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June 2, 2008 |
| This Week | |
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The Bush White House, a former Bush press secretary charged last week, deceived America into war in Iraq. That charge dominated the nation’s headlines all week long. Meanwhile, an exposé of another Bush White House deception, also just released, went almost totally unnoticed. This second exposé appeared in, of all places, an official government publication. The topic: the estate tax, the only federal levy on the fortunes of America’s most financially fortunate. The Bush White House has been waging, against the estate tax, a campaign of disinformation every bit as devious as the walk-up to the war in Iraq. But the two disinformation campaigns — the one on Iraq, the other on estate taxation — do differ in one basic respect. Most Americans have caught on to the obfuscations on Iraq. On the estate tax, many still haven’t. We have more, in this week’s Too Much, on estate tax fact and fiction. |
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| Greed at a Glance: An Egalitarian Jeweler | |
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High-end spas around the world, the Arizona Republic reports, have latched onto a new fountain of youth: gold. Pure gold facials have become the latest must-have for guests at luxury resorts like CopperWynd outside Phoenix. Spa industry officials see gold-infused treatments as a possible Next Big Thing in skin care. Notes one industry leader, Milana Knowles: “When you think gold, you think wealth and sophistication. Just the thought of gold gives you the feeling of ultimate indulgence.” The actual touch of gold, warns dermatologist Julie Salmon, can breed itchy rashes and permanent blue-gray skin discoloration. Gold spa facials can run up to $400 . . . Sometimes even investment bankers have to say they’re sorry. Last Thursday, in a 10-minute meeting that ended the 85-year history of Bear Stearns, the bank’s chair and former CEO, James Cayne, apologized to shareholders. Said the 74-year-old: “Words can’t describe the feelings that I feel.” Last week’s meeting okayed the bank’s distress sale, at $10 per share, to former rival JP Morgan Chase. A year and a half ago, Bear Stearns shares were selling at $170 per share. Six months later, two Bear hedge funds collapsed and revealed how massively the subprime mortgage swoon was eating away at companies — like Bear — that had been recklessly buying, repackaging, and selling subprime paper. The subprime nosedive would eventually chop about $1 billion off the value of Cayne’s personal stock holdings. Cayne does have some assets to fall back on. He collected $232 million in pay over his years as Bear CEO . . . Until last year, U.S. corporations didn’t have to report every significant perk they give to CEOs. Now they do, and observers figured that the new perk disclosure mandate now in effect would have most corporations cutting back on executive Robert Morse has enough years under his belt, 92 of them, to remember how unequal the United States had become by the late 1920s, right before the Great Depression. Morse lived through that depression. Now he doesn’t want to live through another. A retired jeweler, Morse is spending his sunset years working to make America more equal — by introducing resolutions to cap CEO pay at the companies where he holds stock. Last month, at the Merck annual meeting, a Morse resolution to limit executive pay to $500,000 per year won 4 percent of the shareholder vote. A half a million dollars, Morse told the Associated Press last week, makes for an income “far above that needed to enjoy an elegant lifestyle.” Sums up this New Jersey resident: “I'm fighting greed.” Hard to say who’s going to be more unhappy at the annual meeting later this month of Circuit City, the retailer's shareholders or CEO Philip Schoonover. Shareholders have seen their Circuit City stock sink by over three-quarters in the last fiscal year, a disastrous spell that saw the company lose $319.9 million. Most of that loss came after Schoonover fired 3,400 experienced store staff making $11 an hour and replaced them with $8-an-hour entry-level hires. These controversial firings came just a year after Circuit City handed Schoonover $16 million in stock awards to become the chain’s CEO. So why might Schoonover be unhappy? His pay for Circuit City’s latest fiscal year, the company announced last week, totaled only $2.1 million, about $1,000 an hour. Eight dollars an hour, some shareholders no doubt feel, might have been more appropriate. |
Quote of the Week “When the average Joe or Jane makes mistakes, they lose their job. Why don't more CEOs get the axe because of their incompetence? And, when they are let go, why are they entitled to a severance pay that others can get only if they win the lottery?”
New Wisdom Susan Jacoby, Greed Is Not Good, So What Do We Do About It? On Faith. May 28, 2008. High taxes on the rich in Europe, notes author Jacoby, “go to provide a level of security that no American below the top 1 percent enjoys.”
