Tax the Wealthy

For more than a decade, a powerful group of
special-interest organizations has waged a multimillion-dollar campaign to turn
public opinion against a tax that falls on the wealthiest 2 percent of the
population. It worked. The "death tax," many Americans now believe, afflicts
family farmers and small-business owners, robbing them of the opportunity to
bequeath their lives' fortunes to their children.

The people pushing this line include the heirs to the Gallo wine and
Mars candy fortunes, along with an organized association of more than 100
independent newspaper owners. Together with a veritable antitax industry of think
tanks and lobbying firms in Washington, these groups have formed a potent "death
tax elimination" lobby.

Of course, the vast majority of family farmers will never owe an estate tax.
Rather, the windfall of estate tax repeal will shower upon the heirs and
heiresses of the 3,000 wealthiest estates. This elite group will inherit billions
in appreciated stock and real estate -- significant capital gains, many of which
have never been subject to taxation.

Why do we raise the issue now? Because in a matter of days the Senate will
decide whether to make permanent the 2001 repeal of the estate tax. It's an issue
that has scarcely made the news, but its consequences will profoundly affect the
health of the republic.

Many Americans believe that the estate tax debate has already played out.
After all, the tax's phase-out and eventual repeal were included in the $1.35
trillion tax cut that President Bush signed into law last June. But the Bush tax
bill includes such a puzzling assortment of phase-outs, delayed activation dates,
and gimmicks that money guru Jane Bryant Quinn called it "a contemptible piece of
consumer fraud." To mask the bill's enormous cost in outlying years, its authors
included a "sunset" provision: At the end of 2010, tax rules revert to those in
effect as of May 2001.

Predictably, the original patrons of the tax bill -- some of whom have spent
millions in campaign contributions, political advertising, and lobbying fees to
abolish the estate tax -- find the sunset provision unacceptable. They urgently
wish to make repeal of the estate tax permanent. And if they don't succeed in
doing so now, the odds will soon be against them, as budget deficits grow and the
cost of repeal escalates.

If, however, the Senate bows to this lobby's pressures by permanently
repealing the estate tax, the country stands to lose $800 billion between 2011
and 2021. It's a loss that will significantly undercut Social Security and
Medicare over the next seven decades, hitting hard as the eldest baby boomers
reach retirement age.

The United States also stands to lose one of its most progressive federal
taxes. Only estates worth more than $1 million (or $2 million for couples) are
subject to the tax -- and the bulk of it is paid by the fewer than 3,000 estates
with assets in excess of $5 million. Thanks to the Bush tax cut, between now and
2009 the exemptions will rise to $3.5 million for an individual ($7 million for
couples).

Some people object to the notion of a tax at death, but taxing dead
multimillionaires is eminently more fair than taxing the not-so-rich living.
Between now and 2052, the intergenerational transfer of wealth is projected to
reach between $41 trillion and $136 trillion. An estimated one-third to one-half
of this wealth will be transferred by estates worth more than $5 million. The
estate tax, should it remain in place, will therefore be an increasingly
significant progressive source of revenue in the coming decades. Meanwhile, state
budgets, already straining from plummeting tax revenues, will lose more than $6.5
billion a year when state-linked revenue from the estate tax is eliminated in
2005.

If the direct costs weren't high enough, the indirect ones could be beyond
measure. Philanthropy is not solely inspired by the tax code, but the estate tax
unquestionably provides a powerful incentive for charitably oriented people to
stretch their giving. Estate tax repeal will most likely reduce charitable giving
and bequests, particularly from estates in excess of $20 million, by an
estimated $5 billion to $6 billion a year. This will certainly hit large
charities that depend on bequests, such as hospitals, universities, and land
conservancies. But it will also affect the entire nonprofit sector because
one-third of all bequest dollars go toward creating or expanding foundations.

The debate that will decide all this may go by very quickly. Senators Phil
Gramm of Texas and Jon Kyl of Arizona are fervently pushing to attach permanent
repeal as a provision to any moving legislation. After Gramm threatened to attach
the provision to the energy bill, the Senate Democratic leadership agreed instead
to allow a freestanding vote on the matter before June 28. The vote currently
looks too close to call, as each side pressures a handful of swing senators.
Ultimately, the question is this: How high a price is America willing to pay in
order to give a handful of millionaires and billionaires a tax break?

