Democracy and the 'death tax'

In 1877, terrible riots tore through Pittsburgh, Chicago, San Francisco, and New York. No depression fueled worker violence; rather, the United States was experiencing perhaps the fastest economic growth in its history.

Resentment had ignited into violence over a yawning gap between the very rich, the robber barons of the age, and everybody else, says Charles R. Morris, author of "The Tycoons," a recent book.

"In that 'gilded age,' wealth inequality was just about what it is now," notes Mr. Morris. Permanently eliminating the tax on the estates of the wealthy was rejected by the Senate last Thursday. Drastically shrinking the tax remains a goal of the Republican leadership. Weakening the tax would have social, political, and economic implications, Morris says.

Morris doesn't expect violent turbulence again. "Things are a little different now," he says. But he wonders if the "unstable coalition" in the Republican Party between the religious right and prosperous business will break down, leading to a political reorganization along "lunch-bucket-type issues."

The increase in the concentration of wealth at the top in the US is "stunning," says Edward Wolff, a New York University expert on wealth. The number of households with wealth of $10 million or more in constant 2004 dollars has risen 5.19 times from 66,500 families in 1983 to 344,800 households in 2004.

Despite rising home prices, 90 percent of the increase in wealth between 1983 and 2004 has gone to the top 20 percent of households. The bottom 40 percent have seen a decline in their net worth, says Professor Wolff.

Since the wealthy have obtained, on average, between one-half and two-thirds of their assets by inheritance, the weakening of the estate tax would tend to expand the gap between rich and poor.

That bothers Wolff. "People with wealth can disproportionately influence the political process" with campaign donations and support for lobbies, he says. "It makes the nation much less democratic."

Similarly, income (versus wealth) has shifted further to the well-to-do. In the 1950s and 1960s, the top 10 percent of households enjoyed around 32 percent of total national income. Their share rapidly increased to more than 42 percent today, according to a study by two economists, Thomas Piketty at a Paris think tank and Emmanuel Saez at the University of California, Berkeley.

The wealthiest 1 percent have almost doubled their share of total income.

With the stock market crash of 1929, the Great Depression, World War II, and a progressive income tax and estate tax, wealth and income were more evenly distributed by the 1950s. By clobbering the estate tax, "we are laying the groundwork" for a return to the sort of hereditary superrich and the class structure of the early 20th century portrayed in the movie "Titanic," says Sam Pizzigati, editor of Too Much, a weekly online newsletter on inequity and excess.

"Horrible, horrible," he says of the era when the rich tended to see themselves as separate and superior.

The concentration of wealth in the past 30 years has been "incredible," says Mark Weisbrot, co-director of the Center for Economic and Policy Research in Washington. "It will stop when the media start to notice it." People will then learn "they are getting ripped off."

The total income of the richest 10 percent of Americans is about 16 times that of the poorest 10 percent, says a United Nations Development Program report.

That is certainly a lower ratio than it is in such nations as Brazil (68), Colombia (58), Argentina (39), Venezuela (63), or Chile (41). Together with weak economic growth for 25 years, such extreme divisions between rich and poor have been a factor in the growing success of populist parties in Bolivia, Venezuela, Argentina, Uruguay, Ecuador, and Brazil. Even in Mexico, some speculate that a leftist might win the presidency in July.

Opponents of the estate tax argue that it hurts the economy by hitting savings.

Not so, says Joel Friedman, an economist at the Center on Budget and Policy Research. He cites a study by the politically neutral Congressional Research Service which concluded that eliminating the so-called "death tax" would have a "negligible" impact on savings and output. In fact, the CRS says, by depriving the government of major revenues (thereby adding to the national debt), eliminating the tax may have a negative impact.

If repeal of the estate tax is made permanent after 2010, the cost to the US Treasury over the following 10 years would be nearly $1 trillion in lost revenues and higher interest payments, says Mr. Friedman. That assumes the maximum tax rate returns to 55 percent with an exemption of $1 million for each estate. (Few estates would pay such a high rate, given various tax breaks.)

But on a taxable estate of $10 million to $20 million, it would save the heirs $3.369 million. It would be "a program to save the idle rich," notes Bernard Wasow at the liberal-leaning Century Foundation.

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