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Dec 7, 2009 Too Much Weekly: Who’s Winning the Estate Tax Battle?

Click here to read the Too Much weekly edition, as emailed to readers on December 7, 2009.

This Week in Too Much

Are Wall Street’s power suits getting spooked by nightmares about peasants with pitchforks? Could be. A former managing director at Morgan Stanley, now a columnist, reported last week that bankers at Goldman Sachs have been filing for personal pistol permits.

But wheelers and dealers on Wall Street don’t really need guns to safeguard their personal fortunes. They have lawmakers. America’s legislators can’t seem to do enough for the deep-pocket set. Last Thursday, for instance, Democrats in the House of Representatives voted to increase the federal deficit by hundreds of billions of dollars — to give America’s wealthiest a tax break.

Here’s the amazing part: Republicans in the House, joined by some Democrats who style themselves “fiscal conservatives,” attacked the House majority for not making that tax break — and the resulting deficit hole — even larger.

We have that wacky story — and a lot more — in this week’s Too Much.

Greed at a Glance

The biggest troubled U.S. manufacturer and biggest troubled U.S. bank are both now looking for new superstar CEOs. But only one can foot the freight. That would be Bank of America, the financial giant that last week announced plans to pay back $45 billion in federal bailout aid — a move that will free the bank from the bailout’s modest executive pay limits and let the bank’s board offer the big bucks big-time CEO “talent” demands. General Motors, meanwhile, still faces modest bailout pay restrictions — no short-term cash bonuses, all salary over $500,000 limited to shares of company stock “that must be held long-term” — and GM is claiming these limits are complicating the search for the “world-class” CEO GM needs. Nonsense, counters financial analyst James Kwak, who calls any talk about needing a “world-class CEO” a “dead giveaway for delusion.” Researchers, notes Kwak, have come up with “no conclusive evidence” that high-paid CEO superstars can “turn around” a fumbling enterprise . . .

Henry MintzbergThe best summary yet of that CEO superstar evidence, as distilled by one of the world’s “most thoughtful management gurus,” has just appeared — in the world’s most important business daily, the Wall Street Journal. The author: Henry Mintzberg, the distinguished McGill University scholar. His new tour de force demolishes every major rationale for excessive executive pay. Mintzberg’s conclusion: The current executive pay system “simply can’t be fixed.” His recommendation: “Scrap the whole thing. Don’t pay any bonuses. Nothing.” Executive incentive packages, says Mintzberg, serve only one useful purpose: They can help screen out candidates for CEO vacancies. Anyone who insists on outsized rewards, Mintzberg notes, “should be dismissed out of hand, because he or she has demonstrated an absence of the leadership attitude required for a sustainable enterprise.”

In these troubled global economic times, one dilemma is increasingly weighing heavy on the minds of the world’s wealthy. Should they be investing in gold — or wine? The case for wine actually now seems stronger. Since 1993, prices for fine wines have jumped at a 15 percent annual rate, over twice the annual rate for gold. In Hong Kong, investors are taking those numbers to heart. The city recently axed taxes on wine imports, and mega millionaires from around Asia are now buying and storing investment-quality bottles in Hong Kong’s massive new, specially cooled wine warehouses. The biggest will soon hold 300,000 cases. Among the most popular investing choices: the 1982 Chateau Lafite Rothschild. A case typically goes for $5,000 . . .

The folks of Bentley Motors, makers of some of the world’s most expensive motor cars, must be feeling rather bullish these days. They’ve just announced the launching of a new luxury sedan, the $360,000 Mulsanne. Initial orders are coming in so fast, says Bentley marketing chief Stuart McCullough, that the new auto line’s entire production for 2010 will be sold out by February . . .

Warren AndersonTwenty-five years ago last week, in Bhopal, India, a gas leak from a Union Carbide pesticides plant in just hours claimed about 4,000 lives. Dozens of locals are still dying, every month, from the plant’s toxic wastes. The CEO responsible for that factory, Warren Anderson, these days splits his time between one home in the Hamptons, the oceanside watering hole for New York’s wealthy, and another in Florida’s Vero Beach. Nearly 90, Anderson has been avoiding reporters — and the Indian courts that want him tried for homicide — for years. But his wife Lillian has started speaking out — against what she considers the unjust hounding of her husband. She seems almost equally irate about her husband’s unlucky timing. He retired in 1986, a wee bit too early to enjoy the CEO pay gravy train of all the years since. Warren has suffered, laments Lillian, “25 years of unfair treatment, before CEOs were paid what they’re paid today.” Journalist Suketu Mehta has a somewhat different take: “Imagine if an Indian chief executive had jumped bail for causing an industrial disaster that killed tens of thousands of Americans. What are the chances he’d be sunning himself in Goa?”