Opponents of the estate tax tend to be animated by a
zealous
belief in individual success and a profound animosity toward government. If my
success results from my own effort and industry, the thinking runs, then the
estate tax -- or any form of taxation -- is a form of larceny.

Like the "great man" theory of history, our dominant "great man"
theory of wealth creation borders on mythology. Such folklore fills the pages of
business magazines. In a recent interview, one chief of a global corporation was
asked to justify his enormous compensation package. He responded, "I created over
$300 billion in shareholder value last year, so I deserve to be greatly
rewarded." The operative word here is "I." There was no mention of the share of
wealth created by the company's other 180,000 employees. From this sort of
thinking, it is a short distance to, "It's all mine" and, "Government has no
business taking any part of it."

There is no question that some people accumulate great wealth through hard
work, intelligence, creativity, and sacrifice. Individuals do make a difference,
and it is important to recognize individual achievement. Yet it is equally
important to acknowledge the influence of other factors, such as luck, privilege,
other people's efforts, and society's investment in the creation of individual
wealth.

Consider the many components of the social framework that enable great wealth
to be built in the United States. Among them are a patent system, enforceable
contracts, open courts, property ownership records, protection against crime and
external threats, and public education. Even the stock market is a form of
socially created wealth that provides liquidity to enterprises. David Blitzer,
the chief investment strategist at Standard and Poors, recently wrote, "Financial
markets are as much a social contract as is democratic government." When faith in
this social system is shaken, as it has been by recent breaches of trust, we see
how quickly individual wealth evaporates.

Some potential beneficiaries of estate tax repeal are well aware of the
dynamic relationship between individual wealth and the society in which it's
produced. Last year, Responsible Wealth (an organization co-founded by co-author
Chuck Collins) circulated a petition in support of reforming, but not
eliminating, the tax. More than 1,100 business leaders and investors who will pay
estate taxes in the future signed it, including George Soros, Ted Turner, and
David Rockefeller Jr., as well as hundreds of small-business owners and
"millionaires next door" whose wealth totals between $1 million and $10 million.

Bootstrap sagas and "great man" theories reflect
deep strains of American
self-perception, but a countervailing view of wealth also claims roots in this
country's history. In response to the dramatically unequal distribution of
wealth in the first Gilded Age, Andrew Carnegie wrote The Gospel of
Wealth
, which proposed to address these disparities through steep inheritance
taxes and aggressive charitable giving.

Republican President Theodore Roosevelt also believed that society had a claim
on the accumulated fortunes of the very wealthy, thanks to its role in creating
those fortunes. In his 1906 State of the Union address, Roosevelt proposed the
creation of a federal inheritance tax. He explained: "The man of great wealth
owes a peculiar obligation to the State because he derives special advantages
from the mere existence of government." As Roosevelt further argued in a June
1907 speech: "Most great civilized countries have an income tax and an
inheritance tax. In my judgment both should be part of our system of federal
taxation." Such taxation, he noted, should "be aimed merely at the inheritance or
transmission in their entirety of those fortunes swollen beyond all healthy
limits."

No doubt Roosevelt would consider the great income and wealth inequalities of
our second Gilded Age reason to increase rather than to eliminate the one tax we
have that limits the buildup of hereditary concentrations of wealth. Roosevelt
and others of his day understood that the American experiment was an attempt to
balance economic liberty and free enterprise, on the one hand, with a traditional
concern about democracy and the dangers of concentrated wealth and power, on the
other. The estate tax, adopted in 1916, was one of the means by which Americans
rejected the Old World, with its political and economic monarchies.

The upcoming vote on the estate tax will tell us much about the Senate's
ability to maintain fiscal discipline at a time of war and budget deficits.
Responsible senators should vote against making repeal of the estate tax
permanent. They should open the next year with an honest debate about the dangers
of wholesale repeal and the possibilities for meaningful reform.

If need be, Congress should explore the possibility of linking estate tax
revenue to the Social Security trust fund, providing long-term solvency for the
fund without increasing payroll taxes or reducing retiree benefits. But Congress
should reject the notion of wholesale repeal in the short term because it is
fiscally reckless -- and in the long term because we recognize the importance of
protecting our democracy from a further buildup of hereditary wealth.

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