WASHINGTON Now that Congress has failed to override President Bill Clinton’s veto of the estate-tax-repeal bill, we can expect the ultimate question of death and taxes to be a running theme of the fall 2000 campaign. The fight about the tax is being carried forward in standard Republican-Democrat terms, focused on mutual recriminations. Statistics and percentages are flying in all directions. Overlooked in this controversy is the best reason the estate tax should be retained, and it is cultural: Estate taxes keep the United States from turning into Europe.
For centuries, European culture and politics have been plagued by class hostilities centered on inherited wealth. Almost everyone in the traditional European aristocratic cohort received his or her financial position in life through inheritance. (Most Europeans nations enacted estate taxes in the postwar era, but they are easily evaded.) Europe’s “idle rich” performed no productive labors and created no wealth. People who had to work resented that fiercely. The results for Europe have been sharp class hostility and sluggish economies, as the idle rich rouse themselves mainly to oppose any change in the status quo.
In the U.S., by contrast, most wealth is earned. There isn’t an idle rich, but an infuriatingly active, noisy, hectic> rich. Almost all millionaires and billionaires are self-made. The rich may be obnoxious, they may have terrible taste in rugs and art, but their position in life is earned through effort. That the overwhelming majority of Americans who have money earned it is what makes U.S. capitalism, if maddening, morally legitimate.
It is the absence of an idle rich, as much as anything else, that explains “American exceptionalism”?the fact that although Europe is rife with bitter class tensions, America is not. Lack of large amounts of inherited wealth also explains U.S. economic vibrancy: If you want to become rich, you’ve got to be productive. The United States does not have a significant cohort of idle rich, nor the social parasitism that accompanies large degrees of inherited wealth, because America has a strong estate tax that prevents wealth from accumulating across generations in all but the uppermost cases.
Those who propose to repeal the estate tax would change this dynamic, dramatically increasing the percentage of future Americans who possess inherited rather than earned wealth. This is a terrible idea, especially for capitalism.
Already, the arc of U.S. society is toward the creation of European-style wealth concentration, and that is disturbing enough. In 1976, the richest 1% of society held 21.8% of wealth. By 1983, it held 33.8%; today, it holds 38.5% of all wealth, and the figure continues to escalate. In the coming two decades, many in the top 1% will die, and the deck will be reshuffled as the estate tax redistributes some of this accumulation. If the estate tax is repealed, the rate of wealth concentration will continue to accelerate.
How long will it be before half the country’s wealth is held by the top 1%? When that time comes, American exceptionalism may end, and hostility toward the rich may become open, as it is in European politics. If Americans become hostile to wealth, the Republican Party won’t exactly do well, and Congress may enact anti-wealth laws that cause genuine harm to the economy, something the estate tax has never done.
Don’t think that repeal of the estate tax would create a U.S. aristocracy? Consider the numbers. Current law exempts the first $1.35 million of a couple’s estate and the first $675,000 of an individual’s estate; these exemptions are scheduled to increase to $2 million a couple and $1 million an individual by 2005. There are other exemptions for appreciated value in homes and stock, and they further prevent most estates from paying any tax. At current levels, with 98% of estates already exempt, only the 2% at the top of the economy pay any estate tax.
Most family owned or closely held small firms are not hit with estate taxes, and it is rare for family farms to pay such taxes. Neil E. Harl, an agricultural economist at Iowa State University who advises family farmers on tax planning, says he has never encountered an instance of a family farm lost because of estate taxation. He calls this whole idea, so popular in anti-tax rhetoric, “a myth.” Family farms and small business may be sold when one generation dies, but almost always because children want to divide the bequeathed assets, something that would happen regardless of whether the estate was taxed.
The popularity of estate-tax repeal is explained partly by the real-estate boom and stock-market run-up, which have given millions of Americans nest eggs they can look forward to bequeathing. But many who have attained affluence in recent years may not understand that under current law most Americans with big houses and hefty mutual funds will be able to leave everything to the kids. They also may not understand that the exemption ceiling is scheduled to increase much faster than inflation, meaning that even in a rising market, all but the very richest estates will remain exempt.
Consider, in turn, how estate taxes affect aristocratic families. In 1997, the most recent year for which statistics are available, Americans were assessed $20 billion in estate taxes, making the tax one of the smallest, nationally. More than half that sum was paid by just 3,000 families?the super-rich. Had there been no estate tax in 1997, those families would have received, on average, a $6.7-million windfall.
Abolition of estate taxes would hurt charity. In 1997, $10 billion went to charities and universities from estates, three-quarters of that figure given away by the top 1%. Wealthy people make such bequests in no small part because they would rather see their money transferred to church, university or charity than to government. If the estate tax were repealed, this motivation would disappear. Charitable giving, in general, would almost certainly decline, as well. Many wealthy persons make large charitable or foundation donations in their middle or early senior years, reasoning that if the money is going to be taxed at their death anyway, they might as well give it away now and enjoy the accolades that such giving brings. Repeal the estate tax, and this motive would be extinguished.
Comparisons between the United States and Europe are stark on this point. The U.S. and Western Europe have about the same overall economic size, and Western Europe has a larger population. Yet, in 1999, charitable giving was $190 billion here, about $20 billion in Western Europe. Ramifications of the estate tax account for much of this difference.
In an era of government surplus, taxes should indeed be cut, but the focus should be on tax relief for labor and capital, two forces that benefit society, not tax relief for wealth accumulation by the super-rich, which harms society. Since the first $1 million to $2 million of estate gifts to children is exempt, while roughly half the amount greater than $2 million given to children is exempt, too, the only offspring who would be getting still more under estate-tax repeal are those who are already being showered with money. It is simply selfish for wealthy parents to contend that their offspring must have more, more, more, at the expense of those who have less.
The Bible cautions, “Do not store up for yourselves treasures on Earth, where moth and rust consume.” The movement to repeal the estate tax would create a new class of American families dedicated to storing up treasures. The result would be bad for U.S. society and bad for the U.S. economy. Americans once emphatically declared that they did not want to be like Europe. Let’s not change that, just because prosperity makes it possible to create an American aristocracy.
Gregg Easterbrook Is a Senior Editor of the New Republic and ofBeliefnet.com. His Most Recent Book Is “Beside Still Waters: Searching for Meaning in an Age of Doubt.”
Copyright 2000 Los Angeles Times
October 14, 2002