Quote of the Week

“Common sense tells you that if the chief executive of the United States can get by on $400,000 a year to preside over a $14 trillion economy, a fertilizer company CEO should not be hauling in $18 million a year.”
David Olive, business columnist, Toronto Star, December 3, 2009

Stat of the Week

Pulitzer Prize-winning tax journalist David Cay Johnston has calculated just how much the tax cuts enacted during the George W. Bush years — all financed with borrowed money — are costing average Americans. Every dollar withheld from a typical American wage-earner’s paycheck from January 1, 2010 through February 5, he related last month in Tax Notes, will go “to pay interest on the Bush tax cuts.” Between 2001 and 2010, taxpayers in America’s most affluent 0.1 percent saved 284 times more from the Bush tax cuts than taxpayers in the middle 20 percent of the U.S. income distribution.

In Focus

The Estate Tax Battle: Who’s Really Winning?

Congress flipped another page in the estate tax story last week, with a 225-200 House vote to make the embattled tax levy permanent. But we still don’t know how this story will end. In fact, we still don’t even know how to interpret what has happened so far.

Does the House vote represent a victory over plutocracy — or a capitulation to it? Advocates for limiting grand concentrations of private wealth can make a convincing case either way.

Let’s review how we ended up at this point.

Our current estate tax first appeared in 1916, in an epoch not unlike our own. Then, as now, huge private fortunes dominated the U.S. economy, and many Americans considered those pools of privilege a direct threat to democracy.

The initial estate tax kicked in at a mere 1 percent — on wealth left behind at death equal to $50,000 — and capped off at 10 percent on wealth over $5 million. But this rather minor tax, over the next quarter century, would become a significant leveling force in American life. By 1941, the top estate tax rate — on estate value over $10 million — had jumped to 77 percent.

By the 1950s, thanks in part to the estate tax, America’s once fearsome plutocracy had deflated considerably. The mansions of the early 20th century had become, by mid century, hospitals and housing developments.

America’s rich didn’t much appreciate this turn of events, and they railed against the estate tax at every opportunity. But the wealthy lacked the political clout to challenge the estate tax head-on. So they nibbled around the edges and worked with tax lawyers and lobbyists to drill the estate tax with loopholes.

By the early 1990s, after a dozen years of Reagan-era tax cuts, a small handful of wealthy families felt confident enough to finally launch a direct challenge to estate taxation. Their campaign to demonize the estate tax would succeed.

The estate tax, in short order, became the “death tax,” and millions of average Americans started believing that estate taxes were going to gobble up their life-savings. In reality, only a handful of American households, no more than one in 50 throughout the 1990s, would ever face any estate tax liability.

No matter. By the late 1990s, Congress was passing bills to end the estate tax. Vetoes by Bill Clinton stalled this legislation — until George W. Bush entered the White House. In 2001, Bush’s first tax cut more than tripled the wealth that wealthy families could exempt from the estate tax — to $7 million for a couple in 2009 — and lowered the estate tax top rate, from 55 to 45 percent.

The Bush tax cut also mandated a total estate tax repeal, for one year, in 2010.

But this entire Bush estate tax cut package will expire, under current law, at the end of 2010. In 2011, the estate tax will revert back to the pre-Bush status quo — unless Congress acts to change what current law mandates.

The House vote last week seeks to make that change. Under the House bill, the estate tax will not disappear in 2010. Instead, the current estate tax rate — 45 percent on estate value over $7 million for couples — will become permanent.

The Senate still needs to act, and observers expect the Senate to extend the 2009 estate tax status quo into 2010. The estate tax now appears likely not to disappear in 2010 — or any time in the near future.

Does that mean the wealthy have lost a major political battle? In one sense, yes. The super rich who have been bankrolling the anti-estate tax campaign didn’t want to see the estate tax “reformed.” They wanted to see it eliminated.

To gain that repeal, as a United for a Fair Economy and Public Citizen report three years ago revealed, 18 super rich families that stand to save over $70 billion if the estate tax goes extinct have spent tens of millions of dollars on estate tax repeal. Those dollars have not bought exactly what the rich wanted.

Those dollars, on the other hand, have bought America’s wealthiest households enormous tax relief. For every $100 million in estate tax liability, wealthy families will pay, if the 2009 estate tax rate does become permanent, $10 million less in taxes than they would have at year 2001 rates.

Overall, the House move to fix the estate tax at 2009 rates will cost the federal treasury $234 billion from 2010 through 2019. But this total understates how drastically 2009 rates will eventually reduce federal revenues. The reason: The wealthy who’ll be passing away a decade from now and more will be fabulously richer than the wealthy who’ve been passing away over recent years.

One example: The most celebrated CEO of the 1970s, G.E.’s Reginald Jones, only took home $500,000 in 1975. Jones retired in 1981 and died in 2003. His successor at G.E., Jack Welch, retired in 2001 after averaging $65 million annually over the previous five years. Welch is still going strong.

So are most of his generational deep-pocket peers. Their huge fortunes won’t face estate tax liability for years down the road. Their heirs will reap enormous windfalls should the estate tax wind up sticking at 2009 levels.

Just how enormous? Figures from the congressional joint tax committee offer a glimpse at how rapidly the estates of the wealthy are escalating.

