Taxes on inherited wealth have an ancient pedigree. Historians claim that Egypt imposed a tax on death-time transfers of wealth as early as 700 BCE, and that a similar tax was levied in ancient Rome by Casear Augustus. Beginning in 1797, the U.S. Federal government began imposing such taxes in a variety of forms to fund wartime government revenue needs. Through the 19th century, these taxes were routinely repealed after the wartime exigencies had passed.
The modern American estate tax dates from the presidency of Theodore Roosevelt. As he emphasized when he first proposed it, an economic aristocracy conflicts with American values, and large inheritances undermine our commitment to equality of opportunity. It was not until 1916, however, that such a tax came into being—to fund U.S. participation in World War I. Then, the exemption was $50,000, which would be a bit more than $1 million today, based on the Consumer Price Index. But if one looks instead to GDP per capita as a measure of relative wealth, that number translates to nearly $5 million today. The top tax rate started off low at 10 percent, but a year later the rate was 25 percent, and by the 1920s it had reached 40 percent, despite the efforts of Treasury Secretary Andrew Mellon to repeal the levy. In 1926, the rate was cut to 20 percent, but in 1934 raised to 60 percent and raised again in 1935 to 70 percent. The top bracket didn’t hit, however, until estates reached a value of $50 million, or more than $1 billion today.
To finance U.S. efforts in World War II, Congress increased the top rate to 77 percent and set the exemption at $60,000, and those numbers stood unchanged for nearly 35 years. By 1975, however, years of inflation had eroded the exemption’s value so that, instead of the typical 1 percent or so of decedents paying the tax, it hit 6.5 percent of that year’s decedents and was expected to hit more than 10 percent in the subsequent few years.
After three decades of neglect, the Tax Reform Act of 1976 adopted a series of changes intended to return to about 2 percent those affected by the tax and to move toward a structurally more coherent tax, typically to be imposed once per generation without huge disparities due to decedents’ patterns of lifetime giving. That law unified the gift and estate tax rate schedules, created one lifetime exemption level, and increased the size of tax-exempt estates to $175,000. It also expanded the amount of wealth that could be passed tax-free to a surviving spouse and established a new tax on trusts created to benefit generations more distant than the donor’s grandchildren (“generation-skipping trusts”). These changes were expected to decrease revenue in the short run, but to be offset in the long run by the new generation-skipping tax and the enactment of a carryover basis for assets transferred at death.
In fact, the carryover basis provision, which eliminated heirs’ ability to avoid capital gains taxes on the appreciation in inherited assets that had occurred during the decedent’s lifetime, was an explicit tradeoff to obtain support for the estate tax revisions from key Democrats. That carryover basis provision, however, never came into effect; it was delayed in 1978 and repealed in 1980 due to a combination of technical glitches and remarkably effective opponents—of whom the two most amusing were former Harvard Law School dean and Solicitor General Erwin Griswold and a pig farmer. Griswold regaled Congress about the difficulties of knowing the basis of each of the stamps in the extensive stamp collection he had accumulated since childhood. The pig farmer proffered hilarious lectures having to do with his difficulties in knowing the basis of each of his baby pigs.
Not only did Congress repeal the carryover basis, but in 1981 it phased in a further increase in the exemption level to $600,000 by 1987 (ten times its 1975 level), reduced the top rate from 70 to 50 percent, eliminated all limitations on tax-free transfers to a surviving spouse, and increased from $3,000 to $10,000 the amount that could be transferred annually to any donee free of gift tax. Shortly thereafter, I overheard a well-known New York City estate planner respond to a client’s anxious inquiry about what he might do to minimize the estate taxes of his ninety-year old widowed mother, who had a very large fortune composed of portfolio securities, cash and valuable art. The lawyer thought quietly for some time, running through his bag of estate planning tricks before concluding, with a gleam in his eye, “Marry her.” (Today he could tell a client in similar circumstances to go to the nearest public hospital and marry a poor dying person in order to make use of his or her portable $5 million estate tax exemption.)
