From Rags to Aristocracy

Is American individualism compatible with huge inheritances?

Posted Mar 31, 2009

A single lifetime of hard work and personal sacrifice can create a legacy of inherited wealth lasting many generations. But this singular focus on the hero's rugged American individualism hides an important consequence of the story: Only one generation separates rags and aristocracy. In that rarest of stories, you come into the world poor, make a lot of money, and pass it on to your children. After that, family legacies can proceed from riches to idle riches, not exactly the story that the frontier spirit celebrates.

As President Obama picks through unassigned money to cut the deficit, our disastrous economy has left little low-hanging fruit. But the estate tax is juicy, available, and utterly appropriate as a means of funding the budget. By maintaining the tax on estates over 3.5 million at the current 45%, President Obama is missing a huge opportunity to put inherited wealth to budget-balancing use, money more than a generation removed from the sweat that earned it. The current estate tax rate is just 5.4% more than the newly proposed top tax rate on earnings over $250,000.

Taxing estates consistent with our avowed image as self-made Americans won't by itself balance the budget. But it is significant. Even at current levels, the proceeds could help fill the shortfall in social security -- by a recent estimate, as much as 25% of it.

If creating a de facto aristocracy is so inimical to the image of the self-made American, why has the repeal of estate tax enjoyed such stewardship among the most (self-proclaimed) rugged individualists? The credible answer, it turns out, is naked self-interest. In 2006, the Center on Budget and Policy Priorities documented eight estate tax reductions since the previous minimum wage increase. As citizens of wealth or plausible aspirants to it, most members of Congress plan to have total assets that will, when that unspeakable moment comes, trigger estate taxation. So they don't want it, and try to make their reasons nontransparent. People are often secretive when they are ashamed of their motives. That is how members of Congress managed to escape the expected public outrage as they accepted their pay raises while voting down minimum wage increases. Congressional pay raises are largely automatic and so move forward without notice (unless someone points it out). But raises in the minimum wage must surmount all of the hurdles that public debate erects, and then face the additional obstacle of a contested Congressional vote.

If we are serious about balancing the budget, then pushing for a repeal of estate taxes looks irresponsible. As late as January 13, the same Center estimates that advocates of permanent repeal would deny the budget almost $1.3 trillion over the first decade in which its cost would be fully felt, 2012-2021. This amount includes $1 trillion in lost revenue, plus $277 billion in increased interest payments on the national debt.

Any case for the reduction or repeal of estate taxes must hew to a ruthless consistency in the story of rugged American individualism. If you buy the vision, then accept the limits. No more cheap attempts to frame estate taxation as ghoulish or disrespectful (as in "death taxes"), and no more offshore estate-bunkers in which to hide unearned wealth (now being exposed with the cooperation of European banks). The American Dream was always about making it on your own, and never about sneaking around the law, or sneering at those without the resources to hire a financial protector. If we believe that, then let's abandon the double standard and do a modest rebooting after every generation. An estate tax needn't require the wealthy to neglect their children, but neither should it allow them to hog resources they didn't earn.

Rather than re-experiencing a collective moral spasm every time we are reminded of the insensitivity of corporate leaders and arrogant wealth, we should craft a durable image of the America we want to occupy. We should take the moribund task of budget-balancing as an opportunity to redraw the frame that girds the rugged individualist, to redefine that image, now shapeless and undignified. As a nation, do we believe in the power of novel ideas, in new businesses, in enterprise and entrepreneurship, and in the virtues of hard work? If so, why the fear of a new beginning every generation or so, of abandoning aristocratic entitlements?

By all means, if we embark on the experiment of a truly progressive estate tax, then let's watch it carefully. Let's see if childless couples become less productive or save less, or if wealthy families flee the country. These are all choices that citizens can make. And if they do, it will be an example of that rugged American individualism we all treasure. Who knows? Perhaps parents, facing a higher tax on their estate, will choose to spend their excess on their children now -- just what the economy seems to need at this crucial moment.

See The Empathy Gap. Viking, 2009; by J.D. Trout.