Paul A. Volcker
I didn"t get it last year. I still don"t get it. Why, right now, in the aftermath of
the greatest burst of paper wealth creation in all of American history (in all of
history for all I know), in the midst of growing concern (even alarm) about the
growing disparity of wealth and income in the United States, right in the face
of increasing pressures on the federal budget, has there been so much effort
to abolish the estate tax?
Reform—long overdue—I can understand. But total elimination of a tax
broadly accepted as a reasonable part of our revenue system for close to a
century is quite another thing. Of course, no one likes to pay taxes when
alive, or at the expense of potential heirs, after death. But I think we all
recognize, liberal or conservative, rich or poor, that some taxes, like death
itself, are inevitable. The unavoidable fact is that government has certain
responsibilities. The discharge of those responsibilities costs money.
We can, we should, and we endlessly do debate just how far those
governmental responsibilities should extend, and how much we should
spend. We should also be careful about how we tax. We want to minimize
adverse effects on incentives. We should be watchful about distorting
economic activity in ways that reduce efficiency, productivity, and growth.
What we can"t escape is a simple piece of logic. Once we agree on total
expenditures and revenues, if we lose one existing source of revenue—say
for the federal estate tax—we will have to find a replacement. That will
become harder and harder to do a few years ahead, when estate tax
revenues will likely increase rapidly, reflecting the enormous rise in wealth
during the 1980s and 1990s. It"s hard for me—hard in terms of economic
analysis—to think of practical alternatives with fewer adverse effects than a
(reformed) estate tax.
Consider the main possibilities. More points on the income tax, directly
contrary to "supply-side" theorizing? New sales or value-added taxes,
regressive in their impact on already skewed incomes? Even if we succeed,
right against the current trend, in reducing total spending and revenue needs,
we would still have to choose among various taxes. Quite apart from
questions of political practicality, we would be hard-pressed to find evidence
that, compared with the alternatives, a reasonable estate tax significantly
discourages work effort or innovation or savings. I realize much more is at
stake than these calculations of the "dismal science" of economics.
In Wealth and Our Commonwealth, Bill Gates Sr. and Chuck Collins
appeal to one of the more treasured and persistent strains in the uniquely
American experience. From the days of our founding fathers, through
Democratic and Republican administrations, among conservatives and
liberals alike, the concept of equality of opportunity and dispersion of wealth
and economic power has been a part of the American psyche. The
inheritance of huge fortunes, far beyond any reasonable need for education,
for medical care, and for a comfortable—even luxurious—standard of living
has never rested easily with that political philosophy.
Of course, money is not the only measure of real wealth and opportunity,
and perhaps not the most important. Moreover, some monetary measure of
equality at the starting gate of life will never be achieved, certainly not by
taxation, and it wouldn"t make sense to try. But surely, as the authors so
eloquently set out, our traditional values—our moral values—should weigh
heavily, in fact conclusively, on the side of some tax on exceptionally large
Plainly, the act hastily passed last year, with a sudden phaseout in 2010
only to be reversed the following year, doesn"t make sense. Black humor
about the incentives to keep grandma on the respirator until the turn of the
year is only a macabre exaggeration of the enormous complications for
rational estate planning of the existing law. The added burdens implicit for
strained state budgets is only one of the poorly foreseen "side effects."
The time has come for real reform, sustainable reform, that deals with
outdated and unnecessarily intrusive elements of the old and new laws. For
one thing, we ought to take account of inflation and the rising levels of real
wealth. Gates and Collins rightly suggest the old six-hundred-thousand-dollar
and the current million-dollar exemptions are too low. A swath of families that
today would be considered among the reasonably affluent rather than the
exceptionally wealthy are affected. Similarly the annual allowances for
individual tax-free gifts, now eleven thousand dollars, could be raised
significantly. The purported adverse impact on family farms and small family
business—which Gates and Collins convincingly document as enormously
exaggerated by propagandists for the end of "death taxes"—could be
But by all means let"s keep the tax on truly huge fortunes. Even then, no
one would be forced to pay over any of his or her estate to government
against his or her wishes. Instead, an exemption for charitable institutions
provides other avenues for satisfying personal and community objectives.