Taken together, the 1981 changes reduced the estate tax base by about 70 percent, reduced the take of the tax to about a third of what would have been collected if the 1976 structure had remained in place, and began a transformation of the politics of taxing large inheritances that, two decades later, produced legislation to repeal the tax altogether.
hat had happened to make such dramatic change possible? First, inflation raged, simultaneously eroding the real value of the exemption and increasing property prices at a pace that, despite the 1976 increase in the exemption, made the tax a threat to many more Americans. Inflation had also swelled government coffers through both income tax bracket creep and increased property taxes. In California, the combination of rising taxes and government budget surpluses had already transformed tax policy and politics. On June 6, 1978, Californians upended American tax politics by enacting the state constitutional amendment known as Proposition 13. In addition to limiting that state’s property taxes, that vote fired a huge salvo in a tax rebellion whose influence is still being felt today. The anti-tax movement soon became the linchpin of the Republican coalition, the glue that would hold its social and economic conservative coalition together. Years later, Grover Norquist, president of Americans for Tax Reform, famous for gathering both Federal and state legislators’ pledges never to vote for any tax increase, would say, “You win on the tax issue, you win all issues.”
Proposition 13 inspired similar tax limitation amendments across the land. And in 1982, in a stunning vote, 64 percent of Californians voted to abolish that state’s inheritance tax, which only a tiny minority of the state’s wealthy residents paid. By the late 1980s, a band of creative pioneers had started a movement to repeal the Federal estate tax. Washington insiders thought this was a joke. Why would anyone imagine that a tax paid by only 2 percent of the wealthiest Americans could be abolished? When the repeal movement began, the Democrats had been firmly in control of the House of Representatives for a generation. Even when there had been administrations like Ronald Reagan’s, with both a penchant and a mandate for tax-cutting, abolishing the estate tax did not even make it onto the agenda. The last time the modern estate tax had been seriously challenged was back in 1925–26, when Republicans controlled the White House and both houses of Congress, and even then repeal failed.
Eccentric though they seemed, there were several important early advocates for repeal—people like Jim Martin, Frank Blethen, William Beach and Harold Apolinsky. One of these advocates in particular provided crucial resources, organizational skill and the wherewithal to persevere over time: Pat Soldano.
A small woman with bright blue eyes, Soldano had her own inspiring personal stories to add to the cause. She began managing the assets of Frederick Field, the heir to the Marshall Field’s department store fortune, in 1980. After that she added a select number of wealthy families to her portfolio, establishing family offices for them, managing their investments and doing their accounting and tax planning. In 1987, Soldano established a family office for the Brown family of California, whose wealth came from oil and gas properties. In the quest to repeal the estate tax, Soldano’s clients were joined by other wealthy families: the Plimptons of New Jersey, the Mars family, the Gallo wine family, and the heirs to the Campbell’s soup and Krystal fast-food fortunes. All of them contributed to Soldano’s efforts to eliminate the estate tax. Indeed, since the 1990s, the Gallos, the Mars family and others have contributed many dollars to both Soldano’s Center for the Study of Taxation, a not-for-profit lobbying and research group she formed to address the estate tax, and the Policy and Taxation Group, the lobbying organization dedicated to estate tax repeal she founded in 1992, which spent millions of dollars lobbying in the years leading up to the 2001 legislation.
In the movement’s early days, Soldano’s efforts weren’t very elaborate or well organized. But she had the acumen to hire the legendary Patton Boggs law firm to help her meet people and strategize about repealing the estate tax. Patton Boggs’ competitors in town regarded the chances for Soldano’s success as so unlikely that they often joked that the firm was spending Soldano’s money on unbelievably expensive guided tours of the nation’s capital.
Precisely because the odds were stacked so heavily against them, the early repeal advocates had to position themselves to be effective should the political climate change. They had to think creatively about unlikely bedfellows who might be induced to support their cause. Soldano and her allies understood from the beginning that success would depend on divorcing estate tax repeal from other conservative agendas: It had to appeal to a variety of non-traditionally Republican constituencies. Realizing that successful first-generation minority business owners would be vulnerable to the tax, for example, Soldano, along with Frank Blethen, began courting their support. She talked to the Black Chamber of Commerce and other minority groups, and also reached out to gays and lesbians through opinion pieces pointing out how their ineligibility for the marital deduction increased their potential estate tax liability. Soldano’s most natural sell was to a group that she intimately related to: female business owners.
