The other night, I was reading up on the concept of verisimilitude.
I try to avoid philosophical inquiries, which make head and stomach both spin, but in unsettling times we would do well to search the great minds for guidance and solace.
Verisimilitude – also known as truthlikeness, which my spellchecker rejects, and so should you – posits that some notions, while technically untrue, are closer to the truth than others, and therefore of greater validity and utility. The Earth is round, one could claim, but it’s really quite flattened at the poles – well, let’s call it round; that’s closer to the truth than suggesting it’s rhomboid. Close enough, works: ask Sir Isaac Newton.
Simultaneously, I was having a bit of a seethe. My thoughts drifted to injustice, unfairness and all that, and the point at which they apply to me.
Any given Sunday, I can take you to a sermon cautioning against resentment, jealousy, envy and other ‘deadlies’, and I do try my best. But this one time, working at a big investment firm, I learned something I shouldn’t have: our key analyst’s children had better health insurance than me. Indeed, they had full coverage – dental, you name it. But dad is a millionaire, I whined inwardly, silently until now. I do apologize for the spectacle.
Inequality is on every agenda. I’m not bothered by some inequities: if you have a Tesla and I have a Prius, for example. A friend, quite wealthy (inherited) has a swell set of dental implants – he says they’re better than teeth. I have bridgework and veneers: serviceable, comfortable and cheap. We had our work done at the same clinic in Thailand and his new choppers were literally ten times the cost of mine. Better? Perhaps. Is anybody suffering? Nah. If I can eat ribs, I’m fine with it.
Meanwhile, another rich friend (I should have worked harder) told me his three-year-old’s birthday party set him back $7,000. I swear I was muttering ‘guillotine, guillotine’, but then he gestured through the glass Chinese Wall (this was ten years ago and we said such things in innocence) to the Head of Sales. “His daughter’s party cost twenty grand. When he told me, he turned pale.”
The rich do these things without joy, I think – it’s the dues for membership in their club. Yet people are needy; there are worse things than weak teeth, for certain. Typically, I don’t envy anyone’s luxury, but I do sense some waste. Can’t the world’s wealth be distributed more equitably somehow?
We arrive at our topic – a report released by Brookings, entitled Taxing wealth transfers through an expanded estate tax (William G. Gale, Christopher Pulliam, John Sabelhaus and Isabel V. Sawhill; August 4, 2020). This report features a complex methodology aimed at predicting the effects of estate-tax reform, with the aim of addressing “two related and persistent threats to long-term, shared prosperity: growing inequality and rising federal debt.”
Here we return to verisimilitude: the analysts suggest three reform choices for increasing tax revenues and flattening out inequality. Which would work best, or come closest to ‘truth’? We must also consider whether their approach is even ‘true’ – if one of their plans became policy, would our less-fortunate citizens see benefits?
Before continuing, a disclaimer: nothing in this article reflects the views of Cavalier Associates, and any comments or opinions are mine. Typically, we back what we say: yes, we believe life insurance is an excellent estate planning tool, as our agents can demonstrate at length. In the present case, we neither favor nor discredit the Brookings report. In our view, it’s a sound, substantive study, with a tightly drawn methodology producing a range of considered policy suggestions. We like the approach; whether or not the ideas are good, we leave to your opinion.
I am free to offer opinions, as always – it’s a good idea to have them, if not cling to them too dearly. The Brookings analysts believe their proposals would “raise substantial amounts of revenue,” solely from the dime of the wealthiest citizens. To my eyes, this immediately raises an issue: what is this ‘substantial’?
In the search for truth’s likeness, precise terminology is crucial. ‘Substantial’ enough to fund enterprise zones in depressed districts (which typically involve tax breaks, suggesting lower federal revenues, at least initially)? This would directly address inequality, perhaps. Would the money go, say, to the Navy, for ship maintenance and sailor retention? Key issues of security for a maritime nation these are, and if you’re employed in building ships or running the fleet, it would be good for your income. Is that a proper outcome, do you think?
I would personally support curriculum reform to improve high-school students’ understanding of personal finance and economic opportunities. Many citizens have resources, yet fritter them away on objects that simply won’t grow – opportunity lost. Is this solid thinking, or is it just me, riding a hobby horse, like a politician? Taxes flow into the federal giant for good or for naught; we need to be careful. Reform makes no sense if nothing gets fixed, and a crap shoot isn’t real policy.
The Brookings study features an intricate methodology that hopefully demonstrates the accuracy of the Institute’s projections. The researchers propose three new estate-tax regimes and the hoped-for results.
Alternative 1 would set a $1,000,000 exemption, establishing the 0% marginal tax rate. Add one dollar and the rate becomes 40%; the plan could raise an estimated $118 billion per year. Alternative 2 would start similarly, but with a progressive marginal rate rising in increments of $500,000, starting at 30% and climbing to 75% for estates worth more than $20 million. The tax take could reach $130 billion. Finally, Alternative 3 offers a zero marginal rate for estates valued up to $5 million, and a flat assessment of 55% for anything richer. This could bring in around $61 billion, the researchers estimate.
Over ten years, all of these proposals could bring in a lot of money, but then, what do I mean by that? The report’s authors believe their alternatives would address the deficit problem, while conceding the impediment of potential “gamesmanship” from sources unnamed – you know them, I think. Despite my clear doubts, I believe Brookings has produced a rigorously structured and argued report, and it’s up to the reader to judge how close to ideal its parameters could reach.