|Creative enterprise is not stimulated by vast inheritances. They bless neither those who bequeath nor those who receive. [...] A tax upon inherited economic power is a tax upon static wealth, not upon that dynamic wealth which makes for the healthy diffusion of economic good.
—Franklin Delano Roosevelt, 1936
The beneficiaries of this raw exercise in class warfare aren't hurting, to say the least. They are scions of the wealthiest Americans. Their immense wealth is built on growing inequality with which we've become all-too-familiar, most of us personally familiar. The median net worth of the middle class, those households in the 40th to 60th economic percentiles of the population, fell 29 percent between 2007 and 2010, to $65,900. The top 10 percent saw their net worth rise to $2.9 million. The top 1 percent boasted a net worth of $8.4 million. That vast concentration of wealth, built upon vast inequality not seen since the 1920s, delivers political inequality for its owners. Out of that political inequality come changes, in and out of the tax code, that exacerbates the economic inequality. The plutocrats desire to take us ever onward down this path.
But, of course, even making mention of a wealth tax generates screams of "socialist." And despite its clear benefits, its innate fairness, the whole idea gives plenty of people who are nowhere near wealthy, including many liberals, the heebie-jeebies. That's a drag. Not because a wealth tax would solve all of America's economic problems. But a direct annual tax on household wealth would raise revenue, reduce inequality and, along with it, reduce unequal political power.
That obviously is not where we're at politically. Instead, compromises are cut while the plutocrats never surrender their ultimate goals. Let's take a look at the trajectory of the closest thing we've got to a wealth tax right now.
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From 2001 to 2009, changes were made in the tax code that eliminated the levy on 99.76 percent of the estates of people who died. Starting in 2002, estates could pass on $1 million tax free to their heirs, $2 million for a couple. Anything more than that was taxed at 50 percent. By 2009, however, that exemption had been raised to $3.5 million, $7 million for a couple, with amounts over that taxed at 45 percent.
Due to a quirk in the tax law, heirs of anyone who died in 2010 paid zero estate tax. Zero is, in fact, the goal of all those who intone "death tax." One of those is Mitt Romney. But he's got plenty of company.
That's what we have now. If the law isn't changed by Dec. 31, the estate tax reverts to a $1 million exemption with the overage taxed at 55 percent. Republican leaders want to maintain the $5 million inflation-indexed exemption. On their way toward wiping out the estate tax altogether.
Who are the beneficiaries of this policy? Americans in the top 0.24 percent of the population.
The Obama administration went along with this deal two years ago because Republicans demanded it in exchange for their votes maintaining the modest increases in the EITC and Child Tax Credit for some categories of low- and medium-income people. These had been put into place as part of the American Recovery and Reinvestment Act, the stimulus act, passed in the spring of 2009.
Now, as Chye-Ching Huang and Nathaniel Frentz at the Center for Budget and Policy Priorities write, McConnell and Hatch (who themselves are in the top 0.1 percent of the population) have joined colleagues in the House and Senate who want to make the outrageous 2010 estate tax break for the rich permanent while dropping the improved benefits for lower-income Americans:
[T]he estate-tax break would cost $119 billion over ten years in lost revenue, and would increase the deficit by $141 billion over the same period when the interest costs are included, according to estimates from the Treasury Department and the Office of Management and Budget.But surely that 0.24 percent are job creators and the tens of billions in extra cash directed their way would generate jobs worth far more than that paltry sum. Right?
In fact, as we have seen in analyses over and over again, lower tax rates do not lead to more job creation. And while those analyses focus on the income tax rate, particularly the rate charged against dividends and capital gains, there is no reason to believe the matter is any different when it comes to the estate tax.
The income tax break for lower-income working people is another matter altogether.
As Huang and Frentz explain, the Congressional Budget Office and Moody’s Analytics found that the EITC and Child Tax Credit tax credits directed at moderate-income families have had much more “bang for the buck” than the high-end Bush tax cuts.
