What Happens When People Ignore The Mixed Economy (An Example From Our Archives)
Author: Anvil Smith
Note: Here’s something that we first wrote about in 2001. Read the article, then our follow-up commentary.
One of the mysteries of human behavior is why people don’t do things universally recognized as beneficial.
For example, everyone knows regular exercise is a healthy habit, but every new study seems to indicate Americans are exercising less and weighing more. And even the tobacco industry has finally admitted that cigarettes are a health hazard. Yet people still smoke.
In both of the above examples, some might argue that addictive nature of high-calorie foods and nicotine must be considered as part of the equation. That may be the case, but there are other areas where people just don’t do the things that would be good for them.
Read this excerpt from a letter to the editor in the February 26, 2001 issue of the Wall Street Journal:
“On April 23, 2001, my wife and I will write a check for $461,000 to the U.S. Treasury for estate taxes for her father. One would think this is a painless act since she is now considered by many to be rich.
“How will this amount be met by that date? We are in the process of mortgaging the $220,000 Florida house that has been on the market since October. We have sold all of the liquid assets. Yet we are still going to have to borrow another $100,000 by April and avoid the 25% late penalty.”
A sad story, right? It’s the type of anecdote that makes you angry with the government for taking one last swipe at the hard-earned assets from a lifetime of work.
Wait a minute…
We don’t know all of the details, but this appears to be a sad story that didn’t have to happen.
It’s just a guess, but $461,000 of taxes due means an estate with a ballpark value of $3 million, give or take a few hundred thousand. And if the assets aren’t liquid, there’s possibly property or a business involved. More than likely, then, this was an estate that grew gradually over time. It wasn’t the result of some 20-year-old computer geek cashing in on a dot-com idea.
Which means there was time to plan.
Which means there could have been trusts, and life insurance policies, and gifting plans, and other strategies in place to protect those hard-earned assets. Which means a lot of the estate taxes probably could have been avoided.
Don’t misunderstand. It’s legitimate to decry the tax policy that results in the situation mentioned above. But it doesn’t explain why so many wealthy people don’t take the time to do what they can to minimize the damages. As far as we know, there isn’t an addiction or disease that keeps people from planning. Like we said at the beginning, it’s a mystery.
Why don’t people plan?
Comment: The situation described above is a classic example of the risk of ignoring the certain aspects of the mixed economy. This family apparently did a commendable job of accumulating wealth, probably through diligent work in free-market activity. Now they find the “control” of government taxation removing a sizable chunk of their wealth, and it seems so unfair.
You know what? For most people, the estate tax is unfair. But it’s also characteristic of how the mixed economy works. You can complain, even advocate for changes. But you should prepare for the financial realities.
If you have any knowledge of current economic control issues being discussed by politicians, you know changes to the estate tax rules are again under consideration - and the idea is to increase estate taxes, not reduce them. To remain ignorant of these changes means a lifetime of wealth could be transferred to government entities instead of designated heirs.
“You cannot legislate the poor into freedom by legislating the wealthy out of freedom. What one person receives without working for, another person must work for without receiving. The government cannot give to anybody anything that the government does not first take from somebody else. When half of the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for, that my dear friend is about the end of any nation. You cannot multiply wealth by dividing it.”
Dr. Adrian Rogers, 1931 to 2005