THE PROBLEM WITH BERNIE SANDERS'S 77 PERCENT ESTATE TAX FOR BILLIONAIRES? IT'S NOT ENOUGH | OPINION
A new proposal by Senator Bernie Sanders would tax estates over a billion dollars at a 77 percent top marginal rate. Billionaires and conservative politicians were quick to howl, and some mainstream Democrats wrung their hands too.
They're right to be concerned, but wrong about why. Because the only problem with the Sanders bill is it doesn't go far enough. To be sure, it would raise billions for worthwhile programs—but not nearly enough to break up extreme fortunes whose very existence threatens our democracy.
Broadly speaking, let's say there are three kinds of wealth: ordinary wealth, extravagant wealth, and excess wealth.
Ordinary wealth provides for an ordinary person's needs and wants—maybe a modest home and a car that runs (or, if things really go well, maybe a Mercedes). Extravagant wealth might service extravagant wants, such as multiple homes and private jets. Excess wealth is the wealth a person will never have an occasion to spend even if they tried.
Sanders's bill targets only excess wealth, which 99.8 percent of us will never have—hence Sanders called it the "For the 99.8 Percent Act." The bill's 77 percent top marginal rate would apply only on the assets over $1 billion that billionaires leave their heirs.
This would raise billions for worthier causes but in no way endanger the lifestyles of wealthy Americans. Jeff Bezos's grandchildren will own multiple mansions and fly in private jets even if the Sanders tax plan becomes law.
Excess wealth is different from the other kinds in one other critical respect: it corrodes democracy. That is, it can be translated into excess political power, including the power to generate more excess wealth. When too much wealth is concentrated into the hand of too few, democracy suffers.
"Fortunes Swollen Beyond All Healthy Limits"
In America, the accumulation of excess wealth—and the power it confers on the tiny sliver of the population that holds it—has reached levels not seen since the Gilded Age over a century ago. The richest 0.1 percent of Americans now controls as much wealth as the bottom 90 percent—a fact that may explain why deeply unpopular policies such as the Trump-GOP tax cuts for the wealthy sailed through despite popular opposition.
A century ago, we recognized the danger. As Justice Louis Brandeis famously observed: "We can have concentrated wealth in the hands of a few or we can have democracy. But we cannot have both."
In fact, curtailing the accumulation of excess wealth was the original impetus for the estate tax. When Teddy Roosevelt first advocated the tax, he recognized the country's need to "grapple with the problems connected with the amassing of enormous fortunes." He advised that the estate tax be "aimed merely at the inheritance or transmission in their entirety of those fortunes swollen beyond all healthy limits."
A study from a few years back validates the instinctive concerns Brandeis and Roosevelt expressed a century ago.
In a groundbreaking 2014 study, published in Perspectives on Politics, researchers Martin Gilens and Benjamin Page compared outcomes on nearly 1,800 policy issues facing Congress to the policy preferences of average citizens, interest groups, and America's economic elites. They found that policy preferences of elites and associated interest groups correlated directly to congressional outcomes, while policy choices of average citizens (or even "mass-based interest groups" representing those citizens) had "little or no independent influence" on policy decisions.
This responsiveness of the political system to wealth alone led them to conclude that the United States couldn't be properly considered a representative democracy. Without democratizing wealth, one could infer, there can be no democratizing of our broader political system.
The Gift Tax Loophole
Sanders's plan, in other words, identifies the right target. But it misses at least one extremely important loophole. The plan fails to recognize that the ultra-wealthy don't need to wait until they die to transfer excess wealth to their children. After all, we're talking about wealth they'll never actually need, even for extravagances. Why not pass it down now?
And therein lies a fatal flaw in the Sanders plan: Although Sanders's 77 percent marginal rate on billionaires would apply to gifts (transferred during a billionaire's lifetime) as well as bequests (transferred upon their death), the effective tax rate is much lower when gifts are used as the primary vehicle to transfer wealth.
Consider Jeff Bezos. Suppose his wealth grew to $180 billion over the next few years, at which point he chose to make a $100 billion gift to his children. Bezos then would pay an additional gift tax of $77 billion, leaving himself $3 billion—more than enough for all the mansions and private jets a man could want.
Under that scenario, the real tax rate on Bezos' gift to his children is less than 44 percent of the $177 billion he spent on the combined gift and gift tax. And he still has $3 billion extra left to his name.
Had he left the $177 billion in his estate, the 77 percent estate tax on it would have exceeded $136 billion—leaving less than $44 billion for his children, as opposed to the $100 billion he gifted them in our other scenario.
By gifting excess wealth he'll never use to his children, in other words, Bezos could shave $56 billion from his estate tax bill—and leave $56 billion more to swell a fortune already "swollen beyond all healthy limits."
It gets worse. Consider how much excess wealth the Bezos kids would have a generation later, if they invested the $100 billion their dad gave them. Wealth managers, especially on the high end, are often able to double their clients' wealth in a decade or less. Under that rate of growth over 30 years—the length of a single generation—the Bezos kids would control a cool $800 billion, eight times what their father left them and far more than Bezos himself controls today.
Even if Bezos held his wealth until death, allowing the 77 percent tax rate to take full effect, his children likely would control as much or more wealth a generation later as he did at the time of his death.
The Bottom Line
Any increase in the estate tax could help raise funds for programs that help people. But if it doesn't go far enough to diminish extreme fortunes, the extremely rich will continue to accumulate political power—and will likely use it to eliminate things like the estate tax itself, which Republicans are now proposing.
The bottom line? Sanders's estate tax proposal might have a fighting chance of curtailing the concentration of wealth that's corroding our democracy, but only if it's strengthened to tax gifts in the same manner as bequests.
Bob Lord is a tax attorney practicing in Phoenix and an associate fellow of the Institute for Policy Studies.
The views expressed in this article are the author's own.
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