For many lower-income working families, the impact of losing the tax-credit improvements would be substantial. For instance, a married couple with three children that has earnings at the estimated poverty line for 2013 ($27,713 for a family of that size) will receive $1,934 less in combined CTC and EITC benefits next year if policymakers let the improvements expire. Similarly, a single mother with two children working full time at the minimum wage—and earning about $14,000—will receive a CTC of just $173 in 2013 instead of $1,725.The EITC and CTC tax benefits make life just a little easier for working people in tough economic circumstances. The high-end tax break given to that rarefied economic stratum Hatch and McConnell favor reminds us of just how right Thorstein Veblen was.
As they themselves have made perfectly clear, the right-wing "reformers" won't be satisfied until the estate tax is completely abolished. That, analysts say, would cost the Treasury at least $670 billion in lost revenue and increased interest charges on the national debt. Not being yet able to ram abolition of the "death tax" through Congress, advocates are determined in the meantime to nick it repeatedly, surrendering ever more revenue to a comparative handful of Americans who can most afford to do pay up.
That's half of what the current battle is about. The other half, the even more infuriating half, is about lopping off tax breaks to Americans of moderate income (or using them as hostages in "negotiations" over rich-people's tax cuts). Repealing the estate tax, as Mitt Romney is eager to do, ought never to be on the agenda except as a laugh line.
How exactly should estates be taxed? For the little fix, back to 2001. The million-dollar exemption was reasonable a decade ago. It's still reasonable. Resetting to that level would bring into the Treasury, the Tax Policy Center estimated a year ago, $532 billion extra between now and 2020.
For the bigger fix, after making provisions for small businesses and family farms, taxing inherited assets above $1 million at 50 percent, with surcharges as those assets pass $5 million and $10 million and more, would generate hundreds of billions of dollars in revenue over a decade. But we should not stop with taxes on inherited wealth. All wealth above a certain threshold ought to be subject to an annual levy.
For many of us on the left, this is a matter of simple justice, a matter of economic democracy. But there's another issue that Nobel laureate Joe Stiglitz explains in his book, The Price of Inequality:
From the right, you sometimes hear the argument made that inequality is basically a good thing: as the rich increasingly benefit, so does everyone else. This argument is false: while the rich have been growing richer, most Americans (and not just those at the bottom) have been unable to maintain their standard of living, let alone to keep pace. A typical full-time male worker receives the same income today he did a third of a century ago.Most discussions of taxing the rich are about taxing their income. Here, too, the plutocrats are hard at work. Paul Ryan, a recent arrival among the 0.1 percent—that rarefied group that pays lower effective income tax rates than anybody's secretaries—wants to zero out the tax on capital gains and dividends to bring those rates even lower.
From the left, meanwhile, the widening inequality often elicits an appeal for simple justice: why should so few have so much when so many have so little? It’s not hard to see why, in a market-driven age where justice itself is a commodity to be bought and sold, some would dismiss that argument as the stuff of pious sentiment.
Put sentiment aside. There are good reasons why plutocrats should care about inequality anyway—even if they’re thinking only about themselves. The rich do not exist in a vacuum. They need a functioning society around them to sustain their position. Widely unequal societies do not function efficiently and their economies are neither stable nor sustainable. The evidence from history and from around the modern world is unequivocal: there comes a point when inequality spirals into economic dysfunction for the whole society, and when it does, even the rich pay a steep price.
That would, of course, allow for an even greater accumulation of wealth, of social and political clout, of inequality, and thus should be fought against. Not with compromise but alternative tax approaches that raise the marginal income tax rate on those who make the most, restore progressive bracketing, reinforce enforcement of the tax code.
Included in these alternatives should be a wealth tax, one that is itself progressively graduated. Wealth taxes have drawbacks, administrative complexities, plus, of course, evasion. This has caused some nations which once imposed them to give them up. But we're innovative we Americans, we're can do, and no obstacle bars us from coming up with the means and the methods to adopt and implement an equitable, enforceable wealth tax.
Other than, of course, the political obstacles.
Overcoming those is a matter of getting the right leaders into place, something the growing concentration of wealth conspires to make ever more difficult. Which means we should get started now.
A state-by-state Center for Budget and Policy Priorities analysis of how many people would be affected by maintaining the 2010 estate tax levy as is can be found here.