Should we keep the wealthy non-diversified? (from my email)

 [[{“value”:”Byrne Hobart writes to me: One of the purposes of inheritance taxes is to avoid compounding intergenerational wealth. But The Missing Billionaires points out that if all of America’s millionaires had put their money in broad market indices in 1900, their heirs would number 16,000 billionaires, even accounting for taxes, splitting estates among multiple children, etc. So
The post Should we keep the wealthy non-diversified? (from my email) appeared first on Marginal REVOLUTION.”}]] 

Byrne Hobart writes to me:

One of the purposes of inheritance taxes is to avoid compounding intergenerational wealth. But The Missing Billionaires points out that if all of America’s millionaires had put their money in broad market indices in 1900, their heirs would number 16,000 billionaires, even accounting for taxes, splitting estates among multiple children, etc.

So one of the forces that prevents compounding inequality is that rich people tend to have less diversified portfolios than the rest of us—they own a lot of whatever it is that made them rich! If we give them an incentive to stay undiversified, and to do so even when they’re quite old and thus not in a great position to monitor or manage their assets well, they’ll end up with suboptimal portfolios that are much more likely to lose most/all of their value than the average retirement account is. Given how much volatility can cut into returns (witness the 3x levered Microstrategy ETF that has lost 82% of its value in a year when Microstrategy itself doubled), it’s possible that the cost basis step-up actually contributes more to intergenerational economic mobility than the money collected by the estate tax itself, by encouraging them to white-knuckle their way through the last years of their life with all their eggs in one basket.

I’m not personally a fan of the estate tax or the step-up, for various reasons, but I found this argument fun nonetheless.

Speculative but interesting…

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 Economics, Law