Is this the End of American Democracy? Gary Cohn, the current White House National Economic Council director, also the former president of Goldman Sachs, recently explained that in his circles “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’s is explaining is that nowadays it has become quite easy for the wealthy to pass their fortunes on to their children, tax-free.
Although the estate tax applies only to estates over $11 million per couple, wealthy families frequently avoid this by stashing their money in dynastic trust funds that escape additional taxation.
This likely plays a large role in explaining why revenues from the estate tax have been dropping for years even though wealth has become more concentrated in fewer hands in the United States.
Currently, the tax generates around $20 billion a year – less than one percent of government revenues in the United States. It only applies to around one in every 500 people
Despite this, President Trump and other Republican leaders are planning to at least cut the tax, and perhaps eliminate it altogether.
Cohn was also referring to another part of the tax code that similarly only impacts a small number of rich families – the capital gains taxes paid on the soaring revenues of wealthy people’s stocks, bonds, mansions, and works of art when they are sold. There is already a loophole to avoid paying the capital gains tax.
All that one has to do is hold on to these assets until they die, and the tax code allows their heirs to inherit them without paying any capital gains tax since the assets were technically never sold. The Congressional Budget Office (CBO) estimates that this loophole saves heirs $50 billion a year.
Estate and capital gains taxes were created with the goal of preventing the growth of large financial dynasties in the U.S. And to reduce economic inequality. However, in recent decades, they have been failing to do that. Today, the richest one-tenth of 1 percent of Americans now own nearly as much wealth as the bottom 90 percent of Americans.
On top of that, a significant number of the super-rich in the United States today never did a day’s work. Six out of the ten wealthiest Americans alive today gained their wealth by being heirs to prominent fortunes.
For example, the heirs to Walmart alone have more wealth than the bottom 42% of Americans. This trend looks to continue, as rich millennials will soon acquire even more of the nation’s wealth. America is now facing the largest inter-generational transfer of wealth in world history.
As many wealthy baby-boomers pass away, an estimated $30 trillion will go to their children over the next quarter century. These children will be able to live simply off of the income these assets generate and then leave that fortune, which will have grown simply through investment, to their own heirs, tax-free.
It quickly becomes clear that this creates an unsustainable cycle. If nothing is done almost all of the nation’s wealth will be in the hands of a few thousand families in a few generations. This threatens the very idea that America can continue as a meritocracy. It makes a mockery of the notion that people earn what they are worth in the market or make money based on the amount of effort they are willing to put in.
It is clear that the idea that economic gains should go to those who deserve them is deeply threatened by this trend. It puts economic power into the hands of a small number of people who may have never worked, and whole families who have never worked, but whose investment decisions will have a significant effect on the nation’s future.
Ultimately, it creates a self-perpetuating aristocracy that is lethal to democracy. It has been over 100 years since America last faced anything comparable to the concentration of wealth that has amassed today.
Back then, President Teddy Roosevelt warned of “a small class of enormously wealthy and economically powerful men, whose chief object is to hold and increase their power, ” who could destroy American democracy by disenfranchising working people. Roosevelt had an answer to this challenge: He taxed wealth. Following Presidencies built on this idea. The estate tax was enacted in 1916 and the capital gains tax in 1922. Unfortunately, since then, both have been attacked and eroded.
As the rich have once again accumulated greater wealth and political power, they have made use of that political power to push tax cuts for themselves. Teddy Roosevelt was a Republican, but Trump and today’s Republican leaders clearly do not follow in his footsteps.
It seems unlikely that most Democrats would go very far even if they had a chance. Big money has become too powerful in American politics. One of the few voices speaking out against money in politics, and who has consistently opposed the power of wealthy individuals and corporations to influence politics, has been Independent Senator Bernie Sanders. However, Democratic Party leadership put obstacles in his way to their nomination, and ultimately he was not successful.
However, something needs to be done. Taxing significant, accumulated wealth is necessary if American democracy is ever to be repaired. Maybe Gary Cohn is right when he says that only morons pay the estate tax.
However, if he and his boss were smart and they cared about America’s future, they would realize the importance of decentralizing wealth. Roosevelt’s fear of an American dynasty may sadly be more relevant today than ever before.