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