Originally published by US News and World Report.
Democratic presidential nominee Hillary Clinton recently proposed to dramatically increase the inheritance tax on billionaires from 40 percent to 65 percent. Her announcement set off a series of enraged retorts from conservative and mainstream opinion writers, none more indignant than the Wall Street Journal’s, which marked the occasion with a scorn-filled editorial titled, “Clinton’s 65% Killer Death Tax”.
The new rate would be the highest since 1981, the Journal agonized. That year, 1981, is hard to overlook. That’s exactly when America’s wealth began to concentrate dramatically in the hands of the ultra-rich.
In 1982, the first year Forbes’ annual list of the 400 wealthiest Americans appeared, those lucky 400 held under 1 percent of the nation’s wealth. Today, just one generation later, their share of national wealth has tripled to over 3 percent. If the process continues for another generation, 400 billionaires, likely including a few trillionaires, will control close to 10 percent of our wealth.
Is there a connection between the reduction in the top estate tax rate in 1981 and the rapid concentration of wealth that began immediately afterwards? Yes, it’s basic math.
A properly functioning estate tax is the only reliable barrier to runaway wealth inequality. The overwhelming majority of Americans seek to accumulate wealth. Most of us, however, must dedicate a large share of our income to living expenses, including post-retirement living expenses, when our current income no longer will be sufficient.
But the superrich are free from those shackles. Their living expenses are but a sliver of the income generated by their wealth. And since they derive virtually all their income from investments, retirement for them is a nonevent in terms of wealth accumulation.
Because the mega-wealthy accumulate wealth at a faster rate than the rest of us, their share of our total wealth will increase, without limit, unless the process is somehow interrupted. Eventually, we’d have a country in which a handful of billionaires and near billionaires hold the great majority of our wealth leaving a pittance for the rest to split.
If the estate tax rate is set too low, or if the tax is too easily avoided, wealth concentration goes unchecked. It’s happening right now and will continue without serious and significant reform like what Clinton proposes.
When former President Bill Clinton campaigned in 1992, he was concerned that the top 1 percent held as much wealth as the bottom 90 percent. Today, it is a much smaller group – the top 1/10 of 1 percent, which holds as much wealth as the bottom 90 percent.
Obviously, the policies of Bill Clinton (and former President George W. Bush and President Barack Obama after him) failed to arrest, much less reverse, the process by which American wealth is concentrating beyond even Gilded Age levels. The staggering wealth inequality Andrew Carnegie and Teddy Roosevelt sought to remedy through the estate tax has returned. Channeling Roosevelt and recognizing that her husband’s policies have proved too tepid, Clinton is repudiating them in favor of stronger ones. Despite the Journal’s lament, any other approach would be irrational.
Is the 65 percent top rate confiscatory, as the Journal claims? If history is any indication, absolutely not. For nearly a half-century, from 1935 to 1981, the top estate tax rate was 70 percent or higher.
In reality, the effective rate will never reach the nominal top rate of 65 percent. Smart tax planners will continue to devise strategies to reduce the effective estate tax. Even with no planning at all, the 65 percent rate applies only to the portion of an estate’s value that exceeds $1 billion for a married couple. Before a single dollar is taxed at 65 percent, a married couple would pass $460 million to their children.
A truly inequality-busting estate tax rate would prevent intergenerational wealth dynasties, where estate tax payments are dwarfed by the growth in wealth over the next generation. Clinton’s plan, while laudable, does not meet this standard. The fortunes of the wealthy will continue to grow from one generation to the next, albeit more slowly.
And that’s unsurprising for a moderate like Clinton. Her purpose is not to prevent billionaires from growing their wealth across generations, but only to level the playing field so others may share in the nation’s wealth.