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| In Focus: Hard Times for Trickle-Up | |
Nearly three decades ago, packs of free marketeers gained governing power first in the UK, with Margaret Thatcher, and then in the United States, with Ronald Reagan. In quick order, the new prime minister and president clunked upon their countries a set of policies that would go by the shorthand of “trickle-down economics.” The more society’s already prosperous prospered, the basic idea went, the better off everyone of modest means would eventually become. This trickle-down — for people on the lower rungs of the economic ladder — would turn out to be a colossal failure. And now, amid the global credit crisis, that failure is finally trickling up, to the consternation of deep-pockets everywhere. What's the problem? Most deep-pockets need some help climbing the consumption ladder. Owners of big yachts, for instance, typically can’t graduate to the even bigger yachts they crave until they sell the yachts they already have. But today those yacht-owners aren’t finding buyers. “We’re trying to sell a 94-footer," one yacht captain, operating as an agent for the boat’s wealthy owner, told the Megayacht News earlier this spring. "The guys who would buy it need to sell their 80s and 70s. I’ve had several stand on my back deck and say ‘I’d buy it in a minute if I could sell mine.’” Entry-level megayachts — boats that run up to $5 million — simply aren’t selling. And the same dynamic is beginning to show up in the mansion market. Mansion sales are slipping, Barrons reported last week. “From Miami to Beverly Hills,” the biz journal notes, “homes with bowling alleys, theaters, steam rooms, heated decks, six-bay garages, and other luxury must-haves are sitting on the market for at least twice as long as they did a year ago, and many sellers are doing what was, until recently, unthinkable: slashing prices.” In some cities, luxury home prices have dropped nearly 20 percent from a year ago. Barrons is blaming trickle-up. “Would-be buyers” of homes running $5 million-plus have become “unable to get rid of their lower-priced digs.” The meltdown of Bear Stearns and the financial sector has these would-be buyers spooked, probably too spooked to appreciate the irony in their situation. The financial sector is melting because the basic trickle-down policies meant to enrich the rich — deregulation, tax cuts for the wealthy — have nurtured the same chronic instability that extreme inequality always nurtures. Deregulation turned the mortgage market into an anything-goes shell game. Tax cuts for the wealthy provided the cash that pumped up the housing industry’s historic speculative bubble. Now the shell game has ended, and the bubble has popped — and the resulting hard times are climbing the economic ladder. But not all the way up. At the summit, at the level where households count assets in the hundreds, not tens, of millions, life is still going swimmingly. In elite Manhattan, for instance, sales of homes that cost over $10 million have more than quadrupled, from first quarter 2007 through first quarter 2008. To move up in luxury, these sales remind us, some rich simply don’t need to sell off anything they already own. Take, for instance, Alisher Usmanov, the billionaire who just spent $96 million picking up an 11-acre, 168-year-old estate in London that features eight bedroom suites, a three-bed guest bungalow, eight rooms of staff housing, a six-room pool house, and a two-bed gatehouse. Usmanov, a natural gas kingpin, only figures to be a part-time Londoner. He still owns a 30-acre estate just outside Moscow, a villa in Sardinia, and a 300-acre rural English retreat that he bought for nearly $20 million four years ago. | |
| In Review: An Estate Tax Lesson | |
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Brian Raub, Federal Estate Tax Returns Filed for 2004 Decedents. Statistics of Income Bulletin, Spring 2008, Internal Revenue Service, Washington, D.C. Millions of average Americans today believe they face a “death tax” that will snatch away that nest-egg they've labored so hard to leave for their loved ones. They believe that because a handful of wealthy American families started bankrolling, about 20 years ago, a highly sophisticated offensive to demonize the estate tax, the federal tax that has been infuriating America’s ultra-rich ever since 1916. George W. Bush signed on to this offensive early on. His new administration, in 2001, would make estate tax repeal a top priority — and score a smashing triumph. As part of the 2001 tax cut, President Bush signed into law a year-by-year drop in the estate tax rate that led to a full repeal in 2010. But to get this legislation through Congress, the White House had to agree to a catch. The entire 2001 tax cut would expire after 2010, and the tax code, after that date, would revert back to the pre-George W. Bush status quo — unless, of course, Congress took action before then to make the cuts permanent. The White House and the estate