This book sets out one reasonable approach toward reform. No doubt
others can and will be suggested. What strikes me as insupportable—
insupportable as a matter of fiscal and economic analysis and insupportable
in terms of a simple fairness and traditional American values—is to abolish
the estate tax altogether. I am confident that that conclusion is shared by
many thousands of business leaders and extremely wealthy individuals
whose estates will be subject to tax. I am confident that there is support
among the broader population. It is those voices that seem to me in touch
with long-held American values and ideals. And it is those voices, the "silent
majority," that need to be heard as the political attack on the estate tax is
What Kind of Nation Do We Want to Be?
The reality is that US society is polarizing and its social arteries
hardening. The sumptuousness and bleakness of the respective lifestyles of
rich and poor represent a scale of difference in opportunity and wealth that is
almost medieval—and a standing offense to the American expectation that
everyone has the opportunity for life, liberty and happiness.
—Will Hutton, Observer of London
The purpose of the estate tax is not to raise revenue . . . but to gradually
correct the distribution of wealth and to prevent concentrations of power
detrimental to the fair value of political liberty and fair equality of opportunity.
—John Rawls, A Theory of Justice
What makes America great are the things we have done to strengthen
equality of opportunity. Over the last century, we have made significant
progress toward this ideal.
One of the important things our country has done to strengthen equality of
opportunity is to put a brake on the accumulation of hereditary wealth. It
could be argued that a society based on opportunity for all could still flourish
in a nation with great inequalities of wealth. We share a concern with our
nation"s founders that the existence of a powerful economic aristocracy
distorts our democracy and negates equality of opportunity. As we"ll see,
these fears were realized during the Gilded Age of the late 1800s, and the
estate tax was part of our country"s remedy.
The estate tax both limits the power of concentrated wealth and
generates revenue to pay for government from those most able to pay. Our
basic assumption in opposing repeal of the estate tax is that we will continue
to have a federal government that will require substantial revenue. This
assumption is not an argument—it is a plain and simple reality. Despite
divergent views on the purpose and size of government, it is most reasonable
that the estate tax be part of financing it.
But let"s say, for the sake of argument, we agree that to pay for the
minimal services of our federal government we need to raise a trillion dollars a
year. Do we primarily raise this revenue from the incomes and wages of
workers? Or from taxes on the consumption of goods? Or from the estates of
deceased wealthy people? All taxes have upsides and downsides. Taxes that
fall entirely on consumption discourage spending, thereby affecting the
economy negatively. A tax system that raises revenue solely from income
taxes would seriously burden persons with low incomes. An established
principle of taxation is that a good tax system will raise revenue from a
variety of sources and be fair, stable, and sufficient.
Revenue Loss and the Tax Burden Shift
The debate over the estate tax must take into account the absolute
requirement for federal and state revenue. And the estate tax should be
evaluated against all the other forms of taxation. What other form of taxation
do we have that is better targeted to those most able to pay? No other
constituency is in a better position to contribute to public services than the
heirs of deceased multimillionaires. Although the progressive income tax
collects revenue from those with high annual incomes, it does not begin to
tap the reservoirs of vast wealth and assets that exist in our nation.
One way or another, a certain amount of money must be paid in taxes to
the U.S. government to support its activities. We could have a long debate
about the proper size and scope of government, but most people would agree
that the federal government fulfills vital functions and we need to support its
activities with tax dollars. Eliminating the estate tax would deprive the
government of a dependable and highly progressive source of revenue.
As we"ll see, the long-term fiscal health of the country has been put at
risk by the 2001 tax cut. If that tax cut is not reversed, we can look forward to
substantial budget deficits for decades to come. In this light, the elimination
of the estate tax-–and the shift in tax burden-–is even more stark. As William
Gale and Samara Potter noted in their assessment of the entire 2001 tax bill,
Tax cuts are not simply a matter of returning unneeded or unused funds
to taxpayers, but rather a choice to require other, future taxpayers to cover
the long-term deficit, which the tax cut significantly exacerbates. Likewise,
the notion that the surplus is "the taxpayers" money" and should be returned
to them omits the observation that the fiscal gap is "the taxpayers" debt" and
should be paid by them. Thus, the issue is not whether taxpayers should
have their tax payments returned, but rather which taxpayers—current or
future—will be required to pay for the spending obligations incurred by current
and past taxpayers.
Consider these looming budget deficits juxtaposed with the immense
increases in personal wealth that have taken place in this country in the last
fifteen to twenty years. Despite the instability in the stock market and the
return to earth of the technology sector, there has been a dizzying
accumulation of wealth.
