Mao: The Tall Stalk Gets Cut Down-- But Not In America... The Sad Saga Of The Estate Tax

2 out of 1,000 estates are paying estate taxes this year. But even those taxes expire December 31. Obama would like to replace the current legislation with a slightly fairer tax-- but so slightly that it's almost not worth mentioning. Obama's proposal would tax 3 estates out of 1,000. The Republicans, of course, want to abolish the estate tax altogether. I thought Chris Hayes put the estate tax into context very well in his book, Twilight of the Elites. The topic he's discussing is why it's so tough to move America more forthrightly towards genuine equality and how people who benefit most from extreme inequality have outsize power-- as a result of that inequality-- that they use to protect the status quo and hold egalitarian incursions at bay.

...[W]ith the exception of England, every other industrialized democracy has higher levels of income equality than the United States. Data from the OECD shows once consistent, general principle: the higher the taxes in a given country, the less inequality. This makes obvious and intuitive sense. Taxation is the primary method for redistribution, and as a general rule, the more taxation, the more redistribution; the more redistribution, the more equality. The United States collects a far smaller share of the national income in taxes than nearly every other industrialized democracy, and in recent years that rate has been dropping. Total tax revenue as percentage of GDP in the United States is at 24.8 percent, down from 29.5 percent in 2000. You can compare that to Denmark, which has the highest level of tax revenue as a percentage of GDP (48.2 percent) and the most equality out of any OECD country.

Over the last thirty years or so we've seen rising inequality in pre-tax income, which means that before the government even starts its taxing, spending, and redistribution, there has been a profound and accelerating gap between high income earners and everyone else. The rich are earning more, which the non-rich's earnings stagnate or decline. But these pre-tax earnings are run through the redistributive mechanisms of the state. And during the same time that pre-tax inequality has been growing, our tax system has grown less redistributive, further amplifying inequality rather than mitigating it.

This shouldn't be all too surprising, since we've seen inequality is autocatalytic. Those at the top can use their relative power to alter and manipulate existing institutions so as to further consolidate their gains and press their advantage. We've seen this in our own society, so much so that even the most "low-hanging fruit" of meritocratic policy has been abandoned.

Take the estate tax. The estate tax is designed to only affect those with vast fortunes, estates of more than $5 million. And it's logic is clear: We don't want an aristocracy of birth-- that's the very system our founders repudiated when they created a republic. Conservative Winston Churchill argued that an estate tax provided "a certain corrective against the development of a race of idle rich," and it was out of an ideological commitment to a kind of protomeritocratic vision of equality of opportunity that robber baron Andrew Carnegie, opponent of income and property taxes, argued for a steep and confiscatory tax on inheritance:

As a rule, a self-made millionaire is not an extravagant man himself... But as far as sons and children, they are not so constituted. They have never known what it was to figure means to the end, to live frugal lives, or to do any useful work... And I say these men, when the time comes that they must die... I say the community fails in its duty, and our legislators fail in their duty, if they do not exact a tremendous share.

And yet, over the past decade, this fundamental and basic means of gently enforcing some modicum of a level playing field has been gutted. In 2002, the rate for estates of more than $1 million was 50 percent, but it was diminished each year, until it was entirely phased out in 2009. It has since been restored (extended in December 2010 only for two years, for now), but at the historically rock-bottom rate of 35 percent, with a $10 million exemption for married couples. The New York Times said House Democrats opposed the deal brokered by Obama and congressional Republicans in the lame-duck congressional session of 2010 because it "would cost 68 billion, help only the richest of the rich-- an estimated 6,600 households-- and do nothing to stimulate the economy while adding to the national debt."

So, here we are, two years later, at another lame-duck session and with the same Barack Obama working with the same congressional Republicans on the estate tax again. A post-election poll for Americans for Tax Fairness found that by a margin of 58 to 32%, people support “increase[ing] the the estate tax, also called the inheritance tax, on estates of more than seven million dollars for a couple.” Obama is, as usual, aiming very low and asking for way too little. Even as much of a corporate shill as former Treasury secretary Robert Rubin, currently cochairman of Goldman Sachs, thinks Obama should step up his proposal. “A substantial estate tax," explained this week, "can provide revenues at a time when our federal government badly needs additional revenues."

Rubin was one of the signatories on a letter sent on Tuesday to every member of Congress urging them to expand the tax. The letter and call were organized by Responsible Wealth, a project of the nonprofit group United for a Fair Economy.

  The group said it was working with a senator's office to formally adopt the proposal and was in discussions to arrange a White House meeting with some of the letter's 36 signatories. Those signed on include investors Warren Buffett and George Soros, who rank among the top 15 richest people in the nation.

Though the fate of upper-income tax cuts has made headlines in recent weeks, changes to dozens of other provisions, including the estate tax, also make up the fiscal cliff, a $500 billion combination of tax hikes and spending cuts that go into effect at the beginning of 2013.

Tax cuts enacted under President George W. Bush reduced the estate tax between 2002 and 2009 and eliminated it in 2010. It was reinstated in 2011 at a top taxable rate of 35 percent, exempting the first $5 million of assets-- levels more favorable to the wealthy than in 2009. The exemption level will be lowered in 2013 to $1 million, ensnaring more people in the estate tax’s net, with the top taxable rate rising to 55 percent.

The Responsible Wealth letter proposes setting the exemption at $2 million per individual, indexed to inflation, with a rate beginning at 45 percent “and rising on the largest fortunes.” President Obama has proposed returning to 2009 levels-- a flat rate of 45 percent, exempting the first $3.5 million of assets-- which would raise an estimated $276 billion between 2011 and 2020, according to the nonpartisan Tax Policy Center.

Joining the entire Republican caucus in opposing estate taxes are John Tester (MT) and the 4 Democrats who always serve the interests of the wealthy over and above the interests of working families: Mary Landrieu (LA), Max Baucus (MT), Mark Pryor (AR), and Claire McCaskill (MO).