Beefing Up Our Estate Tax to Whittle Down Our Oligarchy

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For about a generation, the Republican Party has fought hard to reduce or abolish the estate tax. Its PR geniuses even invented a catchy phrase to fight it. They called it a “death tax.”

But the estate tax is not a tax on dying. Its burden doesn’t fall on the deceased, who are dead and can’t pay anyway.

The tax falls on the living descendants of owners of great fortunes, who never made the money and seldom deserve it. It’s the perfect tax for a society supposed to be based on individual achievement and merit. It alleviates, if not curtails, a form of nepotism justified only by tradition.

The estate tax is not primarily a means of raising revenue. Instead, it’s a vital social safety valve that relieves the pressure of oligarchy. Properly applied, it can keep us from succumbing to an inherited aristocracy like the feudal one that our Founders thought they had left behind in “Old Europe.”

Our Founders abhorred the landed aristocracy of their time. That’s why they wrote a ban on “titles of nobility” right into our Constitution. They wanted to build a society based on merit and current contributions to the common welfare, not inherited wealth.

Unfortunately, we now have a similar kind of durable aristocracy. Instead of a landed aristocracy, we have an increasingly durable oligarchy of capital. Unlike the landed aristocracy of old, this oligarchy operates mostly in secret.

As its foes correctly state, the estate tax affects only a small fraction of the population. But that’s precisely the point. It keeps a tiny minority from creating a new, durable, inherited aristocracy of wealth and so subverting our democracy—precisely our current complaint.

The old, landed aristocracy had many vices. It excluded the people who grew the crops, did the labor and fought the wars from a share of the locked-up wealth. Not only did ordinary people have no share. The very family at issue often didn’t either. Strict rules and customs of primogeniture often decreed that a vile or stupid heir would inherit the lot.

England was among the first nations to grapple seriously with these ills. In the 1600s, its common-law judges created something called the “rule against perpetuities.” It prevented aristocrats, through their last wills and testaments, from governing from their graves. It limited the future effect of wills to the lifetime of anyone “in being,” plus twenty-one years.

The rule applied to everyone. In most Anglo-American societies, it or a simpler substitute still does. But of course it was and is most important for the great agglomerations of wealth, which at that time belonged to the monarchs and landed gentry.

The rule against perpetuities kept the “dead hand” of the first to acquire land or wealth from setting its future in stone forever by will. It marked a good first step toward reaming out the hardened arteries of a society in which everything in life depended on where you were born, who your parents were, and whether they had land.

Then along came capitalism and the Industrial Revolution. Unlike land, capital is mobile and flexible. It can move from town to town, state to state, nation to nation, and even continent to continent. And unlike land, capital can be hidden and secret.

When passed to progeny, mobile capital offers innumerable paths not only to yet more wealth, but also to social and political power. It does so regardless of merit and any new contributions made to human progress. Capital even lets lazy offspring hire professional managers to inflate their wealth and power with little or no effort of their own.

The rule against perpetuities and simpler substitutes still apply. But all they do is prevent the wealth progenitor and his or her heirs from setting the use of great wealth in stone for future generations. They don’t prevent the super-rich from passing their great wealth on to progeny, giving them all the advantages and power of lords and ladies of old, regardless of merit.

Only the estate tax or a wealth tax can slow this dismal process. Unlike a wealth tax, the estate tax is well established and so not subject even to theoretical constitutional doubt. When it falters, aristocracy or oligarchy looms.

That, dear reader, is where we are today. We are suffering under an oligarchy of great wealth, in which the top 1% of families own nearly twice as much as the bottom 90% [fifth graph], and the top 0.1% have an average net worth above $100 million, while the bottom 40% have negative net worth, i.e., are in debt [fourth graph].

What’s more, wealth is concentrating still further, as is industry. (The latter is a matter of weakness in our antitrust laws, a topic for another day.) The rich are getting richer and more powerful, and the super-rich are getting less, not more, numerous. Today three men—Jeff Bezos, Bill Gates and Warren Buffett—collectively own more wealth than the bottom 40% of families.

This in itself would be a dire enough assault on equality and social mobility to raise concern. But there’s more. Today the super-rich are not content to tend their industrial or financial gardens. Instead, they want to rule us, just like the dukes and duchesses of old.

According to a 2018 book-length academic study, summarized by its authors here, the super-rich (except for a few progressive ones) deliberately bend our political system to their ends. They do so by making campaign contributions, by lobbying, by initiating and financing quiet lawsuits, and by creating “think tanks” that promote their personal and family interests in disguise.

Among their goals are killing or reducing Social Security, lowering taxes, reducing and abolishing regulations, abolishing the estate tax, and making sure we continue to use fossil fuels until they run out, regardless of what happens to our climate. What’s worse, except for a very few progressive billionaires (who pursue better ends), the oligarchs do most of this in secret with dark money and even darker means.