In 2012, the panel estimates, an estate tax at 2009 levels will bring in $18.3 billion less to the federal treasury than the treasury would collect if the estate tax reverts back to 2001 levels, as current law now mandates. In 2015, this revenue loss will total $28.7 billion.

By 2019, the annual loss to the treasury — from taxing wealthy estates at the lower 2009 rates — will hit $38.3 billion.

To limit that revenue loss, some House Democrats, led by Rep. Jim McDermott of Washington State, have wanted to set the estate tax rate, on wealth over $10 million, at the 55 percent top rate in effect in 2001. But House Democratic leaders nixed that move. They felt they couldn’t round up the votes to make the estate tax permanent at anything less than 2009’s watered-down level.

In that sense, the plutocrats have won. They have a large congressional majority ostensibly convinced that any estate tax stiffer than the 2009 version threatens the financial well-being of small businesspeople, family farmers, and other eminently average American households.

In reality, the 2009 rates will let mega millionaires pass on hefty sums, tax-free, to their heirs, as Center for Budget and Policy Priorities analyst Chuck Marr detailed last week.

“Consider a wealthy couple with two children,” asks Marr. “Each child could inherit a trust fund of $3.5 million tax free when the couple dies. This is more money than a middle-class family making $70,000 a year would make in a lifetime, and the middle-class family would pay taxes on that income.”

But isn’t an estate tax at 2009 rates, given all this, still better than having no estate tax at all in 2010, the state of affairs we would have if Congress doesn’t accept the 2009 rate bill now on the table?

Most advocacy groups that champion the estate tax have come to that conclusion — and reluctantly supported last week’s leadership House bill.

“Estate taxes,” Rep. Jared Polis, a Colorado Democrat, noted last Thursday, “help prevent a permanent aristocracy from arising in this country.”

Stiff estate taxes certainly do. But weak estate taxes offer no such protection. Maybe that’s why the new House estate tax legislation has advocates for a more equal America so deeply unsettled.

In Review

America’s Long March to Meltdown

Edward Wolff, The Squeeze Before the Storm, Pathways, published by the Stanford Center for the Study of Poverty and Inequality, Fall 2009.

Most economists who study inequality — in the United States and elsewhere as well — spend their time looking at income, in part because income data gush out abundantly, on an annual basis, from a variety of government agencies.

But data on wealth — on how much households have as opposed to how much households make — don’t do any gushing. As a researcher, you have to be fairly hardy to focus on wealth, and, over recent decades, no researcher on wealth has proved hardier than New York University’s Edward Wolff.

Much of what we know about wealth — and who has it — we owe to Wolff. His 1995 study, Top Heavy, gave us a frame and a vivid image for understanding how who owns what has been changing. Now, with this new piece for Stanford’s inequality research center, Wolff has updated his wealth analysis into 2007.

His purpose: to place the “spectacular wealth destruction” we have witnessed since the Great Recession started into the context of “longer-term trends in wealth and its distribution.”

We know from previous Wolff analyses that household wealth inequality in the United States increased sharply in the 1980s, more modestly in the 1990s. That trend line has essentially extended into our new century.

“In the years leading up to the current crisis,” he writes, “the fruits of wealth accumulation continued to accrue mainly to the most affluent, while the typical American family found itself living increasingly in the red.”

Deeply in the red. In 1983, the debt of America’s middle class households equaled 37 percent of their asset equity. In 1998, this debt-equity ratio stood at 51 percent. The 2007 ratio: 61 percent.

Another yardstick: the ratio of debt to total income. In 1983 middle class debt amounted to 67 percent of middle class income. The 2007 figure: 157 percent.

And at the top? American society continues to see a “near explosion in the number of very rich households.” Between 2001 and 2007, the nation’s population of “penta” and “deca” millionaires — households with at least $5 and $10 million in net worth — both grew by 37 percent.

Expanding numbers of super rich. Expanding numbers of average Americans “saddled” with a debt that left them “vulnerable to income shocks.” That combination, notes Wolff, set the stage “for the mortgage crises of 2008 and 2009 and the resulting financial meltdown.”

This meltdown, Wolff calculates, has knocked the wealth of the typical American household 36.1 percent off its 2007 level, down to $65,400 here in 2009, about the same net worth that the typical American household held back in 1992.

Wolff’s new analysis adds a great deal of statistical depth to this basic narrative of wealth and debt creation. But he does pause, amid his statistics, to remind us why the study of wealth distribution matters so profoundly.

“In a representative democracy,” observes Wolff, ever the sober scholar, “the distribution of power is often related to the distribution of wealth.”

If we want to change who has our society’s power, to be more blunt, we can’t afford to ignore who has our society’s wealth.

New Wisdom on Wealth

Elizabeth Warren, America Without a Middle Class, December 3, 2009. The chair of the congressional panel monitoring the bank bailouts explores why “America today has plenty of rich and super-rich” while “more than 120,000 families are filing for bankruptcy every month.”

Robert Weissman, It’s Time to Tax Wall Street’s Risky Behavior, December 3, 2009. The president of Public Citizen explains why the speculation tax bill introduced in Congress last week needs a speedy green light.

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