It would be folly for the patchwork of future federal revenue sources not to
include a tax on these accumulations. Today the revenue from the estate tax
generates about $30 billion, or about 1 percent of federal revenue, but it could
be a significant and larger contributor to the national revenue base in the
years to come.
Boston College researchers John J. Havens and Paul G. Schervish have
modeled projections about the scale of the intergenerational transfer of wealth
that will occur between now and 2052. They have also speculated about the
scale of potential estate tax revenue. In their research, they offer a range of
estimates based on different expectations of growth. The estimated size of
the intergenerational transfer of wealth between 1998 and 2052 ranges from a
low estimate of $40.6 trillion, based on a modest 2 percent growth rate, to a
high estimate of $136.2 trillion, based on a 4 percent growth rate. Under the
low growth estimate, an estimated $15.4 trillion will pass from the 839,000
estates valued at more than $5 million.
Havens and Schervish estimate that over this period between $13.4 trillion
and $25.8 trillion will pass from living parents to children. They estimate that
the total bequests to heirs, including these inter vivos (between the living)
gifts, will range from $24.6 trillion to $65.3 trillion. An estimated $19.4 trillion
to $50.6 trillion will be given to charities.
The amount of revenue generated for the estate tax is substantial under
these scenarios, even if we anticipate the impact of current reforms such as
increased exemptions. Havens and Schervish project that under their low-
growth estimate $8.5 trillion of this intergenerational wealth transfer will be
paid in estate taxes. Over fifty-four years, average annual estate tax revenue
would be $157 billion a year. Under the higher-growth estimate, estate tax
revenue would be $40.6 trillion, for average annual estate tax revenue of $752
billion per year.
An estate tax on only the four hundred wealthiest Americans would
generate substantial revenue. The average net worth of the individuals and
families listed on the Forbes 400 is $2.4 billion. To join the 400 club required
$725 million in 2001. This is a great leap from when Forbes Magazine first
started counting in 1982, when the average net worth of the Forbes 400 was
$400 million and the entry threshold was $91 million. A meaningful estate tax
imposed on these wonderfully successful people"s wealth (their heirs,
actually) could generate, at an effective tax rate of 30 percent and an
exemption of $3 million, $278 billion over the years between now and the
demise of the last survivor!
Losing federal estate tax revenue ranging from $157 billion to $752 billion
a year would trigger two possible negative scenarios. There will be either
serious cutbacks in public expenditures or serious increases in the taxes of
those less able to pay.
The Impact on State Treasuries
Estate and inheritance taxes at the state level preceded the current federal
estate tax, but since the mid-1920s there has been an interaction between
states and the federal government related to estate taxation. In 1926, the
estate tax law was amended to allow taxpayers to claim a deduction against
their federal estate tax liability for the amount of estate taxes they pay to
Although estate tax repeal does not occur until the year 2010, some state
governments are already beginning to feel the loss in revenue. In structuring
the phaseout of the estate tax, congressional tax writers reduced the pinch
on the federal treasury by accelerating the timetable of revenue loss to the
states. Starting in 2002, thirty-eight states began to lose a portion of the
revenue that they received through their state "pickup" tax.
Many states will lose all of this tax revenue sharing by 2005, while the
repeal of the federal estate tax occurs more gradually over ten years. This
structuring will accelerate the loss of at least $50 billion to $100 billion over
the next ten years, about 1.5 percent of state tax collections. One of the
ways the federal government masked the true costs of repeal was to shift this
burden to the states. In essence, the federal government will end up
pocketing the money that otherwise would have gone to the states from 2006
This is not chump change, especially for cash-strapped state legislatures.
The impact on individual states varies by the size of the state and the wealth
of its elderly population. California will lose the most in terms of dollars, with
an estimated $356 million annual loss as the estate tax begins to be phased
out in 2002—and a $1 billion loss by 2005, when it is fully phased out. For
California, with the biggest state budget in the country, this accounts for only
1.2 percent of the state"s total revenues. In New York, New Jersey, and
Connecticut, each state would lose between 2.5 and 2.8 percent of total
revenue. New Hampshire, which has no income tax on wages and no sales
tax, would be the hardest hit. The $25 million loss would account for 4.6
percent of all state revenues.
Estate tax repeal couldn"t come at a worse time for states. "This is going
to hit at an especially hard time," wrote Kevin Sack in the New York
Times, "as states are already facing declining revenues from sales taxes,
income taxes and slumping capital gains. And they are facing further
reductions in spending on schools, roads, prisons and social services."
