All those millions that CEOs and hedge fund managers have grabbed over recent decades? Our current tax code won’t let us grab them back.
Can a democracy survive if the richest of the rich within it can pass on to their heirs, generation after generation, the vast bulk of their fortunes?
In the United States, that question first became a top-tier topic of political debate back over a century ago. Fortunes of almost unimaginable size were then towering over the nation’s economic landscape. These huge fortunes, Americans feared, could easily become the building blocks for a new aristocracy, for financial dynasties that could leave America’s democracy a dead letter.
How could average Americans prevent that ruin? The nation needed, more and more Americans came to agree, to tax — and tax heavily — the fortunes the super rich bequeathed to their heirs.
America, President Theodore Roosevelt declared in 1906, must place “a constantly increasing burden on the inheritance of those swollen fortunes which it is certainly of no benefit to this country to perpetuate.”
A decade later, Congress began to put that burden in place. Lawmakers enacted a federal tax on the grand estates the rich left behind at death, and this new estate tax would eventually have steady support in the White House, from Republicans and Democrats alike.
Vast “inherited economic power,” as Franklin D. Roosevelt opined in 1935, “is as inconsistent with the ideals of this generation as inherited political power was inconsistent with the ideals of the generation which established our Government.”
A dozen years ago, America’s political leaders took it upon themselves to start hacking away at the federal estate tax.
Any society that tolerates a “fabulously wealthy” class, Republican President Dwight Eisenhower would add a generation later in 1960, is asking for trouble.
“Since time began,” Ike reminded America, “opulence has too often paved for a nation the way to depravity and ultimate destruction.”
Depravity here we come. A dozen years ago, America’s political leaders took it upon themselves to start hacking away at the federal estate tax. The last-minute budget deal struck at the end of 2010 extended — and deepened — that hacking.
Our latest last-minute federal budget deal — the “fiscal cliff” bargain reached right on the eve of 2013 — has now locked all that hacking in place. Our rich today can now do exactly what Republican Teddy Roosevelt warned us against. They can easily “perpetuate” their “swollen fortunes.”
The ease of this perpetuating hasn’t come across in most news accounts of the fiscal cliff deal. These accounts typically note that the deal allows a wealthy person to leave behind, tax-free, the same $5 million that the 2010 tax deal wrote into the tax code. But this $5 million figure only hints at the huge free pass America’s lawmakers have handed America’s most awesomely affluent.
That $5 million, for starters, gets adjusted annually for inflation. In 2013, this adjustment will up the exemption to $5.25 million. This $5.25 million, in turn, only applies per spouse. A couple will this year be able to totally exempt from estate taxation $10.5 million.
The rich can ‘gift’ their way to ever greater estate tax exemptions.
Even this arithmetic doesn’t tell the full story.
Decades ago, Congress realized that dynastic fortunes would flourish if the rich could avoid estate tax liability at death by giving away, while they were still living, the bulk of their fortunes to heirs. The solution: the gift tax, a federal levy on substantial transfers of cash and other assets.
The gift tax and the estate tax have worked in tandem. The substantial gifts the wealthy give to their heirs during their lifetimes get subtracted from the total allowable estate tax exemption. In 2013, a wealthy couple that has bestowed $2 million in gifts will only get to exempt, at death, another $8.5 million.
Or so the tax theory goes. In reality, the rich can “gift” their way to a much greater estate tax exemption. In 2013, the gift tax will only kick in when a single wealthy person gives a single individual more than $14,000 within a single year.
A wealthy couple, under this lucrative loophole, can together give $28,000 a year to as many individuals the two spouses choose, for as many years as they want, and face not one penny of gift tax.
Consider, for instance, a Wall Street exec with two grown children and four grandchildren. This exec and spouse can gift $168,000 a year to their six nearest and dearest without paying any taxes at all on the gift.
And those six nearest and dearest? They don’t have to pay a penny of personal income tax on any of that $168,000. Theydon’t even have to report the $168,000 on their tax returns. Nor will these six heirs face any taxes on — or even have to report — the additional mega millions they’ll eventually inherit.
We’re letting, in other words, our grandest fortunes swell without any reasonable limit. Our progressive forbears didn’t accept that swelling. Neither should we.