tax repeal gang have been fighting for that permanence ever since, railing at what they call the “death tax” at every opportunity, dubbing the estate tax public enemy number one of the family farm and the neighborhood small business. Late last month, the IRS quietly “exposed” the disinformation behind this anti-estate tax effort. Actually, the IRS has been exposing this disinformation for some time now, in a series of statistics-laden analyses of estate tax operations that have appeared in an IRS research journal, the Statistics of Income Bulletin. The latest offering in this series, by IRS economist Brian Raub, details estate tax filings in 2004. In that year, over 2.3 million Americans died. Of that total, only 42,239 — 1.8 percent — left behind an estate large enough to have to file an estate tax return. But the estate tax law allows for various deductions and credits. Funeral expenses can be deducted, for instance, as can attorney fees, charitable contributions, and, most commonly, transfers to surviving spouses. “Decedents” can transfer unlimited amounts to their spouses. In 2004, if you left behind over $1.5 million — that year's level at which an estate tax return had to be filed — but your estate claimed deductions and credits that brought your taxable estate down below $1.5 million, your estate would have faced no estate tax whatsoever. In 2004, over 54 percent of estates worth over $1.5 million fell in this no-tax category. In the end, only 0.8 percent of all the Americans who died in 2004 left behind an estate that actually paid a dime of estate tax. So much for the estate tax as a threat to the hard-earned nest-eggs of average Americans. But an even closer look at the new IRS estate tax numbers reveals a reality that should have average Americans worrying, not about their own personal family savings, but about what estate tax repeal — or any steep reduction of estate tax rates — will mean for America’s future. Estate tax statistics for any one year actually amount to a snapshot of American inequality — as that inequality existed a quarter-century earlier. Most rich people, after all, don’t die in their 50s or 60s, at the peak of their earning power. They die 20 to 25 years later, and the estates they leave behind at death largely reflect the fortune they accumulated back in their most robust earning years. In other words, the richest people who died in 2004 built the core of their fortunes in the 1980s, years when wealth in the United States had only just begun to rapidly concentrate at the top. The rich who died in 2004, as a result, really don’t rate as particularly rich, at least not by contemporary standards. One example: The new IRS estate tax data indicate that chief executives made up the “single most common occupation” of estate tax decedents in 2004. These CEOs left behind fortunes that averaged $7.9 million. That's just a fraction of the fortunes that CEOs active today are accumulating. Last year, CEO annual incomes at America’s 500 biggest companies averaged $12.8 million. Many CEOs today, in short, are routinely making more in a year than CEOs a generation ago made over their entire careers. The new IRS estate tax stats for 2004 also show that only 801 decedents in 2004 left behind estates worth over $20 million. These 801 estates averaged $62.3 million, a hefty sum, to be sure, but a fortune that pales against the enormity of the fortunes that today’s economic superstars are amassing. The 801 richest Americans who died in 2004 left behind, all combined, less than $50 billion. The latest Forbes 400 list of America’s richest has two individuals who each hold a fortune over $50 billion. So what does all this mean? Two decades from now, today’s super-rich will be passing away en masse. They will leave behind fortunes that will dwarf the largest fortunes that appear in the IRS estate tax collection update for 2004. Will these huge estates of the future flow tax-free to heirs — and set the stage for a new permanent American aristocracy of wealth? Or will a meaningful estate tax be cutting future concentrated wealth down to a more democratic size? Congress, in the next year or two, will likely determine the answer. |
Stat of the Week The top executives of S&P 500 companies in the United States averaged pay hikes of 16 percent last year, the Corporate Library, an independent corporate governance research firm, reported last week. Top executives at the nation’s small- and medium-sized companies, by contrast, last year averaged pay hikes of only 2 percent. |
| About Too Much | |
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Too Much is published by the Council on International and Public Affairs, a nonprofit research and education group founded in 1954. Office: Suite 3C, 777 United Nations Plaza, New York, NY 10017. E-mail: editor@toomuchonline.org. | Subscribe
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perks — like reimbursements for country club dues — to avoid bad publicity. Many corporations, says a new Los Angeles Times 