Some states are tapping rainy-day funds that they built up during the 1990s
"The strong fiscal conditions of a year ago have been replaced by anemic
revenue growth and expanding budget gaps," concluded a report by the
National Conference of State Legislatures. "While revenue has slowed,"
writes John Harwood in the Wall Street Journal, "states have faced Medicaid
health-care expenditures that rose by about 14%, more than double the rate
forecast, in 40 states that the conference surveyed. As a result, state budget
surpluses for the just-completed fiscal year fell by the largest proportion in 20
years, to 8.2% of spending from 11.5 percent in 2000."
As states grapple with new constraints, they will be losing one of the
most progressive sources of revenue available to them. Yet many people will
not understand that one of the factors contributing to their woes is the repeal
of the federal estate tax.
Instead, states will turn to the usual menu of possible budget cuts or
revenue raisers. If they have the political will to raise revenue, which very few
states do these days, they will probably not try to pass or expand a state
inheritance tax, though some are considering ways to retain their state-level
estate taxes. In most cases, we will see increased sales and cigarette
taxes, state income taxes, and cute accounting and revenue gimmicks, such
as borrowing against future tobacco settlements and lotteries.
Even more likely, we will see budget cuts that trim very close to home,
cuts that will affect the quality of public safety, schools, health care, and
social services for the needy. The lost revenue from the repeal of the federal
estate tax will most likely appear as an invisible gap, yet it will be another
reason to tighten state and federal fiscal belts.
The Estate Tax and Inequality
Preserving our federal estate tax plays a critical role in limiting the
concentration of wealth in our country. It"s surprising how little the recent
debate over the estate tax probed this fundamentally American concern.
At the heart of the "American experiment" is our vision of equality of
opportunity and the rejection of hereditary wealth and power. As inadequate
as our efforts to build equality of opportunity have been, the establishment of
greater concentrations of wealth and power will only undermine them.
America"s democratic tradition is skeptical of concentrated wealth and
power. What each of us does in our lives, our contribution to work and
society, is thought to be more important than the family into which we are
When the estate tax was established in 1916, our nation was deep in
struggle over the values of equality of opportunity versus hereditary privilege.
The accumulation of great wealth and the power of the great trusts lead to
questions about the direction of our society. One of the expressed intentions
of the tax, as articulated by Theodore Roosevelt, was to break up "those
fortunes swollen beyond all healthy limits."
This sentiment was not "antirich." Rather, it branched out from a belief
that such concentrations of wealth are corrosive to liberty. Today the levels of
inequality in the United States are at their highest point since the 1920s.10
This is an unusually imprudent time to abolish one of the few taxes that has
slowed this buildup of wealth in the hands of a few.
The Dangers of Inequality Today
Our nation has presently attained levels of inequality approaching the 1880–
1900 Gilded Age conditions that gave rise to a movement to establish the
estate tax. Yet, after a pitifully one-sided debate, our response has been to
eliminate one of the few mechanisms to correct this imbalance.
A recently observed slogan says it all: "I lived through ten years of
unprecedented economic prosperity and all I got was this lousy T-shirt." The
economic boom of the 1990s was highly uneven, with the majority of people"s
incomes staying flat. Over the last thirty years, real wages have remained
largely stagnant or have fallen for the bottom 60 percent of households. In
1996, real wages started to climb so that by the year 2000 the median wage
earner had almost climbed out of a hole. But after a two-decade long wage
slump, the median wage earned in 2000 was still less, adjusting for inflation,
than the median wage in 1973, when Richard Nixon was president.
The United States is now the most unequal society in the industrialized
world. The richest fifth of Americans earn eleven times more than the bottom
fifth. At the bottom end of the pay scale, the number of people working for
poverty wages is troubling. The estimated "living wage," meant to lift a wage
earner out of poverty, is now at least ten dollars an hour; the federal minimum
wage is stalled at just over half that amount. Many workers have held their
households together by working longer hours, holding several jobs, and
increasing the number of paid earners in their families. Two-paycheck
families became the majority in 1998. One cartoonist illustrated this
development by depicting a politician speaking at a banquet, bragging that
his "administration had created millions of new jobs." The waiter at the
banquet observes, "Yes I know, I have three of them."
At the same time, the incomes of the top one-fifth of households
increased steeply and the incomes of the top 1 percent have skyrocketed.
The compensation gap between the highest-paid workers and those earning
the average wage in the United States has grown at a dizzying pace.
