds of established companies.
Yet there lies the problem with the estate tax.
Leaving aside the loss of freedom, along with the waste of time and human resources on avoidance of what some call the "death tax," to the extent that the tax succeeds, it almost by definition forces heirs to invest what remains after taxes far more conservatively.
Put more simply, a tax code that forcefully breaks up estates is one that on the margin forces heirs into defensive, as opposed to intrepid, investment stances. Thanks to a tax meant to shrink the amount of wealth passed on, recipients must be a little bit — and perhaps a lot more — conservative when it comes to how much risk they expose their remaining wealth to.
That's problematic because the greatest drivers of modern prosperity — from the railroad, to the telephone, to the car, to the computer, to the jet, to the Internet, not to mention the medical advances that have doubled our life expectancy — were all surprises.
Major innovations are almost always going to be suspect, in the eyes of most, simply because they haven't been tried before. This fact, so important in past, present and future commercial leaps, leads to a lot of failure and some successes. Over 99% of the 2000-plus automobile companies founded in the early 20th century failed; nearly 100 years later, the vast majority of Internet start-ups vanished too.
Was the U.S. economy weakened by all this carnage? Quite the opposite. Each period of massive innovation was defined by intense experimentation that gifted the economy with massive surges of information, with inventions and ideas — all of them surprises — that utterly transformed how we do things.
While defensive investing for wealth preservation is a sensible goal, it's not the source of intrepid entrepreneurial leaps that lead to abundant economic growth. Investment in the unknown powers the pathbreaking innovations.
While estate-tax apologists can point to a microscopic number of U.S. heirs who reportedly pay roughly $20 billion per year in estate taxes, what they miss is that there's nothing ordinary about the $20 billion taxed away.
Particularly if it's coming from the largest estates, it's wealth that, if not taxed, would have some of the best odds of finding its way to the riskiest of ventures. When people have a lot of wealth to work with, their willingness to be experimental realistically grows with each dollar not taxed away by the federal government.
ESPN, like the light bulb before it and the Internet after, has been a wonderful surprise made possible by untaxed wealth finding its way to new ideas. Unknown are all the other brilliant advances that never saw the light of day thanks to government's aggressive stance toward inherited wealth that has likely made heirs far more conservative in how they invest what is left after taxes.
Read More At Investor's Business Daily: http://news.investors.com/ibd-editorials-viewpoint/102215-776956-inherited-wealth-plays-important-role-in-economic-growth.htm#ixzz3pNFQlq6m
Follow us: @IBDinvestors on Twitter | InvestorsBusinessDaily on Facebook
BY ROB ARNOTT AND JOHN TAMNY
10/22/2015 05:44 PM ET
In the 1970s, television was a vast wasteland. There were the three major networks, PBS, and a few local stations in larger markets. Limited choice for viewers meant light competition among the networks, so that television was a shadow of its present, high-quality self. Televisions themselves were referred to as "idiot boxes" back then, and this wasn't entirely a reference to their pre-flat-screen shape. The medium quite simply wasn't very good.
Amid this sea of mediocrity, ESP-TV formed in 1979. Readers today know it as the wildly successful sports media property worth tens of billions, ESPN.
What's perhaps been forgotten is that what became ESPN almost didn't survive. Founder Bill Rasmussen took out a $9,400 advance from his Visa card to keep the company afloat. His son Scott emptied his bank account to pay the fledgling network's $91 incorporation fee. As Michael Freeman wrote in "ESPN: The Uncensored History," the nascent sports network "was hemorrhaging so much, some at the network feared it wouldn't survive beyond 1980."
ESPN likely would have gone bankrupt if not for the Getty Oil Trust. John Paul Getty was America's richest man in the late 1950s. When he died in 1976, he left behind a huge estate. Eager to diversify the Getty family's oil-based wealth, Stuart Evey, the executive in charge of the estate's non-oil holdings, invested $10 million in ESPN. The rest, as they say, is history.
There are many arguments against the estate tax, but easily the most important one concerns capital formation. Taxes on estates shrink the amount of capital in search of entrepreneurs. The result, though unseen, is an erosion of entrepreneurial risk-bearing and an economy advancing more slowly than it otherwise would.
