Swollen Fortunes
Congress Feeds he Rich
by David Moberg
In These Times magazine, August 2000
Times must be tough for the very rich. After all, the House
voted last month by a lopsided margin-with 65 Democrats joining
all the Republicans-to abolish the inheritance tax. This is a
tax paid only by the wealthiest 2 percent of all estates-with
half of all estate taxes paid by the top 5 percent of that group,
about 2,400 estates with assets exceeding $5 million.
The wealthy are hardly in need of relief. From 1982 to 1997,
the richest 1 percent of Americans captured 56 percent of all
the nation's growth in financial wealth-and 47 percent of all
growth in income. As a result, the concentration of wealth in
the United States has grown to its highest level since 1929, when
the stock market crashed and the Great Depression began. Moreover,
it was not simply individual business genius, new technology or
the normally unfair forces of the free market that led to this
new inequality. Public policy intensified it. The abolition of
the inheritance tax will only compound the damage, making the
fortunes of American families even more unequal.
Beyond its own outrageousness, however, the vote to repeal
the estate tax is symptomatic of how politics has been distorted
by the bull markets in stocks and free-market ideology. The warped
view of the world encouraged by stock-market mania may affect
this year's elections and the future of bedrock government programs,
especially Social Security. But it also could open up discussion
about the distribution of wealth in the United States and why
it matters.
The campaign against the estate tax involved cleverly misleading
labels (calling it the "death tax"), a few real and
imagined sob stories about small businesses and farms, and an
appeal to the belief that the government has no right to tax money
someone earned through hard work, thrift, smart investing and
good luck-though that last crucial element is rarely mentioned.
Although Congress is unlikely to override a promised Clinton
veto, the administration says it is willing to reduce the bite
of the inheritance tax, just three years after the law was changed
to raise exemptions and make special concessions to farmers and
small business owners-who were the poster boys for the assault
on the inheritance tax once again this year. Yet in 1998, out
of 47,500 estate tax returns, only 780 involved small businesses
and 640 involved farms. Moreover, according to Chuck Hassebrook
of the Center for Rural Affairs, a family farm advocacy group
in Nebraska, "repeal of the estate tax would be a profound
blow to the future of family farming and would simply pave the
way for greater concentration of wealth in farming and every pursuit,"
rewarding precisely the big operators who are driving smaller
family farms out of business.
Small business groups, including those representing minorities,
joined in the lobbying, but the voting pattern reveals a more
significant constituency. The chief sponsor of the repeal was
Jennifer Dunn, a Republican from the eastside suburbs of Seattle,
home to many newly minted high-tech multimillionaires. And nearly
half of California's Democratic delegation voted for repeal; their
constituents include the dot-com wonders and tech industry employees
betting on a fortune from stock options.
There are plenty of good reasons to tax large estates. First,
despite lots of tax dodging, it's inherently a progressive tax-paid
for by people who can afford it and who have benefited most from
the overall bounty of American society. Also, it brings in significant
revenue-about $28 billion, enough to pay for the Earned Income
Tax Credit that helps lift millions of low-income families out
of poverty. In the first decade of a phaseout, the government
would lose about $105 billion, but in the following decade, according
to the Center on Budget and Policy Priorities, repeal would cost
$620 billion in lost taxes. While opponents rail about multiple
taxation, the estate tax partly captures capital-gains taxes that
heirs do not pay on assets held a long time in the estate. In
a very modest way, it's also an effort to democratize the economy,
or as Congress said in 1916 when the tax was first passed, "to
break up the swollen fortunes of the rich."
Though that's still a worthy goal, those swollen fortunes
are the mother's milk of today's politics. If politicians were
paying attention to the real fortunes of most Americans, they
would be thinking about adding a wealth tax. Instead, politics
and the mass media are filled with dangerously misleading images
of the average Americans enthusiastically cashing in on the stock-market
boom with 401 (k) plans, stock options and skyrocketing values
of new, unproven companies.
While it's true that a growing number of Americans have some
stake in the stock market, the big picture shows growing inequality
of wealth, with greater insecurity lurking in the shadows. For
example, in an analysis of the most recent Federal Reserve Board
statistics by New York University Professor Edward N. Wolff, the
net worth of the top 1 percent of households grew by 42.2 percent
from 1983 to 1998. But the net worth of the bottom 40 percent
actually plummeted by 76.3 percent over that time. They went bust
during the boom.