According to Business Week"s annual review of executive compensation, in
1980 the disparity between the highest-paid workers in America"s 365 largest
companies and their employees was forty-two to one. Today, the ratio
exceeds five hundred to one.
The disparities in wealth and savings are even more disturbing than
income inequalities. Wealth ownership is a less visible yet critical indicator of
economic well-being. Wealth is the security that people have to fall back on,
the reserves that help them to weather an economic downturn. Savings and
assets propel people forward to home ownership and small business
Historically, the share of private wealth owned by the top 1 percent of
households has fluctuated. In 1870, before the peak of the Industrial
Revolution, it is estimated that the wealthiest 1 percent owned 27 percent of
wealth, with the top 10 percent owning 70 percent. By 1912, as the Gilded
Age waned, the share owned by the top 1 percent had doubled to 56.4
percent. At the same time, the wealthiest 10 percent of households owned
90 percent of all wealth.16 On the eve of the Great Depression, in 1928 and
1929, after the advent of modern taxation and the First World War, from 1914
through 1918, the share owned by the top 1 percent had declined to 40
percent of all private wealth.
In the three decades after World War II, our nation actively pursued public
policies that shared prosperity and equality of opportunity. The result was a
greatly expanded middle class and reduced wealth inequality. These policies
included the GI bill, federal mortgage assistance programs, college loans and
grants, and incentives for small business development. These were costly
initiatives that were paid for, in part, by progressive taxes. Few people today
would question the prudence of those investments, as many families
celebrated their first home purchase and first college graduate in the postwar
The data about postwar years demonstrate that these were decades of
relatively greater shared prosperity. Incomes for all quintiles doubled between
1947 and 1979. It is estimated that by 1976 the share of wealth owned by the
top 1 percent of households had dipped below 20 percent. Since then our
society has reversed direction and moved toward levels of wealth inequality
unparalleled since the eve of the Great Depression.
Today the wealthiest 1 percent of households again own over 38 percent
of all private wealth. In terms of financial wealth, including the ownership of
stocks, bonds, and other investments, the top 1 percent of households own
47 percent and the top 20 percent own 91 percent. The benefits of the
economic boom of the last two decades were highly skewed to the top.
Between 1983 and 1998, almost all the growth in wealth of the economic
boom went to the top 20 percent of households. Over the same time period
the wealth of the bottom 40 percent of households showed an absolute
It is true that more Americans than ever own stock. Since 1983, the
percentage of Americans owning stock grew dramatically from 24.4 percent
to 48.2 percent. This was the result of households shifting savings from
banks to mutual funds and greater investment in retirement instruments,
such as private pension accounts like 401(k) plans and IRAs. But even for
those families with investments in the stock market, their stake was small.
Only 32 percent of households owned more than ten thousand dollars in
stock. The concentration of stock ownership mirrored the overall levels of
wealth inequality, with the top 1 percent of the population owning 42 percent
of all stock and the top 20 percent owning almost 90 percent.
As more asset wealth was held in fewer hands, the savings rate went into
steep decline, from 10.9 percent in 1982 to 2.3 percent in 2001.22 With wage
rates flat or falling, many Americans took on unprecedented amounts of
consumer and mortgage debt.
The disparities in wealth are even more pronounced from the perspective
of race. The median white household has eight times as much wealth as the
median black household. The median net worth for a white household is
$81,700; for African-Americans it is $10,000. Median Hispanic net worth
declined from $5,300 in 1995 to $3,000 in 1998. Removing home ownership
from the equation, white financial net worth is $37,600; African-American net
worth is $1,200, and Hispanic financial net worth is $0, meaning half of
Hispanic households have zero or negative financial net worth.
No one can fully explain the causes of accelerating income and wealth
inequality. But most economists agree that multiple forces are at work,
including technological change, deunionization, and global competition.
Public policies during this period, particularly taxation, have exacerbated
inequalities by favoring large-asset owners and corporations over wage
earners and smaller businesses. The taxation burden on higher incomes and
capital gains has consistently fallen in the last four decades, shifting the tax
burden off of high earners and large corporations and onto individual
taxpayers. The effort to repeal the estate tax is part of this trend.
Why does inequality matter? Some commentators have made the case
that we should focus our efforts on alleviating poverty, not inequality. For this
reason, a tremendous amount of public and charitable resources go toward
lifting the floor, building pathways out of poverty for individuals and
communities. But inequality does matter, because concentrations of wealth
and power distort our democratic institutions and economic system and
undermine social cohesion.
