America has entered the "Age of the Millionaire."
Never before in the US have there been so many millionaires, multimillionaires, and even billionaires. Today there are about 6 million of them across the country.
Never before has a nation created wealth this rapidly. The US economy generates a new millionaire household approximately every 31 seconds. That comes to about 1 million new millionaire families every year.
Now this prosperity has created a politically awkward moment for President Clinton and the Democrats on the issue of estate taxes. Having accumulated this wealth, many Americans want it to stay in the family. Today in the House of Representatives, the Republican leadership is expected to call for a vote to override Mr. Clinton's veto of their bill that would first cut, and then eliminate, all federal estate taxes by 2010.
Immense riches are at stake.
Fidelity Investments, the largest mutual-fund company, estimates that during the next five decades, Americans - including baby boomers and their parents - will pass along at least $30 trillion to their heirs. Yet current federal taxes on estates have marginal rates as high as 55 percent.
Disparaging the estate tax as a "death tax," Republicans think they see a winning issue. A Gallup poll in June, for example, found that 60 percent of Americans want the estate tax wiped off the books. Only 35 percent favored any taxation of estates valued at $1 million or higher.
Current law exempts the first $650,000 of an estate from taxes. The size of this exemption is scheduled to rise to $1 million in 2006.
While agreeing that something needs to be done to trim estate taxes, the president strongly opposes their elimination. That would be too much like a gift to the "privileged few," he complains. Eliminating the tax would also make it more difficult to reach the Clinton goal of paying off the entire US national debt within the next 12 years.
Clinton insists, however, that he has nothing against people getting rich. He jokes: "If I were against creating millionaires, I have been an abject failure in my years as president."
In fact, it is the very success of the president's economic policies that makes the Democrats' political situation a difficult one. Clinton argues that the estate tax today hits only 2 percent of all American families.
But that will soon change. With growing wealth, over 5 percent of all US families are now in the millionaire class. And that continues to rise. While the US population is growing at just over 1 percent a year, the number of millionaires in the US is climbing at a 17 percent annual clip, according to studies done for the Lincoln Financial Group.
Studies of these new millionaires show that over 90 percent of them made their money the hard way - they earned it, rather than inherited it. The new millionaires include two-wage-earner families, owners of small businesses, and workers who have maxed-out their retirement savings plans.
Most of these millionaires don't display flashy lifestyles. They live quietly in modest neighborhoods, drive ordinary cars like Fords and Chevys, work hard, and save a large part of their incomes.
Jon Boscia, group president and chief executive officer of Lincoln Financial, heads a firm that markets to many of these new millionaires. Mr. Boscia notes that there are two primary reasons the newly rich object strongly to current federal policy, which taxes estates at rates from 18 to 55 percent.
New millionaires "believe they already paid taxes when the money was earned, so they see the estate taxes as double taxation," Boscia says. In addition, "people think they should have the right to say what happens to the wealth and the businesses they have created, and not have it taken away" from their heirs when they die.
Another important factor in the debate over estate taxes is that today, a million dollars isn't what it used to be. Long-term inflation has changed the perception of what it takes to be rich.
A survey, "Americans and their Money," conducted for Money magazine, found that among Americans with incomes of $50,000 or more, more than half think it takes at least $3 million to be wealthy. By comparison, in 1984, a majority thought a person needed only $500,000 to be considered rich.
THE steady erosion of buying power means that someone retiring today with $1 million could find that it was not enough to sustain a comfortable lifestyle. Because people are living longer - as much as 35 or even 45 years in retirement - they can easily spend down that $1 million because of inflation, Boscia says.
The days are over when $1 million could be equated with "being on Easy Street," he says. In fact, even someone with $1 million needs to be financially cautious, Boscia says.
While the House vote this week is expected to be close, Republicans almost certainly do not have the two-thirds support they need in the Senate to override the veto.
Hank Gutman of KPMG in Washington says that earlier this summer he foresaw a compromise between the Republicans and Clinton on the estate-tax issue.
Now, however, Mr. Gutman, who is a former chief of staff for the Joint Committee on Taxation in Congress, sees less prospect for that. The issue has become too politicized, he says, and both Democrats and Republicans appear anxious to debate the issue on the campaign trail.
AMOUNT SHELTERED FROM FEDERAL ESTATE TAXES (CURRENT LAW)
YEAR AMOUNT SHELTERED
2000-01 $ 675,000 2002-03 700,000 2004 850,000 2005 950,000 2006 1,000,000
Source: Fidelity Investments
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