Tax Wealth to Broaden Wealth

I recently spoke at a veterans' club in suburban Boston about the dangers of America's growing wealth gap and its possible solutions. I informally polled the assembled group of 150 men, all white and over the age of 60. How many had received a low-interest home mortgage from the Federal Housing Administration, the Veterans Administration or the Farmers Home Administration? About two-thirds raised their hands. How many graduated from college without any debt, thanks to the GI Bill or other public-education programs? Again, about two-thirds. How many thought that these past policies were bad investments or a waste of tax dollars? Not one.

My final question generated a lot of laughter: How many had helped their children, through a "Parental Down Payment Assistance Program," purchase a home or start a business? Almost every hand in the room went up. Here was living testimony that our country's postwar commitment to wealth building for one generation and one racial group has had immeasurable multigenerational benefits.

In the three decades after World War II, our country implemented an unparalleled program to broaden wealth ownership. Millions of families got tickets on a multigenerational wealth-building train in the form of college, housing and small-business assistance. Between 1940 and 1970, almost one-fifth of the nation's citizens transformed themselves from tenants to homeowners, thanks in large part to federally subsidized mortgages, tax incentives and highways to new suburbs. Of course, because of racial discrimination in mortgage-lending practices and housing and educational opportunities, many people of color were left at the station.

Today there is a wide support, in principle, for broadening wealth ownership. But how will we pay for the next generation of wealth-broadening initiatives?

Taxation of wealth is simply off the agenda. In fact, we are rapidly reducing the tax burden on those with accumulated wealth via recent cuts in capital-gains taxes and the current push to permanently repeal the federal estate tax and eliminate income taxation of dividends.

Some argue that Americans' aversion to taxing wealth is a deep part of our national psyche, an instinctive rejection of class politics rooted in the broad aspiration to become wealthy. Polls report that 19 percent of Americans believe they are in the top 1 percent of earners, and an additional 20 percent expect to be someday. As David Brooks wrote recently in a column headlined the "Triumph of Hope Over Self-Interest," "None of us is really poor; we're just pre-rich."

But a politics of economic aspiration could also support a program of broadening wealth ownership that's funded by taxation. The main problem is the lack of a well-organized political constituency for broadening wealth ownership that could counter three decades of conservative anti-tax, anti-government organizing.

The movement to repeal the estate tax grew during the 1990s because of a focused and well-resourced 10-year campaign to shift public opinion and line up votes for repeal. Until 2001 there was no organized defense of the estate tax. There was a movement to broaden wealth [see "Savings Incentives for the Poor," Jared Bernstein, page A14] but no connection to tax policy.

Conservatives begin with several advantages, beyond the obvious fact that most people lack enthusiasm for paying taxes. Anti-tax organizing is funded by a small coterie of very wealthy taxpayers (and campaign contributors) who have an immediate self-interest in not being taxed. Conservatives have a long-term ideological agenda around taxation (to starve the regulatory and welfare state), a potent political slogan ("It's your money") and an economic theory (it creates jobs). Their short-term incremental program is to shift the tax burden off capital and onto consumption, off higher incomes and onto middle-income taxpayers, which in turn increases the popular resistance to taxation. They argue that taxing the wealth is bad for economic incentives and efficiency, on the theory that the market works so well that people, by definition, deserve what they get.

However, the continuing battle over the estate tax provides an opening to draw on the historic rationale for taxing wealth, reframe the debate and mobilize a pro-wealth tax constituency.

The social movements of the late 1800s advocated wealth taxation because too much concentrated wealth imperiled our democracy. Gilded Age robber barons began resembling the noblemen of the Old World. Reformers viewed the inheritance tax as a fundamentally American mechanism to interrupt these dynastic accumulations.

Proponents of progressive income and wealth taxation also believed that the very wealthy disproportionately benefited from our free-market economic system, as well as from public investment. As President Theodore Roosevelt stated in 1906, "The man of great wealth owes a particular obligation to the State because he derives special advantages from the mere existence of government."