So we in the US have a grave dilemma. Capitalism and the great wealth it offers create powerful incentives for industrial and technological progress. Yet at the same time, allowing families to accumulate great wealth and pass it on privately to undeserving progeny creates one of the most powerful forces opposing progress in the known universe: a self-interested and self-perpetuating aristocracy of wealth. Neither the rule against perpetuities nor our current, wimpy estate tax is strong enough to control this mighty enemy of social progress.

Today there’s an even more menacing twist. Sometimes the first generation to make the great wealth immediately applies it to perpetuate its fiefdom, in part by promoting an ideology for doing so.

Some call such an ideology “conservatism.” But it’s not the “conservatism” of old. Its goal is not to perpetuate frugality, prudence, moderation, tolerance, democracy or humanity. Instead, its goal is to perpetuate the oligarchs’ wealth and power by a kind of licentious “freedom:” of low taxes, drowned government, little regulation and generally letting the oligarchs do as they please. Hence we have the notorious Koch Brothers (one now deceased), who used their money, mostly in secret, to promote these ends.

We could fix these problems by beefing up the estate tax to whittle down the great fortunes. We could require later generations to make their own unique contributions, rather than relying on the accomplishments of their forebears and claiming undeserved wealth-perpetuating privilege.

Today the estate tax is 40%, and it applies only to estates above $11.4 million. So two generations later, a billion-dollar estate would still amount to $360 million. Raise the estate tax to 50%, and by the second post-founding generation, a super-rich family’s wealth will have dropped, in the absence of augmentation, to about one-quarter of the founding generation’s, or $250 million. Raise the tax to 70%, and an un-augmented billion-dollar fortune will have dropped to 9% of the founding generation’s, or $90 million.

Thus, even a 70% tax would not quickly kill the fortunes of the super-rich. A billionaire’s great grandchildren would still have at least $27 million among them, even if they and intervening generations had done nothing at all for the rest of us. They could live on that. Yet the immense power of the super-rich, and their ability and temptation to control the rest of us, would slowly fade away.

It goes without saying that such an estate tax should apply only to great fortunes, those that have created our current oligarchy. Mere millionaires ought to be able to pass their kind of money along undiminished.

In today’s economy a few million is just a start in economic security, easily squandered and easily lost. A complete exemption of estates of $5 million or less seems fair and appropriate. That’s less than half of what we exempt today, after the Trump-era increase in the exemption.

The main difference is that today’s top-end rates are not nearly high enough to stem the tide of oligarchy, let alone raise much revenue. A proper estate tax would have several, increasingly progressive rates of tax, so as to allow small fortunes to survive for a few generations but whittle great ones down sharply. It would thus be like our progressive income tax, with several tax “brackets” for different sizes of estates, instead of levels of income.

Today public-spirited billionaires like Bill Gates and Warren Buffett are giving most of their fortunes away. Each of them has pledged $30 billion in organized philanthropy. With their skill in identifying winning technologies and people, their gifts ought to have a positive effect.

But the vast majority of billionaires are not like Gates or Buffet. They are using the great wealth to twist our laws and our government in order to perpetuate their families’ wealth and power. They are doing so quite successfully and mostly in secret. They are trying (and largely succeeding) to re-create for our capitalistic world something like the durable power and wealth of the landed gentry in the age of monarchy.

What the super-rich are trying to “conserve” is not the advances of the last four centuries: majority rule, the Enlightenment, a roaring egalitarian economy, equal justice under law or even respect for science. Instead, they are taking us back to something much like the landed aristocracy of Elizabethan England, but much richer and more flexible, and therefore more dangerous.

The primary purpose of the estate tax is to forestall that retrogression. If a family can’t grow its great wealth significantly, with the aid of all the political and social power that great wealth entails, the family should lose it in a few generations. It should become merely rich, not stay super-rich without additional socially useful achievement.

A beefed-up estate tax is thus a good way to maintain a society that is capitalist but also egalitarian and progressive. It’s a practical way to keep great family fortunes from perpetuating themselves for no good reason, just because they can. It could help curtail our new, more durable aristocracy of capital as the old, landed one fades into history.

Footnote 1: The ban on titles of nobility appears in the so-called “Emoluments Clause,” Article I, Section 9, Clause 8 of the Constitution, which also provides a safety valve for Trump-like corruption. The Clause reads in full as follows:

“No Title of Nobility shall be granted by the United States: And no Person holding any Office of Profit or Trust under them, shall, without the Consent of the Congress, accept of any present, Emolument, Office, or Title, of any kind whatever, from any King, Prince, or foreign State”.

Footnote 2: The formula for whittling great fortunes down is R=R₀(1-r)ⁿ, or R₀ times (1-r) to the nth power, where r is the rate of estate tax expressed as a fraction, n is the number of generations after the first, i.e., the one that actually made the fortune, R₀ is the initial fortune made by the founding oligarch, and R is the residual fortune left, in the case of no further additions, after n such generations. This formula will almost invariably understate the residual, unless one generation is profligate, because investing the money, even if only by leaving it in the bank at interest, will produce unspecified gains.

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