Supporters of the estate tax may scoff at what might seem overdone alarm at first glance. After all, for the Gettys, $10 million represented but a tiny fraction of the family's total wealth.
Some might argue that a tax purportedly meant to restrain dynastic wealth still makes sense, because the heirs could still have easily ponied up $10 million for this investment. This assertion makes our argument for us.
Obviously, the Getty Oil Trust was happy to invest $10 million in this fledgling idea because they would feel no pain if the $10 million was lost. Would this investment have "made the cut" with a smaller estate? We will never know.
Interesting about inherited wealth as the source of ESPN's early rise is how common this kind of story is. Banking heir J.P. Morgan provided Thomas Edison with the initial capital necessary to fund his electric-light invention that became General Electric. His investment in this most daring of schemes earned him his father's disappointed ridicule.
As Thomas Kessner explained it in "Capital City," a history of economic innovation in 19th century New York, Junius Spencer Morgan "wanted to have nothing to do with the eccentric inventor and his bulb experiments."
Inherited wealth was particularly crucial to Silicon Valley's rise. As Walter Isaacson noted in "The Innovators," "For much of the 20th century, venture capital and private-equity investing in new companies had been mainly the purview of a few wealthy families, such as the Vanderbilts, Rockefellers, Whitneys, Phippses, and Warburgs."
Notable here is that Venrock, the Rockefeller family's venture-capital vehicle, was an investor alongside Arthur Rock in Apple Computer.
What's too often forgotten is that when it comes to the deployment of wealth, it's very easy to invest in what is known. More to the point, an accepted strategy of wealth preservation generally involves allocating capital to the stocks and bonds of established companies.
Yet there lies the problem with the estate tax.
Leaving aside the loss of freedom, along with the waste of time and human resources on avoidance of what some call the "death tax," to the extent that the tax succeeds, it almost by definition forces heirs to invest what remains after taxes far more conservatively.
Put more simply, a tax code that forcefully breaks up estates is one that on the margin forces heirs into defensive, as opposed to intrepid, investment stances. Thanks to a tax meant to shrink the amount of wealth passed on, recipients must be a little bit — and perhaps a lot more — conservative when it comes to how much risk they expose their remaining wealth to.
That's problematic because the greatest drivers of modern prosperity — from the railroad, to the telephone, to the car, to the computer, to the jet, to the Internet, not to mention the medical advances that have doubled our life expectancy — were all surprises.
Major innovations are almost always going to be suspect, in the eyes of most, simply because they haven't been tried before. This fact, so important in past, present and future commercial leaps, leads to a lot of failure and some successes. Over 99% of the 2000-plus automobile companies founded in the early 20th century failed; nearly 100 years later, the vast majority of Internet start-ups vanished too.
Was the U.S. economy weakened by all this carnage? Quite the opposite. Each period of massive innovation was defined by intense experimentation that gifted the economy with massive surges of information, with inventions and ideas — all of them surprises — that utterly transformed how we do things.
While defensive investing for wealth preservation is a sensible goal, it's not the source of intrepid entrepreneurial leaps that lead to abundant economic growth. Investment in the unknown powers the pathbreaking innovations.
While estate-tax apologists can point to a microscopic number of U.S. heirs who reportedly pay roughly $20 billion per year in estate taxes, what they miss is that there's nothing ordinary about the $20 billion taxed away.
Particularly if it's coming from the largest estates, it's wealth that, if not taxed, would have some of the best odds of finding its way to the riskiest of ventures. When people have a lot of wealth to work with, their willingness to be experimental realistically grows with each dollar not taxed away by the federal government.
ESPN, like the light bulb before it and the Internet after, has been a wonderful surprise made possible by untaxed wealth finding its way to new ideas. Unknown are all the other brilliant advances that never saw the light of day thanks to government's aggressive stance toward inherited wealth that has likely made heirs far more conservative in how they invest what is left after taxes.
Read More At Investor's Business Daily: http://news.investors.com/ibd-editorials-viewpoint/102215-776956-inherited-wealth-plays-important-role-in-economic-growth.htm#ixzz3pNFQlq6m
Follow us: @IBDinvestors on Twitter | InvestorsBusinessDaily on Facebook
Tags
Who is online
410 visitors
We need lower taxes to stimulate risk taking and the development of job producing companies and technology