Wednesday, November 14, 2007

Long Live the Death of the Estate Tax

A Reuters story today mentioned statements by Senate Finance Chairman Baucus and Republican Senator Grassley that were supportive of a permanent repeal of the federal estate tax. I couldn't agree more. We are in a difficult situation at the moment, with built-in transition rules that expire in 2010, putting back in place a much more progressive and invasive federal estate tax that will impact many people who are not considered "wealthy".

The real news piece of the story, however, was this comment by Warren Buffett:
"Dynastic wealth, the enemy of a meritocracy, is on the rise. Equality of opportunity has been on the decline. A progressive and meaningful estate tax is needed to curb the movement of a democracy toward plutocracy."

According to Buffett’s view, dynastic wealth accumulation (i.e., not taking it away from people when they die) is viewed as a social evil. Government must intervene to take that wealth away when some families are too successful. If not, there is apparently no opportunity for everyone else based on merit.

It is a nice statement – and I predict it will be quoted in many other news accounts. (After all, how often do you get to use a cool word like “plutocracy”. I did like that silly dog in the Disney cartoons, but who would have thought he would have this much influence, like, Dude, his own philosophy!)

However, Buffett's statement is sadly out of touch with reality. I challenge Mr. Buffett to provide some facts to support his analysis. First, is dynastic wealth on the rise? The last time I checked, the Forbes 400 included a lot of examples of “new money”, i.e., people who earned it through investing and developing new companies, products, and ideas. The Vanderbilts, the Rockefellers, the Astors, and yes, even the Kennedy’s, are all slipping down the scales when it comes to wealth. True enough, some of them may still be sipping champagne and enjoying their trust funds, but while their minds are languishing at the club, the gardener’s son is getting an education and moving up in the world. Or, in the case of some of the technology scions, he may be dropping out of college and making something new that we will all enjoy. Good for them. That still happens in the US, and we all need to remember it.

Second, how is it true that “equality of opportunity” is on the decline? I would suggest that merit has not declined. In fact, a story on NPR this morning discussed the increasing public perceptions, particularly in minority communities, on the role of personal values in success. True, we have some institutions – particularly on the coasts – which are highly driven by the establishment. We here in the “deep Midwest” may be more used to meritocracy, as we work with other bright people whose parents were farmers, milkmen, businesspeople, and other occupations that are not regarded as privileged. Our parents valued education and ensured that their children got an education. We went to school knowing that we could not goof around and waste our parent’s resources, and even more importantly, we could not waste the precious opportunity we had been given. Some of the kids of more affluent folks did not take that approach – and I am confident that the laws of nature will operate sufficiently well to appropriately reward their profligacy over time. Time and chance affect us all, and we should remember that, too. I will grant that we need to keep the economic ladder open to climbers from all races, creeds, and backgrounds. But I fail to see how government redistribution at death makes that happen in the least.

Third, getting to the real matter of “plutocracy” (and not my feeble attempt at humor above), government by the wealthy is another matter. I agree that we should be skeptical of the interests of wealthy persons when they try to influence government policy. But come to think of it, maybe that is another reason we should doubt Mr. Buffett’s policy advice here.

I also find it amusing that Mr. Buffett, who believes so strongly in an estate tax, has engaged in so much planning to ensure that his own estate will have little taxable content. Instead of a dynastic family accumulation of wealth, he will ensure dynastic accumulation in a charitable foundation. That has the potential for good, but also the potential to be detrimental to other conceptions of the good. (For example, population control and veganism are both valid goals of foundations – would all agree that these are unqualified goods?) In this sense, how is a foundation any better or worse than a private store of wealth? If government redistribution is the answer, then Mr. Buffett should seek to maximize his own estate tax payments. However, something tells me that this is only good for the “little people” without foundations.



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With a budget deficit in excess of $400 billion, the Bush administration’s tax-cutting agenda faced an uphill battle even before Hurricane Katrina struck. But as the prospect of a $200 billion reconstruction effort on top of that deficit looms, the hurricane may have washed away any possibility of extending tax cuts in the near future. While President Bush has repeatedly urged Congress to make his 2001 tax cuts permanent—most are currently set to expire in 2010—even a first step forward, in the form of permanent repeal of the estate tax, appears unlikely this year given fiscal concerns surrounding reconstruction along the Gulf Coast.

Full Repeal Versus Compromise
Conservatives were sanguine about the possibility of extending Bush’s tax cuts in April, when the House voted 272-162 for full repeal of the estate tax. The Republican majority took up the issue during tax season as a show of their commitment to keeping permanent tax cuts on their agenda amid concerns that further tax cuts were unlikely in the face of rising budget deficits and the costs of Medicare, Social Security, and the Iraq War.
The House vote propelled debate into the Senate, where full repeal faced the threat of a Democratic filibuster. This prompted negotiations on a compromise that would increase the exemption level on estates from $1.5 million to a range likely between $4 and $6 million while reducing the estate tax rate from 47 percent to somewhere between 15 and 35 percent. Lee Farris, senior organizer on Estate Tax Policy at the liberal advocacy group United for a Fair Economy, which opposes repeal, told the HPR in an interview that a compromise deal simply recognizes that “Americans want a reformed estate tax, not repeal.” Farris cited a poll by the Coalition for America’s Priorities that showed Americans preferring reform by a 2-1 margin, though other polls find varying support.
Nevertheless, Senate Majority Leader Bill Frist (R-TN) scheduled a vote on full repeal of the estate tax for the first week in September. After Hurricane Katrina struck, however, Frist delayed the vote to address the needs of Gulf Coast hurricane victims. Now, the fate of the estate tax and the rest of the Bush economic agenda for this year appears to depend largely on whether Republicans can successfully maneuver around the political obstacles posed by Katrina, a natural disaster that has brought urban poverty to the forefront of national debate and a reconstruction effort that highlights rising budget deficits. Most of the Republican caucus remains committed to tax cuts, but moderates and budget hawks may be more likely to speak up after Katrina than they were before it.