The Latte Factor and the Estate Tax

So, as if you are a person on the internet you have probably seen, Senator Chuck Grassley had this to say when asked why Congress plans to reduce (the Senate bill) or eliminate (the House bill) the estate tax:

“I think not having the estate tax recognizes the people that are investing, as opposed to those that are just spending every darn penny they have, whether it’s on booze or women or movies.”

For a hippie communist, I have some surprisingly mixed feelings about this point.

I’m gonna try a numbered list here.

First of all, to be clear, the estate tax does not fall on savers. By the time we are talking about the estate tax, the people who built the estates are dead. They literally cannot take it with them, so they leave it, and the tax falls on their heirs — that is, people who did not put blood, sweat, and tears into putting away that money. Insofar as we want to moralize about savings, the estate tax is 100% the wrong place to do it. If the estate tax fell on estates that weren’t worth much, I think that would be a discussion worth having — say it fell on estates of $100,000, and you had people who were uncompensated caregivers to their parents inheriting, we might want to think about that. But at $5.5 million, it falls on a very small number of estates, and all of those people’s kids are going to be just fine even after the tax is imposed.

Second of all, [unprintable comment about Chuck Grassley]

Third of all, he’s not wrong that most people blow off steam in ways that involve money, because most things in our society involve money, and that most of us, if we never did that, would in fact be better off financially. This is where my mixed feelings come in: he isn’t wrong about that. Who among us (and by us I mean the PF blogosphere) doesn’t have a story that involves a substantial amount of pennypinching? Me, I freely admit that I got out of grad school with $19K of unnecessary loans, and that my life improved immensely after I started budgeting, especially at the grocery store (I’m more of a cheese person than a booze person), and saving the savings. If I were counseling someone about money, I would in fact advise pretty much anyone to cut down on the wine, women, and song.

Fourth of all, the latte factor is irrelevant in whether or not someone’s estate is taxed. Most people could probably improve their finances by becoming more disciplined about, or at least more attentive to, their daily spending. But the kind of improvement we’re talking about is the kind where you get out of debt or get an emergency fund, not the kind where you leave millions to your kids when you die.

I think Grassley’s comment is instructive in a couple of ways. First of all, he’s irritated. I hear that, Senator Grassley! I deal with 18-year-olds all day, and I’m irritated with irresponsible people too! But the thing is, I have some self-control. I don’t fly off the handle at a reporter with my deepest, darkest thoughts about Kids These Days, because I realize that there is probably a complicated human story behind why someone has turned in a paper with no sources, and Senator Grassley should also take a deep breath and realize that he is going to sound like a jerk, even if it’s true that human beings, as a whole, are terrible at money.

But there’s a larger question to be answered too. Should the tax code reward work or should it reward investment? Both now and, assuming this bill passes, even more in the future, our tax code does the latter. People with passive income, which would include inheritances, are much more gently treated than people with salary income. Grassley’s comment suggests that he thinks this is correct, not because investing is good for society as a whole (which is the justification for things like the lower capital gains tax), but because it’s a sign of moral virtue in the individual. I find that, to say the least, troubling.

1 thought on “The Latte Factor and the Estate Tax

  1. Good points. It’s a shame how many of us are misinformed or never taught at all about how disproportionately generous tax laws and other financial instruments are to unearned income vs earned income.

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