‘We Are Not Taxing the Very Wealthy Enough’: Runaway Inequality About to Get Worse
The United States' astronomical levels of economic inequality are poised to become further entrenched in the coming years.
Changes in state tax laws now encourage America’s awesomely affluent to create ‘perpetual’ trusts. The new laws and new technology, legal scholars warn, now allow the ‘dead hand’ of the past to rule over the living.
Money can buy many things. But money can’t buy immortality, right?
That may once have been true, legal scholars Lawrence Waggoner and Michael Vincent argue in two new and chilling scholarly papers, but not anymore.
Billionaires today — and mere mega millionaires, too — now have all the tools they need to impose their values on future generations essentially forever.
Lawrence Waggoner, an emeritus University of Michigan law school prof, traces the modern evolution of these tools back to the 1986 federal tax “reform” that created a monster loophole for the owners of the new grand fortunes then just beginning to pop up all across America’s economic landscape.
The details can get complicated. The simple story: The rich have always been able to create “trusts” for their heirs. In a common trust situation, people of means set aside nest-eggs of multiple millions, let their kids who survived them live off the income from those millions, then had the trust’s millions revert to the grandkids. At that point, the principal in the trust would face estate taxation.[pullquote]Billionaires today now have all the tools they need to impose their values on future generations forever.[/pullquote]
The 1986 legislation created a tax on those trust millions every time a generation passed on, but also gave rich people and their heirs an exemption that shielded part of those original trust millions. Trusts now became even more attractive to the rich — and the longer a trust could last, the better.
But before 1986, trusts couldn’t last long. State statutes typically limited trust length to no more than 90 or so years.
The new 1986 loophole gave the rich — and the bankers and lawyers who make fortunes setting up and running trusts — an incentive to kill these state laws that prohibited “perpetual” trusts. In a few years, enough of these state laws died to nurture a new national industry dedicated, Lawrence Waggoner notes, to creating “trusts that can last for several centuries or even forever.”
The old common law “rule against perpetuities” actually went centuries back on its own. Legal philosophers had long warned against letting the “dead hand” of the past rule the lives of the living. And perpetual trusts would give the dead rich that ruling power. Those rich could, for instance, have their trust instruments deny income distributions to heirs who engage in certain behaviors.
Not to worry about this ancient legal wisdom, argue bankers and lawyers who pushed the new state laws that permit perpetual trusts. A trust may now be able to last forever, their argument goes, but human trustees administer trusts.[pullquote]Our contemporary rich can perpetuate their ‘values and beliefs’ as if they remained still alive. [/pullquote]
“Human discretion,” we’re assured, will limit any trust restrictions future generations might find untoward — and end the trust altogether if future heirs who hold legal title to a trust property find that termination beneficial.
So we have no need to worry? Not exactly, advises Michael Vincent. The super rich, he points out, don’t just have the legal tools they need to create perpetual trusts. They now have the computer tools they need to take “human discretion” out of the equation.
Vincent takes us into the near-future world of the “robo-trust,” a trust instrument that uses computer “AI” — artificial intelligence — to impose a dead billionaire’s will on generation after generation.
The combination “of breathtaking advancements in computer technology” and “the abolition of the rule against perpetuities,” Vincent explains, lets our contemporary rich create trusts that continue living long after their deaths, in the process perpetuating their “values and beliefs” as if they remained still alive.
Vincent vividly paints the eminently plausible technological possibilities. A rich person’s descendants petition a robo-trust for an income distribution. The robo-trust “analyzes the content and sincerity of the appeal” with face-recognition software, then considers “the person’s income, marital status, net worth, religion, and general life history,” then “decides whether to pay out.”
Far-fetched? Not at all. Notes Vincent: “The first computer-run trust may already be waiting in a safe deposit box.”
How can we prevent a robo “perpetual trust” future? Both Michael Vincent and Lawrence Waggoner see the same answer. Congress can simply re-instate the old common-law “rule against perpetuities.” But lawmakers need to act soon.
“Society,” Vincent warns, “must be on guard for the dying man with just enough money to be dangerous — after five hundred years of compounding interest.”