Inequality is Weakening Social Security. Here’s How We Fix That.
When Congress set the cap on Social Security contributions in 1983, they didn’t anticipate forty years of rising inequality. And it’s cost us — a lot.
Dan Duncan died at the end of March. The Houston gas pipeline mogul left behind a spouse, four children, four grandkids, and a fortune worth $9 billion.
Duncan, a prominent philanthropist who supported cancer research and the Boy Scouts, left behind another distinction. He was the first American billionaire to ever leave his heirs a tax-free fortune.
America’s first-ever billionaire, John D. Rockefeller, died in 1937. His heirs faced a 70 percent estate tax on the bulk of his estate. Duncan’s heirs are enjoying a zero percent estate tax. When he died, his son and three daughters became instant billionaires.
If Duncan had died last year, his heirs would have had to share their new billions with the rest of America. But for the first time since 1916, no estate tax graces the tax code. That’s because it’s been suspended for the duration of this year, thanks to a 2001 Bush administration maneuver and an impasse in Congress.
Heirs to billion-dollar fortunes, if they sell the assets they inherit this year, will have to report whatever windfalls they rake in as taxable capital gains. But analysts don’t expect this new capital gains rule to raise nearly as much money as the estate tax would have.
How much will the absence of an estate tax this year cost the Treasury? It’s impossible to say. No one knows how many other billionaires may pass to the great beyond between now and New Year’s Eve. We do know that in 2008, the latest year with figures available, the federal government collected $25.7 billion in estate tax revenue.
That sum, by coincidence, would be enough to fully fund the $23 billion Rep. George Miller (D-CA) and Sen. Tom Harkin (D-IA) want Congress to appropriate to avert the nation’s worst teacher layoff crisis since the Great Depression. Without additional federal funding, our schools may lose 300,000 teachers, causing class sizes to balloon across the country.
But getting that help seems to be a long shot. The 2009 stimulus legislation saved tens of thousands of teacher jobs. But stimulus dollars are running out, and deficit hawks in Congress say we can’t afford more.
How can a civilized nation afford to hand the heirs of the super-rich billions of dollars tax-free and not afford to keep teachers in classrooms?
We can trace our current budget inanity back to when the Bush White House put on a full-court press to repeal the federal estate tax. The administration lacked the votes needed for a permanent repeal. However, it did manage to pass lower estate tax rates over the rest of the decade and a repeal in 2010. Under that legislation, the estate tax would reappear in 2011.
White House strategists never expected to see this reappearance. They counted on a future Congress to extend the repeal beyond this year. But by 2007, the GOP had become a minority in the House and Bush lost his shot at permanently scrapping the tax.
Meanwhile, estate tax supporters were confident the 2008 election results would make it possible to overturn the 2010 repeal. But in 2009, lawmakers deadlocked over many issues. The year ended without any congressional estate tax action.
Apparently no one in Congress expected a billionaire of Dan Duncan’s magnitude to actually go and die without an estate tax on the books.
There’s hope that Congress will bring the estate tax back for the remainder of the year, and apply it retroactively. But with so much at stake, lawyers for Duncan’s heirs would likely battle that kind of action in the courts. The longer we go without the tax on the books, the higher the chances the courts will agree with them.
After his death, a close friend of Duncan’s noted “he really wanted to help everybody.” If Duncan’s heirs want to help everybody, they’ll troop over to Capitol Hill and demand the immediate reinstatement of a meaningful federal estate tax.
Chuck Collins directs the Program on Inequality at the Institute for Policy Studies. He is co-editor of Inequality.org and the author of Born on Third Base: A One Percenter Makes the Case for Tackling Inequality, Bringing Wealth Home, and Committing to the Common Good.