Concentrated Wealth and Democracy
If concentrations of wealth did not translate into political power and influence
in our democracy, they might be less troubling. But unfortunately they go
hand in hand. As Supreme Court Justice Louis Brandeis observed a century
ago, "We can have concentrated wealth in the hands of a few or we can have
democracy. But we cannot have both."
Once a household accumulates wealth above a certain threshold, say $15
million, it has moved beyond the point of meeting its needs and aspirations of
itself and its heirs. Such households are now in the nation"s top quarter of the
richest 1 percent of households and stand atop a global pinnacle of wealth
almost too enormous to contemplate. By the late 1990s, there were an
estimated forty thousand households with more than $25 million and five
thousand with over $100 million.26 They may be asking themselves, as Bud
Fox queried speculator Gordon Gekko in the 1987 film Wall Street, "How
many yachts can you water-ski behind?"
The amassing of great wealth, above a certain point, becomes an
accumulation of social and political power. This is not inherently evil power,
as the legacy of Carnegie"s libraries and Rockefeller"s contributions to
medical research attest. But in a democratic, self-governing society, we
should be concerned with the potential threat that concentrated wealth poses
to our democratic institutions. Political scientist Samuel Huntington observed
that in the United States "money becomes evil not when it is used to buy
goods but when it is used to buy power. . . . Economic inequalities become
evil when they are translated into political inequalities."
Our democracy is now at risk because of the enormous power of
accumulated wealth. The practices of government, administration, and law
writing have been molded by the money power of the few, against the
interests of the many. For example, the concentration of media ownership
narrows and cheapens public discourse. When Ben Bagdikian wrote The
Media Monopoly in 1983, about fifty media conglomerates controlled more
than half of all broadcast media, newspapers, magazines, video, radio,
music, publishing and film in the country. Today, fewer than ten multinational
media conglomerates dominate the American mass media landscape.
A more publicized example of the influence of money and power is how
we finance our elections and write our laws. Both the high cost of running for
elected office and the enormous amount of resources devoted to lobbying
underscore the quantum leap in financial influence that has changed our
national politics. In 2000, the average winner of a Senate election spent $7.7
million; the average winner of a House election spent $842,000. Less than 1
percent of the population make contributions of two hundred dollars or more
to candidates; half the donors have incomes over $250,000 per year. These
contributions clearly have an influence on public policy, particularly on roll
call votes on issues that do not attract significant publicity, like special
interest tax legislation. And this skewed influence also explains why most
senators, while needing to raise over seven thousand dollars a day to run for
reelection, don"t spend more time at neighborhood diners or soup kitchens.
Similarly, the number of paid lobbyists and the scale of contributions to
political action committees has spiraled upward for two decades.
Even with campaign finance reform aimed at plugging up some of the
avenues of influence, big money will continue to dominate our elections and
governing institutions. The result is a government primarily concerned with
writing rules and administering regulations to serve the interests of its paying
patrons. The power of the political contribution will continue to diminish the
power of the ballot. And in the policy contests over the great issues of our
day, concentrated wealth will emerge victorious almost all the time.
In this context, the estate tax is a very important issue. The estate tax
does make a dent in the dynasties of wealth. If the organized money that is
now working to eliminate the tax succeeds, the distribution of wealth and
power in our society will become more skewed. The result will be societal
rules that are even more beneficial only to those who can pay.
Concentrated Wealth and Equality of Opportunity
This concentration of political power directly and indirectly undermines
equality of opportunity. The wealthy and powerful generally "privatize" their
personal and family needs through private education, private ownership of
books and learning tools, private clubs and recreation, private transportation,
and so on. For those who are not born wealthy, however, opportunities
depend on the existence of strong community and public institutions. The
ladder of opportunity for America"s middle class depends on strong and
accessible public educational institutions, libraries, state parks, and
municipal pools. And for America"s poor, the ladder of opportunity also
includes access to affordable health care, quality public transportation, and
child care assistance.
During decades when the concentration of wealth is great, our society
puts a greater priority on tax cuts and spending priorities that benefit the
wealthy rather than on building the institutions of opportunity. In the 1920s,
after several decades of Progressive Era reforms aimed at improving the
conditions of ordinary people, there was a widespread rollback of social
reforms and public investment. In a similar way, the 1980s and 1990s have
witnessed the erosion of investment in equality of opportunity in education,
home ownership, and small enterprise development, compared with that of
the 1950s and 1960s.
