The Dangerous Road to an Oligarchy of the Rich
Why we need to bring back very high estate tax rates in order curb the political influence of the super wealthy.
As near as I can tell we’ve got at least two situations actively working to undermine our American experiment at the present moment. Wait, perhaps three. At any rate, the first two directly lead to the third.
Since our founding, America has been the working laboratory of The Enlightenment. For most of our history, we tried things out ahead of the rest of the world. We have been consistently and constantly trying to figure out how to embody the principles of Liberalism in our daily affairs.
Early on those seeking to do things differently came to our shores. People came because of their desire to test themselves. Could they make a life here away from the stifling rules of established societies, kings, and gods?
By the middle of the 18th century, the experiment had deepened significantly. We Americans began to speculate that we could form the first modern democracy. Our experimentation grew more intense from the 1760s to 1787, as we adapted and invented forms of government fit for the scope of our needs, the gaping hole of our inexperience, and the high and intense expectations for our future. Our lab gave us our Constitution.
Our Liberal Democracy was very good at rooting out error in our application of the principle that all are equal. The pace was slower than we (who only live an average of 75 years) might have liked, but it has been nothing short of a hockey stick of error resolution in the last 250 years.
Our laboratory continued to experiment on so many fronts. In this time period we attempted to answer the critics of our system. We discovered we could create a strong and stable centralized government. We discovered a path to growth without destabilization. We corrected the error of slavery. We found that we truly could create a melting pot which allowed us to live up to our motto: e pluribus unum. We corrected the error of not including women in the franchise. We codified into law that the error of segregation based on religious or racial grounds was no longer acceptable. Most recently, we’ve come to see that it was a deep error to discriminate in the law based on one’s sexuality or gender identity.
Our American tradition is that we repeatedly and correctly try to further a society where the individual has the opportunity to make a life for themselves. One that is chosen by themselves, and based on their own efforts (meritocracy). Why then are so many of our fellow citizens so skeptical on the liberal mechanisms that have driven our success? Our liberal political system (democracy) has worked hand in hand with our liberal economic system (capitalism) and our liberal knowledge production engine (science) to propel the America experiment along it’s path of ever increasing liberty and freedom for ourselves and our posterity. What then is driving the current skepticism in this process?
Well, for starters, over the last four decades, economic disparities in the United States increased substantially and are now greater than those in other wealthy democracies. The unfortunate political reality today is that a tiny minority of extremely wealthy Americans wields disproportionate influence. The result is that this abuse of wealth by purchasing political power is leaving too many Americans feeling disempowered.
Also, since the 2010 SCOTUS ruling in Citizens United v. Federal Election Commission, money has been pouring into politics as never before. The Court ruled that no limits could be placed on spending by corporations or unions for ads that boosted or attacked those running for political office. Doing so, it was ruled, would be tantamount to restricting individuals’ right to free speech, protected by the First Amendment. This was closely followed by the 2014 ruling in McCutcheon v. Federal Election Commission which only served to increase money’s influence in politics by removing the aggregate limit on an individual’s contribution to candidates and to national party committees.
While these rulings alone give rise to the threat of turning America into an Oligarchy of the super wealthy, our undoing of the estate tax since the mid 1970s is the real nail in our coffin here. Mostly (with the notable exceptions of Buffet, Gates, and a handful of other ) gone are the days of where the wealthy felt an obligation to use their surplus wealth for the good of society. To much Ayn Rand and not enough Andrew Carnegie.
Surplus wealth is a sacred trust which its possessor is bound to administer in his lifetime for the good of the community.
— Andrew Carnegie
In England, researchers have demonstrated how a family’s status in England can persist for more than eight centuries, or more than 28 whole generations. It’s a trait shared by elite families in China, whose high status has persisted since the Mao years. Here in America, it is estimated that 70% of wealthy families will lose their wealth by the second generation and 90% will lose it by the third. When you actually stop and think about this you come to realize this is a feature not a bug. It is the meritocracy engine at work.
For the average person to feel that America is indeed a meritocracy, they cannot be constantly made to compete with others who start with a huge advantage in life as a function of inter-generational wealth. These days, the average person doesn’t need to look around very far to notice that super-affluent parents have been using their wealth to get their manifestly unqualified children into America’s most highly selective colleges and universities. This completely undermines any previous reputation (whatever the reality was) of such institutions weighing the merits of applicants above their parents’ wealth or influence.
Also, while the average American might be working hard, they are also paying a deeply unfair share of taxes. America’s billionaires leverage tax-avoidance strategies beyond the reach of average Americans. Because billionaire wealth largely derives from the skyrocketing value of stock and property assets, such gains are not defined by U.S. laws as taxable income unless and until the billionaires sell. Couple that with reduction’s in estate taxes (Figure 1) and you come to
realize that America’s billionaires, and their heirs, never pay taxes and are enabled in holding property they might never actually use. Being wealthy is not an excuse to opt-out of our collective social contract.
