THE FUTURE OF FINANCE BLOG

Fix (Don’t Flush) the Estate Tax

October 31, 2017


“The external glitter of wealth conceals a corrupt political core that reflects the growing gap between the very few rich and the very many poor.” – Mark Twain, The Gilded Age: A Tale of Today (1873)

 

The Estate Tax, or a tax on wealth passed onto heirs, is not unique to America, but many OECD countries have no such tax. Only Japan, South Korea, and France have statutory estate tax rates higher than the US rate of 40%, but in America, the first $11mm is exempt for couples. By definition, only the truly wealthy pay the wealth tax, although loopholes abound.

Enacted in 1916 in response to the excesses of the first Gilded Age and a search for revenues, the Estate Tax is on the chopping block in this second Gilded Age. Strangely, it’s getting less attention than the other components of the “tax plan” like a reduction in the corporate tax rate, apparently because it doesn’t raise much money (as if $20 billion is not much money). Defenders of the plan either (falsely) suggest it breaks up family farms and small business, or more cynically, they maintain that “anyone smart enough to amass a large fortune is smart enough to avoid paying it anyway.” That’s the spirit!

Yet there is probably no aspect of the U.S. tax code more aligned with the values that the Founding Fathers risked their lives for than the law taxing inherited wealth. After all, what the American Revolution was all about was emancipation from the corrupted power of the King and a general, well-considered aversion to Old World aristocratic rule.

Aristokratia (rule by the best) was originally conceived by the Greeks as a system where the best and brightest — the elite — would rule in the interest of society as a whole. But too often in the real world, aristokratia devolved into tyrannical plutocracy, both in Greece and later with the Roman Empire (followed by centuries of the Dark Ages I must add). Rather than wealth recirculating in a way that served the common good, it became increasingly concentrated within an elite class through marriage and policymaking, further enriching that class and ensuring its hold on power. The pattern has repeated itself throughout history, with disastrous consequences for the rich and the poor alike.

America was to be an experiment in something different, breaking from the European aristocratic tradition. America was “conceived in Liberty” (specifically liberty from the English Monarchy and from aristocracy more generally), and from that conception grew a unique entrepreneurial and opportunistic culture of discovery and personal fulfillment previously unseen in the Old World. America would go on to lead the world and become the envy of many nations. Some (dangerously) even believed it was America’s God-given “manifest destiny” to spread a system of liberty (by whatever means necessary) based on democratic self-governance (in sharp relief to the Old World’s aristocracies).

America also has a great philanthropic tradition that is aligned with this experiment and directly opposed to the extreme consolidation of dynastic wealth and power. Andrew Carnegie, perhaps the father of American Philanthropy wrote in his Gospel of Wealth that “the amassing of wealth is one of the worst species of idolatry.” His position on the “duty of the man of Wealth” is clear:

First, to set an example of modest, unostentatious living . . . and to provide moderately for the legitimate wants of those dependent upon him; after doing so to consider all surplus revenues which come to him simply as trust funds, which he is called upon . . . and strictly bound as a matter of duty to administer in the manner which, in his judgment, is best calculated to produce the most beneficial results for the community…

Carnegie’s Gospel of Wealth is not perfect and needs an update for the modern context of complexity. But even this “robber baron” of the first Gilded Age – and certainly Mark Twain and our Founding Fathers – would be rolling in their graves if they knew an American-billionaire-narcissist president (with the advice of two former Goldman Sachs partners in his cabinet and politicians corrupted by big-money donors) was trying to ram through a tax plan that eliminates, rather than fixes, the Estate Tax.

It’s easy to rebut the critics of the Estate Tax. It is a tax triggered by death. So what. Would you prefer it be a wealth tax imposed annually? And it’s not double taxation on the creation of real wealth, rather it is largely a tax on hitherto untaxed unrealized gains—looking at you Jeff Bezos and Walton family. Let’s have a healthy debate on what level the exclusion should be. $1 million or $10 million? One can make the case for an even higher level. But the right number for a healthy civilization is not $1billion, much less no limit at the amount that the next Paris Hilton is born into. It turns out that some people need a little nudge to help them join the Giving Pledge, and the Estate Tax provides such an incentive. The question on the table is not whether the current tax collects enough revenue to be worth the effort. Rather, the question is: do we want to moderate the extreme wealth inequality in America’s second Gilded Age or exacerbate it further?

