Can a democracy
survive if its richest people can pass on to their heirs, generation after
generation, the vast bulk of their fortunes?
In the United States,
that question first became a top-tier topic of debate back over a century ago.
Huge fortunes were then towering over the nation’s economic landscape. These
fortunes, Americans feared, were fueling financial dynasties that could wreck
our democracy.
How could America prevent that ruin? The nation needed, Americans came to agree, to tax the fortunes the super-rich bequeathed to their heirs.
America, President
Theodore Roosevelt declared in 1906, must place “a constantly increasing burden
on the inheritance of those swollen fortunes which it is certainly of no
benefit to this country to perpetuate.”
A decade later,
Congress enacted a federal tax on the grand fortunes the rich left behind at
death, and this new estate tax would eventually have White House support from
Republicans and Democrats alike.
Vast “inherited
economic power,” as President Franklin D. Roosevelt opined in 1935, “is as
inconsistent with the ideals of this generation as inherited political power
was inconsistent with the ideals of the generation which established our
Government.”
Any society that
tolerates a “fabulously wealthy” class, President Dwight Eisenhower would add
in 1960, is asking for trouble.
“Since time began,”
Ike reminded America, “opulence has too often paved for a nation the way to
depravity and ultimate destruction.”
Depravity and
destruction, here we come. A dozen years ago, America’s elected leaders started
hacking away at federal estate taxation. The budget deal struck at the end of
2010 hacked some more, and our latest last-minute budget deal — the “fiscal
cliff” bargain — has now locked all this hacking in place. Our rich today can
now do exactly what Teddy Roosevelt warned us against. They can easily
“perpetuate” their “swollen fortunes.”
The fiscal cliff deal
allows an individual wealthy person to leave behind, tax-free, the same $5
million the 2010 tax deal wrote into the tax code. But this $5 million gets
adjusted annually for inflation. In 2013, the exemption will hit $5.25 million. This $5.25 million, in turn, only applies
per spouse. A wealthy couple will be able to totally exempt $10.5
million from estate taxation. Fewer than
4,000 households are
expected to cross that threshold in 2013.
Even this arithmetic
doesn’t tell the full story.
Decades ago, Congress
realized that dynastic fortunes would flourish if the rich could avoid estate
tax liability at death by giving away, while still living, the bulk of their
fortunes to heirs. The solution: the federal gift tax.
The gift tax and the
estate tax work in tandem. The gifts the wealthy give to their heirs during
their lifetimes get subtracted from the total estate tax exemption. In 2013, a
wealthy couple that has bestowed $2 million in gifts will only get to exempt,
at death, another $8.5 million.
Or so the theory goes.
In reality, the rich can “gift” their way to a much greater estate tax
exemption. In 2013, the gift tax will only kick in when a single wealthy person
gives a single individual more than
$14,000 within a single
year.
A wealthy couple,
under this lucrative loophole, can together give $28,000 a year to as many
individuals the two spouses choose, for as many years as they want, and face no
gift tax. A CEO with two grown children and four grandkids, for instance, can
gift $168,000 a year to these six nearest and dearest without paying any taxes
at all on these presents.
And those six nearest
and dearest? They don’t have to pay a penny of tax on that $168,000. They don’t even have
to report the $168,000 on
their tax returns. Nor will these six heirs face any taxes on — or have to
report — the additional mega millions they’ll eventually inherit.
We’re letting, in
other words, our grandest fortunes swell without any reasonable limit. Our
progressive forebears didn’t accept that swelling. Neither should we.
OtherWords columnist
Sam Pizzigati is an Institute for Policy Studies associate fellow. His latest
book is The Rich Don’t
Always Win: The Forgotten Triumph over Plutocracy that Created the American
Middle Class. OtherWords.org