Harry Moroz

No Man - Even a Millionaire - Is an Island

In an American economy that often seems to benefit only the most cutthroat and ruthless of financial competitors, one might easily overlook the importance of public goods and the creative commons to the generation of wealth. As Bill Gates and Chuck Collins described in a 2006 op-ed in the Miami Herald, “No one makes a fortune alone, without the help of our society’s investments.” Infrastructure investments – from roads and bridges to broadband services – and public spending on health care, medicine, biotechnology, and even the arts benefit not only those who receive contracts for construction or grants for research, but the entirety of the American public who can use and improve upon such advances.

This economic and social reciprocity is, as Gates and Collins argued in the article, one of the most important reasons for those who benefit most from “the fertile economic soil we have cultivated together” to give back concretely, in taxes, to the system that is responsible, in great part, for their prosperity. Along with Warren Buffet, whose distaste for a tax code weighted against the middle class is well-known, these three most wealthy Americans often extol the benefits of an estate tax to, as Buffet stated in congressional testimony, “curb the movement of a democracy toward a plutocracy.”

The estate tax currently applies to inherited assets that pass from one generation to the next, but only affects approximately 0.5% of deaths because tax law exempts all households worth less than $2 million. The tax, along with its exemptions, mitigates the concentration of wealth through inherited windfalls, maintains the American tradition of rewarding hard work, and recognizes that, indeed, no man (and no woman) is an island.

However, the Bush tax cuts have wreaked destructive havoc on the estate tax system: whereas the minimum exemption was a reasonable $675,000 as recently as 2001, it will increase to $3.5 million in 2009; whereas the maximum tax rate was 60% in 2001, it will decrease to 45% in 2009. Perhaps worst, the estate tax is to be repealed entirely in 2010, only to reappear in 2011.

Though fairness suggests that the estate tax’s rates and exemptions should be stabilized to permit reasonable financial planning, several budget amendments proposed early last month that claimed to “stabilize” the estate tax to the benefit of family farmers, ranchers, and small business owners were mere canards. The first was proposed by Arizona Republican Senator Jon Kyl and would have decreased the maximum federal estate tax rate, while permanently exempting estates of up to $5 million per individual and $10 million per married couple from the estate tax. The budget proposal sought no cost offsets and would have increased the budget deficit.

As TheMiddleClass.org describes:

For years wealthy opponents of the estate tax have campaigned for its repeal. Although the Kyl Amendment is an improvement over complete abolition, the legislation remains indicative of a tax code that is weighted against middle-class Americans and towards the superrich. Since 2001, the amount exempt from the estate tax has increased while the maximum tax rate has decreased. This means that aspiring middle-class and middle-class Americans face the possibility of an increasing tax burden and cuts in the public services they rely upon. Stabilization of the estate tax exemption and rate are only fair to those who must pay the tax; however, legislation should fix the exemption and the tax rate at levels that maintain the tax’s important revenue stream.

The Republican from Arizona was not the only Senator ignoring the interests of the middle class to the benefit of dynastic wealth. Ken Salazar, Democrat of Colorado, proposed an amendment with the same provisions as those recommended by Senator Kyl, though the Democratic Senator vowed to counterbalance revenue losses with unspecified cost offsets.

Even though the bill’s spending was completely offset (albeit by some quaint device), cuts to the estate tax would still have undermined a tax that is important to the health of federal programs. TheMiddleClass.org indicates:

Although the Salazar Estate Tax Amendment is revenue-neutral, and so will not increase the budget deficit, estate tax revision that significantly decreases the tax rate and increases the exemption still adversely affects the middle class. The estate tax applies only to Americans lucky enough to inherit substantial fortunes – approximately .5% of deaths result in taxable estates – and the amendment’s changes to the estate tax in 2009 would benefit only 3 of every 1,000 estates worth millions of dollars. The tax preserves the American tradition of rewarding hard work, not inherited privilege and wealth. The revenue neutrality of the amendment could require spending reductions for already underfunded federal programs that benefit the middle class or will oblige those who work for their money to pick up a bigger share of the tax bill while allowing accumulated wealth to be passed on for generations.

The Salazar Amendment, supported by 34 Democrats (including both presidential candidates), demonstrates that both parties at times support the superrich to the detriment of hardworking Americans. Indeed, Senator Kyl’s Amendment would have passed had Vice President Dick Cheney been available to cast a tie-breaking vote.

During a financial slump during which ordinary Americans are losing their homes to foreclosure and the Senate is catering to the interests of the construction and mortgage industries responsible for the sputtering economy, it is easy to forget that the aim of public policy is to find common ground on which the prosperity of all Americans can be based. The estate tax does not tax the rich in order to give to the poor. Rather, it seeks just recompense in an economy and a society that nurture individual talent through public investment in the common good.

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Posted at 8:49 AM, Apr 09, 2008 in Tax Policy
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