Income Inequality Solutions 1: Estate Tax

This is the first in a series of articles about what we can do to reduce our unacceptable levels of income and wealth inequality.

Over the cliff and onto catastropheI don’t have a fundamental problem with a capitalist economic system. It does seem right that if I provide the bicycle that allows another person to operate a package delivery service, then I ought to receive some part of the profits of that business. It isn’t much different than if I were to simply sell the bicycle. The problem we run into is that capital begets capital. There is an absolute limit on the amount of labor one possesses. There is little limit to the amount of capital one can possess. The state of technology and the law will determine just how divergent worker and capitalist will be.

Technology is not such a big deal, but it is worth thinking about. A society defined by the manufacture of chairs and tables is far different than one defined by the manufacture of computers. Automation really does exacerbate inequality as the demand for labor goes down. But thus far in our economic evolution, we don’t really see this effect. That’s because the law swamps this effect, but it may not always be so. Still, conservatives love to talk about this because they claim that nothing can be done about it. But if it really were a problem and if it eventually becomes a problem, there is much that can be done about it. For now, I want to talk about the law—specifically, the Estate Tax.

The Estate Tax and Dynasties

Perhaps the biggest problem with the accumulation of capital is that it can be transferred from generation to generation. This is no different from an aristocracy. A worker cannot bequeath his labor to his children. So they start at zero. A capitalist can and does bequeath his capital to his children. And indeed, if you look at the prominent billionaires in American culture, they all inherited huge fortunes: Rupert Murdoch, the Koch brothers, Donald Trump. This is not a story of meritocracy, and note that even if rich men were not allowed to leave any money to their children, their children would still have huge advantages over the poor in terms of education, social connections, and much more.

Right now, with income inequality being at its highest rate ever, we have an Estate Tax that is anemic at best. It is hard to be specific, because the law does change a lot. But currently, one can inherit up to $5,250,000 without paying any taxes on the money. (It doesn’t apply to spouses at all.) Above that amount, the tax is progressive, running from 18% up to 40%. What’s more, the percentage of dying people who owe any estate taxes was at an all time low (as of 2008, since Reagan) of just above 0.5% , even though the rich are richer than ever. The tax structured in this way is not meant to provide parents with security that their children will be taken care of. It is structured to allow the building of dynasties.

Foolish Arguments Against High Estate Taxes

The primary conservative argument against the Estate Tax is that it lowers the incentive of people to be entrepreneurial. That may be true, but the effect is clearly not large. Regardless, this goes along with the very silly conservative argument that people start businesses based upon how much in taxes they will have to pay if they are really successful. I understand that the super rich corporate raiders think about this stuff. But these are not the kinds of market activity that we should be encouraging. I simply cannot imagine someone considering opening up a doughnut shop or creating an Android app thinking, “I’d do it, but if I’m really successful, they are going to tax some of the money I give to my kids!”

What’s more, the government does what it does. Would a high Estate Tax be worse for the economy than a high tax on earned income? Most clearly not. But in the conservative mind, if a trillion dollars of taxes on the rich results in the reduction of one dollar in “innovation,” then it is unacceptable. The opportunity costs are never considered. The fact that the poor could have a trillion dollars more money to spend and that this would lead entrepreneurs to create new products for them to buy doesn’t matter. Ever. That’s because the insistence of a low Estate Tax is at best about protecting entrepreneurship of the past, not of the future. (And in reality it is primarily about protecting past inherited and stolen wealth.)

Clearly, what drives the Estate Tax down is people who already have huge amounts of money who want to give it to their kids tax free. For the umpteenth time, these are not the entrepreneurs. Look at the difference. Joe Coulombe bought a small supermarket chain that was going out of business and created a whole new kind of market, Trader Joe’s. That’s entrepreneurship. Mitt Romney bought companies, saddled them with debt that often destroyed them, took his “cut” and ran. That’s not entrepreneurship. Now if someone can show me how the Joe Coulombes of the nation will just give up because the Estate Tax is too high, I’m willing to listen. But I think it is the Mitt Romneys of the nation who will be hurt and who thus lobby for an end to what they now call the “death tax.”