During periods of less wealth inequality, our country has strengthened
equality of opportunity, particularly for access to education for people of
modest means. This is not only beneficial to the economy but a precondition
for electoral democracy. Although our education system has many strong
points, we are losing ground in ensuring affordable access for all. In 1965, the
Pell grant, the largest federal program for lower-income students, covered 85
percent of the cost of four years at a public university. By 2000, it covered
just 39 percent of the cost.
The current political and economic situation, shaped by the priorities of
organized wealth, will not improve this picture. College costs have
dramatically risen since the late 1970s and will continue to rise. State
governments are raising tuition at community colleges and public universities.
All of these will be additional obstacles for lower-income students seeking
higher education. Those who enroll will endure distracting financial stresses,
working long hours while in school and graduating with enormous personal
and school debt burdens.
A society with widening disparities of wealth and power chooses other
priorities over access to education for all. Historian of U.S. inequality Sam
Pizzigati writes that "if we allow great wealth to accumulate in the pockets of
a few, then great wealth can set our political agenda and shape our political
culture—and the agenda and the culture that emerge will not welcome efforts
to make America work for all Americans."
The policy priorities of organized big money are not the same as the
priorities of those who are unable to privatize their needs.
Growing Inequality Is Bad Economic Policy
Too much concentrated wealth and power is bad for the economy because it
undermines prosperity. Economists have tended to look narrowly at the
impact of wealth inequality on economic efficiency-–and they have left it to
the worldly philosophers to speculate on the social dangers of concentrated
wealth. But a number of economic studies show how too much inequality of
income and wealth can be a drag on economic growth. In a survey of
academic research on the topic, Philippe Aghion summarizes: "Several
studies have examined the impact of inequality upon economic growth. The
picture they draw is impressively unambiguous, since they all suggest that
greater inequality reduces the rate of growth."
There are several reasons for this pattern. First, as discussed above,
countries with high levels of inequality fail to invest adequately in education.
Second, as discussed below, inequality leads to a breakdown of social
cohesion, and in its most extreme form, to widespread social unrest and
political instability. Finally, too much concentrated wealth distorts the
investment priorities and market decisions of the country at large, leaving
lower- and moderate-income people without the incomes needed to stimulate
the economy with widespread consumer spending.
For instance, inequalities of wealth and income backfire in the
commercial marketplace. In the last two decades we"ve seen the emergence
of a "Tiffany/Kmart" dichotomy, a two-tier consumer market. One consumer
market is shaped to suit the particular tastes and dollars of the top 5 percent
of wealth holders. The mass market appeals to the rest. But as the buying
power of the middle class erodes, the whole economy is put at risk. The
purchasing power of the super wealthy alone is not enough to propel our
After the terrorist attacks and economic downturn of September 2001,
several troubling economic trends were unmasked. Commentators expressed
concern that the long-term impact of rising consumer debt and stagnant
wages might slow our economic recovery. Lower- and middle-income
Americans couldn"t afford to continue to prime the pump of the U.S. economy
with additional consumer borrowing, especially in the face of rising job
layoffs. They were maxed out.
Historians have seen this before. In his history of the Depression and
Second World War, Freedom from Fear, David Kennedy notes how the
Hoover administration conducted an extensive survey of social trends on the
eve of the Great Depression.
As Hoover"s investigators discovered, the increasing wealth of the 1920s
flowed disproportionately to the owners of capital. Worker incomes were
rising, but not at a rate that kept pace with the nation"s growing industrial
output. Without broadly distributed purchasing power, the engines of mass
production would have no outlet and would eventually fall idle.
Too much economic inequality undermines economic stability and
growth, threatening prosperity for all.
Inequality and Our Civic and Public Health
If too much inequality is bad for our democracy and economy, it is also
harmful to the social fabric of a society that aspires toward fairness. British
historian Arnold Toynbee analyzed the collapse of twenty-one past
civilizations and determined that there were two common factors that led to
their demise. The first was a concentration of wealth, and the second was
inflexibility in the face of changing conditions. Jeff Gates notes that
concentrated wealth and societal rigidity are "two sides of the same coin."
Concentrated ownership leads to inflexibility when what societies need is
greater cooperation and adaptability.
As our society pulls apart, there is a greater distance between haves and
have nots, eroding society"s social solidarity and reinforcing a sense that we
are in very different realms. Our culture becomes more like an apartheid
society, where haves and have nots no longer simply occupy opposite sides
of the tracks but inhabit wholly different worlds. And the distance between
these worlds has become so wide that it erodes any social sense that we are
in this together.