To rekindle that debate, we must shine a spotlight on society's contribution to wealth creation. Wealth taxation is not confiscatory. Rather, it is an appropriate levy upon those who have received the most from America's fertile soil of public investment, charitable institutions, natural resources and the efforts of our forebears.

How wealthy would our very rich be if they had plied their talents in a country without regulated markets, systems of property rights and legal remedies, and subsidized research and education systems? As Warren Buffett observed, "If you stick me down in the middle of Bangladesh or Peru or someplace, you'll find out how much this talent is going to produce in the wrong kind of soil. I will be struggling 30 years later. I work in a market system that happens to reward what I do very well -- disproportionately well." As a culture, we overvalue the individual's heroic role in wealth creation and undervalue society's considerable role. A wealth tax, particularly at the point of passing on an inheritance, is a fair payment for the continued benefits of our economic system.

Wealth taxation also fosters greater equity and stability in our federal tax system. The biggest tax loophole in our system is that vast aggregations of wealth multiply dramatically, are spent and get transferred to heirs -- without ever being subject to the rigors of taxation faced by low- and middle-income wage earners. If our tax system is based on ability to pay, net worth is the single greatest element of taxable capacity.

Prior to 1916, the federal government raised revenue through the highly regressive tariff that, in the words of a legislator at the time, was a "license to rob and plunder industrious consumers." The establishment of the income and estate tax dramatically shifted the tax burden onto those better able to pay. Today that principle is eroding. At a time of mounting budget deficits, maintaining an estate tax or instituting a modest net-worth tax could enable those who are not rich to accumulate assets and lessen the tax burden on wage earners.

We also need to revive the historical policy distinction between "earned" and "unearned" income. Vestiges of this are still seen in some state tax systems, where income from "unearned" capital gains and dividend income is treated differently than "earned" wage income. Treasury Secretary Andrew Mellon, in other respects an early supply-sider, argued in 1924 that "the fairness of taxing more lightly incomes from wages, salaries or from investments is beyond question. ... Surely we can afford to make a distinction between the people whose only capital is their mental and physical energy and the people whose income is derived from investments."

The best mechanism to implement wealth taxation continues to be the federal estate tax. There is no tax less likely to depress economic incentives. But we still lack a stakeholder constituency for taxing wealth. This potential constituency includes those aspiring to the American dream, people who would benefit from the next GI bill-style program of broadening homeownership, wealth ownership and opportunity.

In the abstract, Americans are instinctively anti-tax. But when offered real choices and funds targeted to particular uses, they embrace progressive tax-spending initiatives. Wealth-tax revenue should be linked directly to expenditures that encourage and broaden wealth ownership. Our country presently makes substantial public investments that help economic winners build wealth. At death, some of that wealth can be transferred to the next generation -- and not just to fortunate sons and daughters in the family.

From our experience organizing Responsible Wealth, we know hundreds of entrepreneurs and wealthy individuals who favor such a proposal, buffering it from accusations of "class warfare." At the same time, we can build a constituency of future homeowners, savers and college graduates who have a stake in this program and in wealth taxation. As for that veterans' club, would its members support a "wealth opportunity fund," capitalized with a tax on the largest 1 percent of inheritances? If we do our homework they will.

Great concentrations of inherited wealth distort the public commitment to quality of opportunity. Consider how some colleges devote enormous resources to recruiting the academically mediocre sons and daughters of wealth to boost their capital campaigns. At the same time, state and federal tax cuts are fueling state budget deficits, leading many public universities to raise their tuitions and weaken opportunities for disadvantaged students. Is that smart? Is it fair?

Wealth taxation and asset development, in sum, need each other. Promoting wealth taxation, without linking it to a broader program of wealth building, is doomed politically. Conversely, a serious program of wealth broadening needs a source of serious money. Taxing concentrated wealth and linking those revenues to wealth spreading in the next generation is the political heart of a strategy to broaden equality of opportunity and ownership of wealth.

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