The Growing Danger of Dynastic Wealth

September 16, 2017
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White House National
Economic Council director Gary Cohn, former president of Goldman Sachs, said
recently that “only morons pay the estate tax.”

I’m reminded of Donald
Trump’s comment that he didn’t pay federal income taxes because he was “smart.”
And billionaire Leona Helmsley’s “only the little people pay taxes.”

What Cohn was getting at
is how easy it is nowadays for the wealthy to pass their fortunes to their
children, tax-free.  

The estate tax applies
only to estates over $11 million per couple. And wealthy families
stash away dollars above this into “dynastic” trust funds that escape additional taxes. 

No wonder revenues from
the estate tax have been dropping for years even as wealth has become
concentrated in fewer hands. The tax now generates about $20 billion a year, which
is less than 1 percent of federal revenues. And it applies to only about 2 out of every 1,000 people who die.

Now, Trump and Republican
leaders are planning to cut or eliminate it altogether.

There’s another part of the
tax code that Cohn might also have been referring to – capital gains taxes paid
on the soaring values of the wealthy people’s stocks, bonds, mansions and works
of art, when they sell them.

If the wealthy hold on to
these assets until they die, the tax code allows their heirs to inherit them
without paying any of these capital gains taxes. According to the Congressional
Budget Office, this loophole saves heirs $50 billion a year.

The estate and capital
gains taxes were originally designed to prevent the growth of large dynasties in
the U.S. and to reduce inequality.

They’ve been failing to do
that. The
richest 1 tenth of 1 percent of Americans now owns almost as much wealth as the bottom 90 percent.

Many of today’s super rich never did a day’s work in their lives. Six out of the ten wealthiest Americans alive today are heirs to
prominent fortunes. The Walmart heirs alone have more wealth than the bottom 42 percent
of Americans combined.

Rich millennials will soon
acquire even more of the nation’s wealth. 

America is now on the cusp
of the largest inter-generational transfer of wealth in history. As wealthy
boomers expire, an estimated $30 trillion will go to their children over the
next three decades. 

Those children will be able to live
off of the income these assets generate, and then leave the bulk of them – which in the intervening years will have grown far more valuable – to their
own heirs, tax-free.

After a few generations of this,
almost all of the nation’s wealth will be in the hands of a few thousand
families.  

Dynastic wealth runs
counter to the ideal of America as a meritocracy. It makes a mockery of the
notions that people earn what they’re worth in the market, and that economic
gains should go to those who deserve them.

It puts economic power
into the hands of a relative small number of people who have never worked, but
whose investment decisions will have a significant effect on the nation’s
future.

And it creates a
self-perpetuating aristocracy that is antithetical to democracy.

The last time America faced
anything comparable to the concentration of wealth we face now, occurred at the
turn of the last century.

Then, President Teddy
Roosevelt warned that “a small class of enormously wealthy and economically
powerful men, whose chief object is to hold and increase their power,” could
destroy American democracy.

Roosevelt’s answer was to
tax wealth. The estate tax was enacted in 1916 and the capital gains tax in 1922.

But since then, both have
been eroded. As the rich have accumulated greater wealth, they have also
amassed more political power, and they’ve used that political power to reduce their
taxes.

Teddy Roosevelt, a
Republican, helped create a movement against dynastic wealth. Trump and today’s
congressional Republicans will not follow in his footsteps. I doubt even today’s Democrats would do so if they had a chance. Big money has become too powerful on
both sides of the aisle.

But taxing big wealth is
necessary if we’re ever to get our democracy back, and make our economy work
for everyone rather than a privileged few.

Maybe Gary Cohn is correct
that only morons pay the estate tax. But if he and his boss were smart and they cared about
America’s future, they’d raises taxes on great wealth. Roosevelt’s fear
of an American dynasty is more applicable today than ever before.

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