Apartheid societies are unhealthy places to live, for the rich and everyone
else. Public health researchers have shown how societies with wide
disparities of wealth have poor health. Although it is unhealthy to live in an
impoverished community, it is even worse to live in communities with high
levels of income and wealth disparities. Within the United States, counties
and states with greater inequality, not absolute poverty, have the highest
incidences of infant mortality, heart disease, cancer, and homicide. Regions
with greater equality enjoy the opposite, longer life expectancies and less
Why is it healthier to live in a community with less inequality? Inequality
leads to a breakdown in the social solidarity that is necessary for public
health. British medical researcher Richard Wilkerson argues that
communities with less inequality have stronger "social cohesion," more
cultural limits on unrestrained individual actions, and greater networks of
mutual aid and caring. "The individualism and values of the market are
restrained by a social morality." The existence of more social
capital "lubricates the workings of the whole society and economy. There are
fewer signs of antisocial aggressiveness, and society appears more caring."
Nothing demonstrates the fragmentation of community in the United
States more vividly than the rise in gated residential communities for the
affluent and the simultaneous record numbers of people in prison. Some 9
million households now voluntarily live in gated residential communities and
another 2 million people are involuntarily incarcerated. More people than ever
are living behind gates and walls with entrances patrolled by armed guards.
This polarization disturbs the equilibrium of a democratic society. It is in no
one"s interest for the United States to become more like some of our South
American neighbors, such as Brazil, with such extreme levels of inequality.
What kind of nation do we want to become?
The "American experiment" has attempted to balance two competing
values: economic liberty versus democracy and equality of opportunity. We
want to create a prosperous society, a goal we have achieved for a significant
percentage of the population. We also aspire to create a society in which
there is equity, where the playing field is level and the runners all start at the
same starting line.
As you look over the Forbes 400 list, contemplate what the inevitable
multiplication of these large estates will mean for this country in the decades
to come. If they are not interrupted by a significant transfer tax, these will
become the political dynasties of tomorrow.
There is no possible way for the children, grandchildren, and great-
grandchildren of the Forbes 400 to spend the income from these huge
estates. Their dynastic wealth will grow and grow, and the accumulation of
excessive power in the hands of a limited number poses a significant risk for
Does the Estate Tax Have an Impact?
Some might argue that if one of the goals of the estate tax is to reduce the
concentration of wealth, it is not doing a very good job. After all, the growth in
wealth concentration has been enormous and seemingly unchecked by the
tax over time. Bruce Bartlett of the libertarian National Center for Policy
Analysis observed that "wealth is probably more unequally distributed in the
United States than in countries with no estate tax." He compared the
maldistribution of wealth in the United States to four countries—Canada, New
Zealand, Australia, and Israel-–that don"t have an estate tax and have lower
levels of wealth inequality. He concludes that since the estate tax is
ineffective, it should be scrapped.
Wealth researcher Lisa Keister, however, points out that the wealth
distribution in the United States would be much worse without the estate tax.
In one simulation, she shows how the distribution of wealth would be different
if the estate tax had remained as progressive as it was in the mid-1970s,
when the top estate tax rate was 77 percent and exemptions were lower. Had
this rate and exemption structure remained in place during the stock market
explosion of the 1990s, it would have greatly reduced wealth inequality.
Keister finds that the richest 1 percent would have held just 30 percent of the
wealth in 1983, rather than the actual 34 percent of wealth they did possess.
And, according to her model, the top 1 percent would have had 32 percent in
1998, rather than the actual 38 percent. The middle class, defined as
households between the twentieth and sixtieth percentiles in the distribution,
would have had a 10 percent greater share of the wealth pie, rather than
In another scenario, Keister demonstrates that the concentration of
wealth would have been much greater if the progressivity of the estate tax
had been reduced. Under this scenario, the top 1 percent would have owned
37 percent of the nation"s wealth in 1983 and 43 percent in 1998. Remember,
the actual figures are that the top 1 percent owned 34 percent of the nation"s
wealth in 1983 and 38 percent in 1998.
It is clear that the 2001 reforms of the estate tax will increase wealth
inequality-–and that complete repeal will further fuel greater concentrations of
wealth. Indeed, the estate tax could be more effective in deterring wealth
imbalances. We should strengthen the tax, not eliminate it.