The only actual concern with regard to the Estate Tax is that if it were too high, the rich would find ways to avoid it. That is an issue that can be dealt with. Regardless, it could not be any worse a problem than it was in 2010 when there was no Estate Tax at all. Note: the Estate Tax has been much lower the entire time Obama has been in office than the entire time that Bush was in office. The Estate Tax was supposed to go up to 55% on gifts above one million dollars. But because of the Fiscal Cliff deal, it was lowered dramatically to 40% on gifts above five million. That is a difference in tax revenue of roughly $40 billion per year.

High Estate Taxes Promote Democracy

My main point is that a low or (as most conservatives wish) nonexistent Estate Tax increases inequality. It also puts further pressure on the government to spend less on safety net programs. All of the Debt Scolds are big on cutting Social Security and Medicare, but raising the Estate Tax is almost never mentioned. Simpson-Bowles don’t even consider it. Yet they are big on Chained-CPI which would save half that amount. And 55% isn’t that large. Throughout our booming post-WWII period, it was 77% with a deduction amount of only roughly $300,000 in today’s dollars.

Our current Estate Tax is unfairly generous to the rich. It exacerbates inequality and makes our country more class based. It is also undemocratic. We should at least raise it back up to 55% with a one million dollar deduction. We should look seriously at raising the amount to the previous 77% with a lower deduction. My intention here is not to “get the rich!” It is to put more sanity and fairness into our economic system. As such, I think that the Estate Tax itself should be much more progressive. When the top rate was 77%, the bottom rate was 3%. Now that the top rate is 40%, the bottom rate is almost half that, 18%. This situation exacerbates inequality among the wealthy—which is also an important issue. The Estate Tax we have now is more fitting to a feudal system than to democracy or meritocracy. It needs to be changed.

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About Frank Moraes

Frank Moraes is a freelance writer and editor online and in print. He is educated as a scientist with a PhD in Atmospheric Physics. He has worked in climate science, remote sensing, throughout the computer industry, and as a college physics instructor. Find out more at About Frank Moraes.

5 thoughts on “Income Inequality Solutions 1: Estate Tax

  1. The only thing our current inheritance laws encourage is making family members who loathe each other engage in contests over who can pretend they love the scion more. That’s it. Also, fees for probate lawyers. It’s like a 19th-century novel, with everyone sucking up to Mother.

    All changing the laws would do is encourage super-rich scions to spend their money (good) or give it away (probably to rich universities and orchestra halls, less good) rather than leave it to the government or their demon-spawn children. The "innovation" cri de couer is a joke; if rich kids innovate anything besides new ways to vomit on hookers in Cabo, I’m unaware of it.

  2. @JMF – You forgot the best example: [i]King Lear[/i].

    Well, I’m not suggesting we take all their money away. Although an Estate Tax of 99% on gifts above a billion dollars would be just fine with me.

    My great hope is that it would disincline the rich from creating wealth for its own sake. It is the same thing with rich actors writing books or doing voice work. There are plenty of really capable people who are trying to make livings by writing or doing voice work. You don’t need the money. Go volunteer at a soup kitchen or something! All is vanity.

  3. Ha — Lear, of course. And that would be a good plot to steal nowadays. You could update it nicely, complete with Cabo hooker vomit scenes. As Cecil B. DeMille taught us, moralizing always goes best with scenes of delicious depravity.

    Voice work I understand is fun for some people (say, acting in a cartoon or reading "Harry Potter" books-on-tape), and everybody wants a book about themselves (it seems), but it does make me cringe when I hear, say, Morgan Freeman for Visa, or George Clooney for Budweiser. At least Clooney doesn’t do Coors!

  4. @JMF – What bugs me is that Wikipedia will say, "Actor, writer, director, knitter, carburetor repairman, garbage taker-outer…" Unless they would be in Wikipedia because of their writing or knitting, it shouldn’t be mentioned. Of course, that’s fans. But it shows the absurdity of our economic system.

    Also: [i]Ran[/i] fixes all the problems in [i]King Lear[/i]. I [i]love[/i] that movie. It is so great!

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