Earlier this week, Chatterbox disputed the notion set forth in a Wall Street Journal op-ed by Melik Kaylan that people who inherit vast fortunes “lead lives on a higher plane.” Kaylan meant not a higher economic plane but a higher moral, intellectual, and civically beneficial plane, blessed with “contemplation,” “connoisseurial study and acquisition,” and “cultural stewardship.” (Tangential observation: Neither Chatterbox’s American Heritage College Dictionary nor the spell check on his word processor recognize any such word as “conoisseurial.”) Kaylan’s has got to be the most ludicrous argument ever waged on behalf of eliminating the inheritance tax. Chatterbox offered his own anecdotal observation that WASP rot is in fact far more common among the idle rich than contemplation and philanthropy. He also passed along similar views by various commentators, both liberal and conservative. No one wrote in to disagree, except about Chatterbox’s claim that the Rockefellers were the only American family to have sustained a commitment to the commonweal over many generations. (Chatterbox overlooked the Warburgs, the Astors, and perhaps a few others. A few readers mentioned the Kennedys, but three generations isn’t “many,” and besides, its third generation is a mixed batch.)
At the end of the previous item, Chatterbox promised to hunt down statistical data examining the lifestyles of the idle rich–incidence of alcoholism compared to the general population and that sort of thing. Alas, he hasn’t found much. This amazes him since the ill effects of inherited wealth have been a topic of discussion going back at least six centuries in the Western world, and probably further in older civilizations. Chatterbox promises to keep looking. Meanwhile, he’ll share what he has.
First of all, Kaylan is simply wrong when he suggests that the idle rich are an endangered species. (“The immediate effect of the inheritance tax, when first imposed in this country, was the eradication of the great American country-house culture.”) Robert Frank, Cornell economist and author of Luxury Fever, points out that even with the estate tax in place, today’s wealthy can pass on far more to their children than their counterparts could several decades back without an estate tax:
The reason, of course, is the spectacular growth in income and wealth that has occurred at the top of the economic pyramid during that period. Despite the swooning stock market, the latest Forbes 400 Richest Americans list published by Mr. Kaylan’s magazine includes 298 billionaires, up from only 13 in 1982. (Five of the 13 in 1982 were children of H. L. Hunt.) Those who inherit a billion dollars under the current estate tax could still manage to lead the kind of life Mr. Kaylan envisions with the nearly $500 million they’d have left after taxes.
What will become of the people who inherit that $500 million? Well, there’s a pretty good chance they’ll quit their jobs. “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,” observed Andrew Carnegie in 1891. That hypothesis was tested in a study titled “The Carnegie Conjecture” by Douglas Holtz-Eakin, David Joulfaian, and Harvey S. Rosen, published in the May 1993 Quarterly Journal of Economics. The authors compared the 1982 federal income tax returns of people who received inheritances in 1982 and 1983 with their federal income tax returns from 1985. People who received inheritances of $150,000 or more were three times more likely to quit working than families with inheritances below $25,000.
This is hardly surprising. Would you work at a crummy job if you didn’t have to? Moreover, Robert Hauser, a sociologist at the University of Wisconsin, points out that the labor supply shrinks when you increase income for any demographic group, rich or poor. But remember, we aren’t just talking about quitting a crummy job. We’re talking about quitting the labor market altogether. That’s quite different from Kaylan’s idea of contemplation and connoisseurship, which usually has to take place within the context of some sort of job, even if it’s at a foundation you set up with your own money. Even now, the beneficent “dollar a year man” is less common than Kaylan supposes.
Five years ago, Thomas Stanley and William Danko earned a small fortune by publishing a book titled The Millionaire Next Door. Its thrust was that people who create America’s wealth are penny-pinchers. It’s no fun to be a millionaire if you have to earn the cash yourself! On the other hand, they argued, it’s a little too much fun to be a millionaire if you get the money from mom and dad. These people are more likely than folks who don’t get money from mom and dad to run up big credit card bills, and they’re less likely to put their money into investments. (A weird exception, apparently, is teachers and college professors who are subsidized by mom and dad. They’re at least as frugal as those who receive no parental cash.) “The more dollars adult children receive,” wrote Stanley and Danko, “the fewer dollars they accumulate, while those who are given fewer dollars accumulate more.”
There is a silver lining. One way that these children of the wealthy are more spendthrift is in giving to charity:
On average, [parental] gift receivers donate significantly more to charity than do others in the same income categories. For example, gift receivers who have annual household incomes in the $100,000 category normally donate just under 6 percent of their annual incomes to charitable causes. The general population in this income category donates only about 3 percent. Gift receivers give in proportions that are much like those of households with annual incomes in the $200,000 to $400,000 bracket.
If I inherit $1 billion, quit the labor force, and give $999,000,000 away to charity (hey, I gotta live on something!), I can still be the sort of philanthropist Kaylan envisions, even though Holtz-Eakin will probably chide me for being an unemployed bum, and even though Stanley and Danko will probably call me irresponsible for pissing the family fortune away. Indeed, I’d probably be a net benefit to society even if I spent the remaining $1 million on booze and hookers and let my toenails grow 6 inches long. But how many such people are there? Chatterbox doesn’t know. More urgently, Chatterbox still needs to learn about the incidence of alcoholism, drug addiction, and other kinds of anti-social behavior among the idle rich compared to the population at large. If this research really hasn’t been done, it’s a great opportunity for some ambitious social scientist. You could probably get a fat grant from a big foundation funded by America’s wealthiest families.