Should I Talk About Trickle Down Economics? Or Maybe The Laffer Curve?

It's as close to an established truth as you'll find in economics that there is a "sweet spot" for taxation, at which government revenues are maximized.  That point is the apex of the Laffer Curve.  Tax above the apex, and government revenues decline as earners hide their money, channel it into unproductive tax shelters, or flee overseas.  Tax below the apex, and you're just not taxing efficiently.  The rich spend their money on solar powered dog polishers, or breeding new Kennedys, while government starves.

Then there's Brunei, where one family owns everything and pays no taxes.  The ruling Sultan provides a generous welfare state from his own pocket, and his family, well…

What do they do with all that money, and no jobs?

They commission life-sized ultrarealistic pornographic statues of themselves, that's what.

Lawyers for Prince Jefri Bolkiah, the kid brother of the Sultan of Brunei, don't want jurors to hear anything about his four sex trophies in a blockbuster real estate trial opening next week in Manhattan Supreme Court.

Unfortunately for Prince Jefri, he had to sue his real estate developer in New York, rather than Brunei, which lacked jurisdiction.  Unlike Brunei, New York has open courts, liberal discovery, and no procedural or evidentiary rules favoring royalty.  So word of the statues decorating his New York estate, which depict Prince Jefri sharing the wealth with his wives, trickled out, all the way to the New York Daily News.

And there our economics lesson continues.  According to theory, by taxing the wealthy, such as Prince Jefri, at low rates the government ensures that their wealth will "trickle down" to others engaged in valuable trades and industries, like ultrarealistic porn sculptors.

Supposedly the statues illustrate the concept of trickling down, in great detail.

Now you're probably asking, "What's the point of dressing up this tawdry story with all this shaggy dog economics talk?".  Well, I could say that we're going to be hearing a lot about the estate tax with the new Republican Congress, and it's important to remind ourselves of what the children of inherited wealth actually do with their unearned money.  This is an educational post, with an important message to share about tax policy.

But I'd be lying.


Last 5 posts by Patrick Non-White


  1. shawn says

    I'm surprised you don't mention the recipient of such largesse — the sculptor– is John Seward Johnson, partial heir to the Johnson & Johnson fortune (whose father's will was drafted by Nina Zagat and then was furiously litigated as covered at length in the Aspen T&E text). Trickle-down indeed.

  2. Mike says

    Being born into a rich family is proof that God wanted them to be rich. Why are you attempting to thwart God's will?

  3. Rich Rostrom says

    Inherited money was earned by the original possessor, who paid taxes on the income. Why does the government have an additional claim on it because he died?

    If I earn $10 million, and pay taxes on it, I should be able to do whatever I want with what I have left: spend it myself, or give it to someone else to spend.

    Suppose I want to give $5 million to my child, so he can devote his life to some unremunerative field of science, or Torah studies, or marathon running, or elaborate formal gardens, or cheap vodka… what right does the state have to tax that transfer?

  4. Base of the Pillar says

    Hey, Rich. How did the possessor get the money? Did it magically appear in his account? No, he probably got paid some-to-all of it. And the entity who paid him probably also got taxed on it. And the government, we as a society have agreed, has the right and obligation to tax that transfer. Your inheritor has just received wealth and I don't really see why that transfer is substantially different (tax-wise) than when the company paying the rich daddy got taxed.

  5. says

    At least generally, when you inherit assets, the cost basis for capital gains purposes is what they were worth when you inherited them. So there's quite possibly untaxed capital gains in estates.

  6. zarathud says

    It's easier to tax the estate at a gross value than to try and calculate the taxable gain on inherited assets. 2010 is the second time we've dealt with deferred income tax on inherited assets and it was an enforcement disaster then, too.

    I'm sure you know that the Laffer Curve's validity has been questioned outside the politically-motivated economic circles where it originated. Then again, you were being educational, right?