I’ve not read anywhere that the Founding Fathers believed in the freedom to amass ever larger concentrations of wealth and to create family dynasties. That’s not the “freedom” the founding fathers sought to protect. Given the long run stakes, it is terrifying to me how little intelligent debate on this topic is even taking place, with all the daily distractions, many around other forms of abuse of power.

Several years ago, my science colleague Dr. Sally Goerner observed that we are facing two immense challenges at this moment in history: The first is to transition to a new era; what many are calling the Integral Era. It requires us to transcend the mechanistic worldview on which the Scientific Revolution was grounded, and to embrace an integral or holistic understanding of how the world works, consistent with the universal principles and patterns of modern complexity science. This mirrors the necessary transition humanity made from the Medieval era to the Modern Era some four hundred years ago. It will be a monumental undertaking, certain to be filled with chaos and resistance from those in power.

But the second challenge is one humanity has experimented with and temporarily mastered but never succeeded at over the long term. That is how to organize and maintain a healthy hierarchy that provides the necessary coherence any complex society requires, while at the same time ensuring that those in positions of power act in such a way that serves, not merely their own self-interests, but the health of the whole system, or what we call the Common Good. Recirculating this wealth, either voluntarily or through taxation is fundamental to a healthy metabolism, as we know from the study of all regenerative systems. It’s not ideological.

When in the history of this great nation have we witnessed, to such a degree, the soul- and civilization-destroying consequences of corruption and the sheer predatory abuse of power as we are experiencing at this moment in time?

 

Comment<Back
  • Nancy Roof

    Thank you for speaking up, John.

    • John Fullerton

      The silence on this is deafening…

  • Excellent points John! Redistribution of wealth is necessary.

    I just read a book called “Debt or Democracy” by Mary Mellor about the concept of public money. She argues that, for a sovereign money system like we have in the US, taxation is a vital tool to manage inflation.

    An analogy: all organisms take in materials, metabolize them, and get rid of excrement. Bad things come when organisms don’t get rid of their excrement. Concentration of wealth breaks this natural pattern. Taxes are a way of encouraging this natural cycling of resources and energy. Too much money is illustrative of an imbalance that necessarily indicates a lack of health.

    • John Fullerton

      Exactly the right analogy if we think of a human economy as just another example of a living system that must metabolize just like all other living systems. Which we do!

      On “redistribution”, I prefer to think of it as “reinvestment” in the health of the system. If the system design generates accelerating inequality (as our current system obviously does), then it is unsustainable and redistribution is merely a bandaid. And one that angers those being redistributed from which is not a plus. What we need is to understand that just like you need to eat food to remain healthy (healthy food), so too does the system need to secure healthy inputs. So taxes pay for public education, because we understand that a healthy democracy and civilization depends on it. I see that as “reinvestment” in the health of the system. Now of course a safety net is also necessary for both ethical and systemic health reasons. But I think we benefit if we understand that this is about reinvestment rather than redistribution. And it’s not just semantics if we understand from a systems perspective. But it also has practical advantages.

  • Mike at Responsible Wealth

    Very nicely written piece.

    True, the silence, especially in the media, has been deafening. The Brady bill out today proposes raising the exemption level to $10 million per person but still gives away $172 billion over 10 years to those most able to contribute to our collective good (I.e. dead multi-millionaires and billionaires who have benefited so much from all this country has to offer – publicly educated employees, infrastructure, research, patents, courts, regulations – all the public investments and public institutions that make business success possible). No excuse for lowering this tax, which affects only the wealthiest one quarter of one percent of all estates!

    Great credit goes to Bill Gates, Sr, for stepping up to lead the defense of the estate tax, for a dozen or more years, starting back in 2001 (after Clinton vetoed a repeal attempt the year before). Over 3,000 wealthy people joined Gates Sr. and the Responsible Wealth project (at United for a Fair Economy) in speaking up for preserving our country’s only tax on accumulated wealth.

    In 2012, with the estate tax again under threat during the Fiscal Cliff negotiations, 36 prominent individuals, led by Gates Sr. and Buffett and Jimmy Carter, jointly proposed a Responsible Estate Tax plan to lower the exemption level and raise the rate, which led to the first strengthening of the state in 28 years.