As we move forward, you can be sure that Billionaires will use their “money as speech” right to fund candidates and opposition to a return to the 78% top estate tax rate that was in place over much of the 20th century. Especially given that Baby boomers, and the generation that preceded them, currently own $84 trillion, or 81 percent of all U.S. household wealth will want to see their money inherited by their children and other beneficiaries. Under the current rules of trusts and taxation, the super wealthy will largely avoid the current top rate of 40% and end up paying only around 2% as they redistribute their wealth to their heirs.
Compare this to those who earn their income from actual work. The average tax on income from work and savings is around 15.8%, and the highest earners pay a 37% marginal tax rate on top of payroll taxes that absorb much of an average worker's paycheck. In a meritocracy, the people doing actual work, should be the direct and tangible beneficiaries of their efforts. When too many people feel the system is stacked or rigged —and let’s be clear many populist politicians (i.e. Sanders & Trump) are pushing this notion— the entire system is at risk.
What to do?
If you could redesign our estate tax policy from scratch, what would it look like? What rate would you choose to tax the wealth of a deceased individual? How might you define fairness to the individual and to society? Lastly, this is the kicker, what if you had to make those decisions without knowing if you stood to inherit vast amounts of wealth or nothing at all?
Philosopher John Rawls asked similar questions about society in general in a thought experiment known as “the Veil of Ignorance” in his 1971 book, Theory of Justice. Like many thought experiments, the Veil of Ignorance can never be carried out in the literal sense. Its purpose is to explore ideas about justice, morality, equality, and social status in a structured manner. Thus, we can use it to explore what a fair estate tax and wealth transfer policies might look like in a society that aspires to be a meritocracy.
According to Rawls, in a fair society all individuals must possess the following:
Rights and liberties (including the right to vote, the right to hold public office, free speech, free thought, and fair legal treatment)
Power and opportunities
Income and wealth sufficient for a good quality of life (Not everyone needs to be rich, but everyone must have enough money to live a comfortable life.)
The conditions necessary for self-respect
For these conditions to occur, the people utilizing the Veil of Ignorance are tasked with figuring out how to achieve what Rawls regards as the two key components of justice:
Everyone must have the best possible life which does not cause harm to others.
Everyone must be able to improve their position, and any inequalities must be present solely if they benefit everyone.
In my reading of recent policy papers on these issues, one by New York University School of Law’s Lily L. Batchelder stands out as likely meeting the Rawlsian standard of fairness. Batchelder proposes a "silver spoon tax" based on the sum a person amasses over a lifetime. She also provides calculations on how many additional federal tax dollars it might help raise:
Lifetime exemption at $2.5 million: The government would raise $340 billion over a decade, affecting top 0.02% of heirs.
Lifetime exemption at $1 million: Raises $917 billion over 10 years, impacting top 0.08%.
Lifetime exemption at $500,000: Raises $1.4 trillion over 10 years while affecting top 0.18%.
Batchelder wrote that the proposal would "soften inequalities, strengthen mobility, and more equitably allocate taxes on inheritances among heirs," adding that it would also cut any distortions in the labor market and increase work among heirs. I happen to think she’s on to something here.
Couple that with this report indicating the US has one of the lowest levels of upward mobility. It found that upward mobility "heavily depends" on the circumstances of birth. It also pointed out significant barriers among communities of color, particularly black men, when it comes to improving their financial position through life. This would hardly be considered a hallmark of fairness under any veil of ignorance, except perhaps actual ignorance.
While we cannot undo the rulings of the SCOTUS, we the people can ensure that we do limit the political influence of the super wealthy by confining much of their influence to the time in which they are actually alive. We should also limit how much they can give away tax free to heirs. Lastly, we should give them two choices: (a) use your money for the public good as you see fit in your lifetime; or (b) we the people will use it for the public good as we see fit after you die.
Pick One.
The third problem
The problem of money as speech tied together with increasing inter-generational wealth is creating a third and perhaps deadly problem for the American Experiment. The super wealthy have signed on in large numbers with this strange Trumpian notion that they are losing their birthright, their legacy. That they need to make America great again in the face of this radical change that is destroying the very fabric of our country.
Yet this view of a mythical good old days in America is so clearly wrong. What our predecessors really engaged in was science. They were experimenters. They were radicals who always considered the impossible possible. To define those earlier Americans narrowly as merely the sum of their outward appearances strips them of their most stunning features:
Their near-supernatural optimism and defiance.
A willingness to go into the unknown and make it their home.
The ability to make the amazing the normal.
Americans through history have consistently defied the status quo. That’s how we’ve built this place. That is why so many people come here from around the world to live the dream.
Those Americans who want retain inter-generational wealth are in reality seeking to end the grand experiment. They are few, but boisterous. They use their wealth to exercise political influence to keep the status quo because it benefits them in this moment. They are using their accumulated wealth to acquire power to stop continued experimentation in its tracks regardless of how that impacts future generations. They are wrong to do so in every way.
Thoughtful Americans know that there is no America without the experiment. They know we must keep at it. That we must persevere. We must continue to ensure the lab is still open; and, that America, in general, will always be at the drawing board, expanding its concept of liberty and justice and equality until we finally fulfill the founding principles that created our nation so many years ago.