Wealth, Mobility, Inheritance And The Estate Tax

Studies | Taxes

No. 235
Thursday, June 01, 2000
by Bruce Bartlett


Introduction

Figure I - Cost of a Color Television Set

"The simple existence of wealth is economically of great importance."

While there are many economists and philosophers who have defended the right to become wealthy, few have defended wealth per se. But in fact, the simple existence of wealth is economically of great importance, quite apart from the familiar need for society to accumulate capital for investment. Wealth and the inequality it breeds are actually central to the functioning of our entire economic system. As Texas A&M University economist Finis Welch recently put it:1

It is not much of an exaggeration to say that all of economics results from inequality. Without inequality of priorities and capabilities, there would be no trade, no specialization, and no surpluses produced by cooperation.

"Without 'rich' people to buy the first television sets, cheap ones would not be available to the masses today."

Consider the simple fact that many of the appliances and other conveniences that almost all Americans own would not have come into existence if there weren't rich people to buy them in the first place. It is easily forgotten that things like televisions, VCRs, microwave ovens, home computers and wireless phones, most of which are now owned by almost all middle class Americans - and even a significant number of those officially classified as poor - were not too long ago luxuries so expensive that only the very rich could afford them.

"In effect, the rich underwrite the cost of bringing new products to market."

The first color televisions cost $1,000 in 1954, or $6,660 in 1997 dollars, requiring 562 hours of labor by a typical worker to buy.2 Today, of course, almost all TVs are color and cost a fraction as much. In 1997, one could buy a 25-inch RCA color set for $299, or about 23 hours of labor. Furthermore, a 1997 model was far better in quality than its 1954 version. [See Figure I.]

Even more dramatic is the computer. In 1970, it would have cost close to $5 million to buy a computer that was capable of performing 12.5 million instructions per second (MIPS). This works out to almost $400,000 per MIPS. Such computers were, of course, available only to governments, universities and large corporations. Not even the richest American would have considered buying one for home use. By 1984, the cost of computers had fallen to within reach of the modestly well-to-do. A computer able to perform 8.3 MIPS could be had for about $4,000, or $479 per MIPS. In 1997, a good home computer capable of performing 166 MIPS could be had for less than $1,000, or $6 per MIPS. At such a price, even children could have computers with more power than all the computers on earth when their parents were born.

The point is that unless there were "rich" people out there willing to buy those $1,000 TVs in 1954 or the $4,000 computers in 1984, there would be no businesses producing such products for the masses today. Someone had to be willing and able to pay a seemingly exorbitant price to be the first to have the latest gadget. The profits made from selling these high-priced gizmos are what paid for the research and development and the capital investment needed to bring the first one to market. They also attracted competitors and other businesses that made the products cheaper and more valuable still. After all, what would television be without programming or computers without software?

"The unequal distribution of wealth was tolerated because equality of opportunity prevailed widely."

In a sense, therefore, the rich perform a public service when they engage in what sociologist Thorstein Veblen called "conspicuous consumption." They are in effect underwriting the cost of bringing new products to market that ultimately become ubiquitous, available even to the hoi polloi. Since it's not much fun to be rich if even the riffraff can enjoy the same products, the rich aid innovation by pushing the limit of what is possible, encouraging producers to meet their demands in return for large profits. For example, now that everyone has a color TV, the rich are buying high-definition televisions at $5,000 or more each. It may well be that 10 years from now such sets will be standard in every middle-class home. But unless someone buys them today, it won't happen.


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