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 andMars candy fortunes, along with an organized association of more than 100independent newspaper owners. Together with a veritable antitax industry of thinktanks and lobbying firms in Washington, these groups have formed a potent "deathtax 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 andheiresses of the 3,000 wealthiest estates. This elite group will inherit billionsin appreciated stock and real estate -- significant capital gains, many of whichhave never been subject to taxation.
Why do we raise the issue now? Because in a matter of days the Senate willdecide whether to make permanent the 2001 repeal of the estate tax. It's an issuethat has scarcely made the news, but its consequences will profoundly affect thehealth 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 $1.35trillion tax cut that President Bush signed into law last June. But the Bush taxbill includes such a puzzling assortment of phase-outs, delayed activation dates,and gimmicks that money guru Jane Bryant Quinn called it "a contemptible piece ofconsumer fraud." To mask the bill's enormous cost in outlying years, its authorsincluded a "sunset" provision: At the end of 2010, tax rules revert to those ineffect as of May 2001.
Predictably, the original patrons of the tax bill -- some of whom have spentmillions in campaign contributions, political advertising, and lobbying fees toabolish the estate tax -- find the sunset provision unacceptable. They urgentlywish to make repeal of the estate tax permanent. And if they don't succeed indoing so now, the odds will soon be against them, as budget deficits grow and thecost of repeal escalates.
If, however, the Senate bows to this lobby's pressures by permanentlyrepealing the estate tax, the country stands to lose $800 billion between 2011and 2021. It's a loss that will significantly undercut Social Security andMedicare over the next seven decades, hitting hard as the eldest baby boomersreach retirement age.
The United States also stands to lose one of its most progressive federaltaxes. Only estates worth more than $1 million (or $2 million for couples) aresubject to the tax -- and the bulk of it is paid by the fewer than 3,000 estateswith assets in excess of $5 million. Thanks to the Bush tax cut, between now and2009 the exemptions will rise to $3.5 million for an individual ($7 million forcouples).
Some people object to the notion of a tax at death, but taxing deadmultimillionaires is eminently more fair than taxing the not-so-rich living.Between now and 2052, the intergenerational transfer of wealth is projected toreach between $41 trillion and $136 trillion. An estimated one-third to one-halfof this wealth will be transferred by estates worth more than $5 million. Theestate tax, should it remain in place, will therefore be an increasinglysignificant progressive source of revenue in the coming decades. Meanwhile, statebudgets, already straining from plummeting tax revenues, will lose more than $6.5billion a year when state-linked revenue from the estate tax is eliminated in2005.
If the direct costs weren't high enough, the indirect ones could be beyondmeasure. Philanthropy is not solely inspired by the tax code, but the estate taxunquestionably provides a powerful incentive for charitably oriented people tostretch their giving. Estate tax repeal will most likely reduce charitable givingand bequests, particularly from estates in excess of $20 million, by anestimated $5 billion to $6 billion a year. This will certainly hit largecharities that depend on bequests, such as hospitals, universities, and landconservancies. But it will also affect the entire nonprofit sector becauseone-third of all bequest dollars go toward creating or expanding foundations.
The debate that will decide all this may go by very quickly. Senators PhilGramm of Texas and Jon Kyl of Arizona are fervently pushing to attach permanentrepeal as a provision to any moving legislation. After Gramm threatened to attachthe provision to the energy bill, the Senate Democratic leadership agreed insteadto allow a freestanding vote on the matter before June 28. The vote currentlylooks 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 inorder to give a handful of millionaires and billionaires a tax break?
Opponents of the estate tax tend to be animated by azealousbelief in individual success and a profound animosity toward government. If mysuccess results from my own effort and industry, the thinking runs, then theestate 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 ofbusiness magazines. In a recent interview, one chief of a global corporation wasasked to justify his enormous compensation package. He responded, "I created over$300 billion in shareholder value last year, so I deserve to be greatlyrewarded." The operative word here is "I." There was no mention of the share ofwealth created by the company's other 180,000 employees. From this sort ofthinking, it is a short distance to, "It's all mine" and, "Government has nobusiness taking any part of it."
There is no question that some people accumulate great wealth through hardwork, intelligence, creativity, and sacrifice. Individuals do make a difference,and it is important to recognize individual achievement. Yet it is equallyimportant to acknowledge the influence of other factors, such as luck, privilege,other people's efforts, and society's investment in the creation of individualwealth.
Consider the many components of the social framework that enable great wealthto be built in the United States. Among them are a patent system, enforceablecontracts, open courts, property ownership records, protection against crime andexternal threats, and public education. Even the stock market is a form ofsocially created wealth that provides liquidity to enterprises. David Blitzer,the chief investment strategist at Standard and Poors, recently wrote, "Financialmarkets are as much a social contract as is democratic government." When faith inthis social system is shaken, as it has been by recent breaches of trust, we seehow quickly individual wealth evaporates.
Some potential beneficiaries of estate tax repeal are well aware of thedynamic relationship between individual wealth and the society in which it'sproduced. Last year, Responsible Wealth (an organization co-founded by co-authorChuck Collins) circulated a petition in support of reforming, but noteliminating, the tax. More than 1,100 business leaders and investors who will payestate taxes in the future signed it, including George Soros, Ted Turner, andDavid 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 reflectdeep strains of Americanself-perception, but a countervailing view of wealth also claims roots in thiscountry's history. In response to the dramatically unequal distribution ofwealth in the first Gilded Age, Andrew Carnegie wrote The Gospel ofWealth, which proposed to address these disparities through steep inheritance taxes and aggressive charitable giving.
Republican President Theodore Roosevelt also believed that society had a claimon the accumulated fortunes of the very wealthy, thanks to its role in creatingthose fortunes. In his 1906 State of the Union address, Roosevelt proposed thecreation of a federal inheritance tax. He explained: "The man of great wealthowes a peculiar obligation to the State because he derives special advantagesfrom the mere existence of government." As Roosevelt further argued in a June1907 speech: "Most great civilized countries have an income tax and aninheritance tax. In my judgment both should be part of our system of federaltaxation." Such taxation, he noted, should "be aimed merely at the inheritance ortransmission in their entirety of those fortunes swollen beyond all healthylimits."
No doubt Roosevelt would consider the great income and wealth inequalities ofour second Gilded Age reason to increase rather than to eliminate the one tax wehave that limits the buildup of hereditary concentrations of wealth. Rooseveltand others of his day understood that the American experiment was an attempt tobalance economic liberty and free enterprise, on the one hand, with a traditionalconcern about democracy and the dangers of concentrated wealth and power, on theother. The estate tax, adopted in 1916, was one of the means by which Americansrejected the Old World, with its political and economic monarchies.
The upcoming vote on the estate tax will tell us much about the Senate'sability to maintain fiscal discipline at a time of war and budget deficits.Responsible senators should vote against making repeal of the estate taxpermanent. They should open the next year with an honest debate about the dangersof wholesale repeal and the possibilities for meaningful reform.
If need be, Congress should explore the possibility of linking estate taxrevenue to the Social Security trust fund, providing long-term solvency for thefund without increasing payroll taxes or reducing retiree benefits. But Congressshould reject the notion of wholesale repeal in the short term because it isfiscally reckless -- and in the long term because we recognize the importance ofprotecting our democracy from a further buildup of hereditary wealth.