Those numbers are not the consequence of the poor being inherently
lousy stock pickers. The top 1 percent-households with at least
$3.3 million in net worth-owned 42.1 percent of all stocks, mutual
funds and retirement accounts in 1998, with 36.6 percent held
by the next richest 9 percent of households. That left 21.3 percent
in the hands of the remaining 90 percent of the population. Although
43 percent of American households had some direct or indirect
stock holdings in 1997, about a third of them owned less than
$2,000 worth.
The problem is not simply that the richest 20 percent of households
captured around 90 percent of the growth in both wealth and income
from 1983 to 1998. Over that time, the debt load of American families,
especially in the low- to middle-income range, has grown sharply,
and the ranks of families with zero or negative net worth-more
debts than assets-grew from 15.5 percent to 18 percent from 1983
to 1998. Despite this disparity, there's a collective obsession
with the stock market as a solution to all problems.
What are the consequences of all this? Greatly disproportionate
wealth leads to greatly disproportionate political influence.
It also creates hugely unequal opportunities for the next generation.
Wealth inequality also means that lower-income people, who are
more vulnerable to vicissitudes of employment, have less cushion
against misfortune, especially since growing numbers of Americans
also have no health insurance. Not only are they bad for people's
health, but, as even many conservatives acknowledge, huge disparities
in wealth and income create social tensions. Many economists also
argue that great inequity is bad for long-term economic growth,
and current growth could rapidly collapse, since it is based in
large part on consumer spending by families enriched by the stock-market
bubble.
Accumulated wealth is also the basis for retirement incomes.
In theory, people rely on Social Security, private pensions and
personal savings for retirement, but fewer people-now less than
half-have private pensions and those are increasingly riskier
plans without guaranteed benefits. Significant personal savings
are obviously concentrated at the top, while most people rely
primarily on Social Security. Yet bull-market mania has led to
an assault on Social Security through plans for privatization.
George W. Bush's privatization plan-diverting part of Social
Security payments into individual private accounts-would move
Social Security away from its important but modest role in redistributing
income and its even more important function as reliable social
insurance. (Contrary to prevailing hysteria, its future is sound,
at most requiring small tax increases in the distant future. )
Though its projected gains are highly unrealistic, the Bush plan
would fatten brokers' pockets with administrative costs. With
part of the revenue diverted, it would also require more taxes
or benefit cuts for current retirees.
Al Gore also has succumbed to stock-market fever. Following
an earlier Clinton model, the vice president has now proposed
a supplement to Social Security: The government would match savings
in a tax-sheltered account for low- to moderate-income families,
providing a more generous match of $3 in tax credits for every
dollar saved by families with lower incomes. While Gore's plan
doesn't threaten Social Security and is progressive in theory
(unlike Bush's plan), in practice it is more likely to most benefit
middle-income families, who can save more easily and benefit from
tax credits, rather than low. income families who pay little or
no income tax. It would also cost the government $200 billion
over 10 years.
More than a new savings vehicle, American families need higher
incomes. Despite some upticks at the bottom, thanks to a minimum-wage
increase and a tight labor market, there has been little growth
in wages and income for most Americans in this boom. According
to United for a Fair Economy, a research and advocacy group that
focuses public awareness on wealth inequality, the median worker
in 1998 would have made $12,500 more a year if her wages had kept
pace with productivity increases since 1973. If wages had grown,
then the average worker would have had something to save.
To further combat inequality, what workers really need are
more minimum-wage increases, universal single-payer health insurance,
protection of their right to organize unions, a full-employment
Federal Reserve policy, generous education and income support
for displaced workers, and investment of that $200 billion in
research, education and public infrastructure that could generate
real wealth and higher incomes.
If Gore wanted to tackle the unfairness of the distribution
of wealth in an eminently capitalist fashion, he could propose
a modest tax on the wealth of the richest households and use the
revenue to give every young person a nest egg- say $80,000-that
could pay for college or help start a business. Last year, Yale
law professors Bruce Ackerman and Anne Alstott outlined such a
plan in The Stakeholder Society. It wouldn't eliminate the privileges
of wealth or the injustices of a market system-nor remove the
need for programs like Social Security and universal health care-but
it would be a small step toward greater equality of wealth and
opportunity. It would also be a public investment in the American
people-the real wealth of the nation.
Class War