Monday, March 27, 2006

The wealth gap and the estate tax

From the New York Times comes yet more evidence of the growing concentration of wealth in America, this time from an analysis of inheritances.

In 2004 median inheritances — half were bigger and half were smaller — amounted to about $29,000 in today's money, according to a Federal Reserve analysis of the Survey of Consumer Finances. That is enough for the heirs to buy a new Pontiac Coupe. But for almost all, it is hardly life-changing money.

Nor are inheritances likely to increase. According to the analysis of the Fed data by Mark Zandi of Moody's, 30 years ago the median inheritance was about $10,000 more, adjusted for inflation.

Yes, big money is being passed down. According to the Fed data, the overall pie of inheritances has grown to nearly $200 billion annually — more than three times the amount that was passed down in the mid-1970's, after accounting for inflation. ... But the typical American is seeing little of this wealth. Mr. Schervish and Mr. Havens found that most money would go to a few lucky heirs: 7 percent of the estates would account for half the aggregate bequests.

There are several reasons for shrinking inheritances, starting with basic demographic changes: parents are living longer and spending more of their money themselves, and most people do a lousy job of saving for retirement at a time when fewer and fewer people can rely on pensions and other traditional sources of retirement income. So what money they do save gets spent.

But simple demographics cannot explain the increasing concentration of wealth reflected in the statistic that 7 percent of estates account for half of the money being passed down.

The story notes that wealthy heirs are seeing more and more money:

"We are seeing bigger-sized estates," said Myra Salzer, president of the Wealth Conservancy in Boulder, Colo., which helps heirs manage their inherited wealth.

"Wealth is just exploding," said Daniel FitzPatrick, chief executive of Citigroup Trust, whose clients typically have hundreds of millions of dollars.

Add this to all the other evidence of wealth concentration in America, and other measures of disparity such as CEO pay, which now averages 500 times the wages of average workers. 15 years ago the ratio was 140 to 1; 40 years ago it was 40 to 1.

I don't believe in "punishing the rich" simply for being rich; I'd like to be rich someday, after all. But I do think that it's fair to tax someone's second $300,000 at a higher rate than everyone's first $300,000. And I think we all have an interest in the ill effects of excessive wealth concentration.

Tie up too much wealth in the hands of the few and you damage the economy, limiting opportunity and driving social unrest. For extreme examples look at France during the runup to the French Revolution, or Victorian and Edwardian England, or parts of South America today, where the wealthy live in fortresses, drive armored cars and employ bodyguards while the poor scavenge for food in city dumps. This is how revolutions are born.

Which brings us to the estate tax -- or, as Republicans like to spin it, the "death tax." Along with the Bush tax cuts that provided disproportionate relief to the wealthy, the gradual repeal of the estate tax plays a large part in increasing the concentration of wealth.

Republicans cast it as simple fairness: why should someone's money be taxed twice? It's a fair argument, but it ignores several things:

1. A lot of money is taxed twice, through sales taxes, for example. Or consider the gift tax. Give someone more than $10,000 a year and it's subject to tax. Why, then, does it make sense to exempt a gift from taxation simply because the giver has died?

2. The estate tax brings in about $70 billion a year. In a time of war and budget deficits, is it really good policy to blow another gigantic hole in the budget for a law that only benefits the very very rich?

3. What is the social benefit of allowing heirs to receive millions of unearned dollars tax-free?

4. The government taxes nearly every transfer of money. What is the rationale for refusing to tax this transfer of money? What separates it from all the other transfers of money that we do tax?

It makes no sense to worsen our budget situation in order to provide a tax benefit to the least needy -- especially when doing so actively harms society and the economy. I'll give Bush the benefit of the doubt and call it a case of following a principle out the window instead of simply pandering to wealthy supporters. But it's a move we simply cannot afford -- in any sense of the word.

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Anonymous Anonymous said...

Great points you made there at the end. I'd like to see the Heritage Foundation take them up!
May I add something to your "extreme examples"? Look at The Gilded Age in the U.S. during the 1920's, just before the Great Depression. I'm not sure how much actual concentration of wealth played a part in that economic collapse, but there was rampant deregulation and a host of giveaways to the already wealthy. Some of the trends we see today are eerily similar.
- Caracarn

3/27/2006 2:05 PM  
Blogger Sean Aqui said...

Good point about the 1920s. If nothing else that's a great example of the downside of too little regulation. Overregulation can be just as harmful, but deregulation is no panacea. People who complain about "excessive" regulation would probably miss the FDA if it disappeared.

3/27/2006 5:17 PM  
Blogger JP said...

Sean, I totally agree here - we can't afford this. Just ask New Orleans.

5/12/2006 12:11 PM  

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