Economy & Business

The Myth of the Idle Rich

The class-war Left gets it wrong on inheritances.

The Republican tax plan may be kind of dumb, but if it were three times as dumb as it is, it would only be half as dumb as the Washington Post’s analysis of it.

Catherine Rampell, the scrappy young self-described Princeton “legacy” who handles the class-war beat for the Post’s opinion pages, offers up a truly batty take on the Republican tax plan: that it too strongly favors “passive” income in the interests of those who spend their days — here comes the avalanche of banality — “yachting and charity-balling . . . popping bottles of champagne and hunting endangered wildlife.” All of the usual clichés make an appearance: “passive owners of capital” vs. “workers,” “those who work and those who don’t,” etc. The New York Times isn’t the only newspaper getting carried away with celebrating the centenary of the Bolshevik Revolution, it appears.

Rampell is wrong on many of the specifics and doubly wrong to take “passivity” as her overarching theme. Criticizing the current Republican tax plan without discovering any substantive and persuasive criticism is a neat trick, a kind of negative accomplishment, like falling out of a boat without hitting water. But given the popularity of the errors she makes, her ignorance is potentially educational, so let’s peer briefly into that goofy abyss.

Rampell argues that reducing taxes on inheritances undercuts the incentive for work, something about which Republicans make a great deal of noise when it comes to welfare reform. The idea is that the larger the inheritance, the less the incentive to work. But that ignores the complicated facts about inheritance in American life. Of course, there are a handful of born-rich idlers who will never work and never feel the need to, though those are in fact pretty rare: Donald Trump never needed to work a day in his life (and, indeed, by many estimates would have been financially better off if he hadn’t, and had simply parked his substantial inheritance in a good index fund), but, then again, neither did Bill Gates, whose father was a very wealthy man in his own right before Junior became a billionaire. The existence of Waltons and Kennedys in varying degrees of insufferability is not much of a basis for making tax policy.

In reality, inherited assets and gifts make up a tiny share of the wealth owned by the richest Americans — about 15 percent for the top wealth quintile and 13 percent for the top income quintile, as the Bureau of Labor Statistics runs the numbers. By contrast, inherited assets account for about 43 percent of the wealth of the lowest-income group and 31 percent of the wealth of the second-lowest. (There’s a reason for that: Low-income people don’t have much in the way of assets at all, but many of them inherit a house from their parents or grandparents.) Of course it is the case that 13 percent of $1 billion is a lot more than 43 percent of $150,000. But the proportions suggest very strongly that, by and large, the very wealthy do not get that way by inheriting money but by earning it.

A cleverer class-war columnist might derive a useful insight from that: Rich people have all sorts of ways of helping their children to grow wealthy rather than just leaving them money or giving it to them. (E.g., getting them into Princeton.) It is the case that people with rich parents are a lot more likely to end up rich than are people with poor parents, but enacting a larger estate tax probably will not have much effect on that, given that people who inherit large estates typically already are wealthy and are in most cases well into middle age and well into their careers, if not into their retirement, at the time they inherit.

It’s all good and fun to sneer at them as “passive,” but there are two sides to an inheritance: Those fortunes do not build themselves, and they generally are not the result of “passive” anything. American millionaires and billionaires typically get wealthy through one of two avenues: starting a business or investing, on their own or as part of a firm. The number of hectomillionaires and billionaires made mainly through salary or contract labor is vanishingly small: a few very rarefied CEOs, maybe, and a few score athletes and entertainers.

If you have had the experience of signing both sides of a paycheck over the course of your career, you might in fact regard salary or wage income as a good deal more passive than investment income. The salaried worker gets a guaranteed check every fortnight; the entrepreneur and the investor do not. Business owners and investors are “workers,” too, if “work” means anything at all.

People who save and invest their income are the opposite of passive.

But whether they end up Bill Gates rich or just retired-California-schoolteacher comfortable, people who save and invest their income — perhaps with an eye toward leaving a bequest to their children or their grandchildren — are the opposite of passive. They take charge of their financial lives. Anybody who wants to become a “passive owner of capital” can do so sitting at home in his underwear in front of a computer. Those who are truly passive in their economic lives tend to end up at the unhappy end of the income-distribution curve.

None of which is to say the Republican tax plan is worth a damn; it’s possible to make bad criticisms of things that deserve other kinds of criticism. More broadly, this also isn’t to say that we really should privilege some kinds of income — inheritances, dividends, capital gains, etc. — over salaries and wages and more ordinary kinds of income. Some people will take $5,000 and sock it away in a brokerage account or an IRA, and some people will take $5,000 and take the family to Disneyland — and there’s no particular reason the tax code should reward or encourage one over the other. There is a pretty good argument for treating all income the same way for tax purposes. I am sympathetic to abolishing the fiction of “corporate income” and taxing everything at the same rate once it hits somebody’s bank account in the form of a payroll deposit, dividend, profit-sharing payment, etc. But Rampell isn’t making that argument, and neither is the rest of the class-war Left. It’s something they might want to start thinking about, if they start thinking about things.

Funny thing about those idle rich: They seem awfully busy. Starting businesses, investing, building fortunes to leave to their heirs. Where do they find the time between the champagne and the yachting and the charity balling and the hunting endangered species and whatnot, I wonder. Perhaps Rampell has overlooked something.

Princeton legacies ain’t what they used to be.


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