    The most effective advocates for preserving a strong estate tax are those who themselves would owe one. Their voices need to be louder than the voices of wealthy congressional donors who would like to see the estate tax repealed so that they can have more millions in their heirs’ pockets. It doesn’t help that many of the Members of Congress are themselves among the 1% of taxpayers who would get 80% of the Trump/GOP tax cuts, including benefiting from estate tax repeal. Why doesn’t the legal tradition of recusing oneself (when there is a conflict of interest like this one) apply to congress voting for massive tax cuts for themselves and their largest donors?

    • John Fullerton

      Thanks for this contribution, all well said. I did know Gates Sr. took up the cause and wrote a book on it. Great point on conflict of interest! But I had not seen your work on the topic (or I would have drawn on it!). Sounds like we should compare notes when time allows. All best- john

  • Doc Hall

    Insightful commentary, John:

    I agree that abolition of estate taxes is probably the least publicized aspect of the tax cut proposals now afloat in Congress. Marjory Kelly has a good phrase to describe it; “Enshrining the Devine Rights of Capital as the pillar of a new Monarchal Feudalism.”

    The political logic for extreme tax cutting changes little: Throw a few sops to the many while disguising that the main objective is shoveling money to the fortunate few. The cuts must be paid for by eliminating social safety nets, or by expanding debt and money supply, or both. Of course, the danger is that printing money merely pretends that we are still rich. The whole rickety system will at some point collapse. Any specific timing or exact chain of causality for this chaotic transition is of course, unpredictable.

    This dire scenario is apt to play out even if there were no tax cuts. They might even be beneficial if they quickly trigger such a systemic upheaval that almost everyone realizes that we have to take a dramatically different course.

    So how do we promote a saner fallback to be ready when the calamity comes?

    • John Fullerton

      Well we’re all working on it, right? I tell my self to get used to just doing the work without any clarity on the outcome. Because this is not a simple cause and effect business we’re in! If i’m honest, often easier said than done…

      I wonder if we could engage a conversation on the Founding Fathers’ values rather than their legislation. The former are universal, the latter context specific. (And the context has changed!)

      • Doc Hall

        Would enjoy a conversation on values. Yes, the Founding Fathers were wise men plugging a new values system — mostly from Locke and Newtonian physics, and the context has changed. The real revolution is apt to be more bottom up than top down policy change. Policy changes without a values change will be undermined; the regulated co-opt the regulators.

  • Brian Nelson

    Bravo, John. It IS a duck…. doesn’t just walk and talk like one. We are voting on our own version of Plutocracy in its toddlerhood. Do we let this thing grow to be the iron handed of past tyrannical Plutocracies, or will our public stewards of Congress turn their back on the FINE life the money shall funnel to them? I have my suspicions, and this challenge will have to be fought on grounds more familiar to Marie Antoinette than to the hallowed ideals of our nation’s forefathers. They can squeeze only so much out of the rock.

    • John Fullerton

      MA did appear in an earlier draft of my piece…
      As for me, I still haven’t given up on the power of ideals. But rising pressure wont hurt in helping us remember them!

      • Brian Nelson

        Indeed, but through the “third lens” of even Biblical reference, this direction seems immoveable, but for cause of money alone, the system of lobby for service, funding for votes and all the cash-based rewards systems must be dismantled for the “Democracy” to really behave like the Democracy idealized and created by our forefathers. There are no two ways about it. Publically funded elections would be a start… Here, you each get a dollar, now go make your argument for your votes. In my HEART I want this, in my mind, brewed from cynicism, I cannot dream that any of the congressional critters or PARTIES for that matter would ever go the way of “The People”… too much to lose for them. But by all means, John, keep up the lovely pressure as will our group in revolutionizing ecological environmentalism in the creation of still lucrative waste management models. Gung ho!

  • Fran Korten

    John — thanks for speaking to this particular aspect of an abominable tax bill. I like your language – it is not redistribution, but reinvestment. I also ask the question of those who would like to be even richer than they already are. Do you want to be rich in a poor country? That’s where we are headed.

    • John Fullerton

      Greetings Fran,
      Some, like for example those signing the Giving Pledge, would certainly say “no”. Others, (without naming names) i’m not so sure… 🙂
      And if one uses the SDG index as a guide, we already are a “poor rich country” (relative to other rich countries). Just the facts ma’mm…