Soldano and Blethen knew that any coalition to repeal the estate tax would lose if it was seen as serving the ultra-wealthy. Popular support could be garnered only if people could empathize with those who were vulnerable to the so-called death tax—especially with people who had worked hard all their life to build a nest egg that was about to be smashed at their death by a voracious Federal government. The working rich, not the idle rich, had to become the poster children of the movement. Soldano and her allies worked hard to ensure that the public would see the estate tax repeal as a small- and medium-sized business issue, even though, of course, mostly it wasn’t. They hit propaganda paydirt in 1995 with an elegant, 83-year-old, African-American tree farmer from Montrose, Mississippi, named Chester Thigpen, who happened to be a grandchild of slaves. Repeal advocates told his story over and over again for years.1
The estate tax repeal pioneers of the late 1980s and early 1990s laid the groundwork for what became the main pro-repeal group, the Family Business Estate Tax Coalition. By the time of the 2001 Tax Act, the coalition included more than a hundred trade associations and other organizations representing some six million individuals and businesses. It ran one of the most effective legislative campaigns in recent times—flawless in organization and execution, adept at managing internal tensions, professional in its public relations, and formidable in applying constituency pressure to key politicians in time for critical votes. But this juggernaut had formed just a few years before the 2001 legislative victory. As late as 1997, the leaders of the National Federation of Independent Businesses (NFIB), the single most important coalition member, believed repeal was unrealistic. As they saw it, reform to reduce the rates and increase the exemption was the only serious option. They were worlds away from the disparate collection of individuals and groups that had been crusading for abolition, against apparently overwhelming odds, for the better part of a decade.
Even after the 1994 mid-terms, when a Republican majority captured the House for the first time in a generation, Washington insiders, including Bill Clinton and his lieutenants, remained confident that repeal was just a pipe dream. There was ample time for the Clinton Administration to take repeal off the table by substantially increasing the exemption and providing relief for farmers and owners of small businesses.
Instead, in the spring of 1997, then-Deputy Treasury Secretary Larry Summers insisted publicly that “there is no case other than selfishness” for cutting the estate tax. The congressional Republican leadership jumped on Summers’s remark, claiming it revealed that there was no room for bipartisan tax policy. Even after the President learned, to his shock and dismay, that a majority of the Congressional Black Caucus had voted for a repeal bill in the House, the Clinton Administration chose to ignore the estate tax issue.
And so did others with a real stake in opposing repeal. Labor was preoccupied with the task of rebuilding unions’ diminishing ranks and political prowess. Charities, such as universities and museums, had been estimated to have nearly 20 percent of their bequests at risk if the tax were repealed, but they were afraid to speak up for fear of alienating important donors and board members. After the 2001 Act passed, representatives of the life insurance industry, which gets substantial revenues from policies purchased due to the tax, were asked why they had been so outmanned. “We were sure Al Gore would win the presidency”, they said. And they sell insurance.
Liberal think tanks were also blindsided, while conservative ones, particularly the Heritage Foundation, were arming repeal supporters with effective talking points. In 2001, when it really mattered, opponents of the estate tax were pleasantly surprised to learn that they were pushing against an open door. The other side was many days late and millions of dollars short. By the time they realized what was going on, polls showed that a large majority of Americans—65 to 70 percent—favored repealing the “death” tax, as it had been branded. Again, how did this happen?
irst, Americans have always been, until quite recently, unrealistically optimistic about their relative and absolute economic circumstances. They underestimate inequality, overestimate their own wealth compared to others, and exaggerate their chances of moving up significantly and getting rich. A Time/CNN poll taken in 2000 revealed that 39 percent of Americans believe that they either are already in the top 1 percent of wealth or “soon” will be. This is truly a great country.
Second, the pro-repeal forces were smart enough to design polls simply asking, “Do you favor or oppose repeal?” They never explained that repealing the tax might someday cause other taxes to rise, or that spending on popular programs like Medicare or education might have to decline. Faced with a stand-alone question about repealing or keeping any tax, a majority of Americans would no doubt favor repeal.
Third, consider the economic and Federal budget context when repeal was enacted. In January 2001 Federal Reserve Chairman Allen Greenspan famously told the Senate Budget Committee that the budget surpluses facing the U.S. government were so large that it would soon have to buy private assets because all Federal government debt would be paid off. He suggested that the government might even have to buy corporate stock, an idea he abhorred. (Needless to say, that problem has now been solved.)
But even all this doesn’t fully explain public antipathy to the estate tax. The repeal forces have been enormously successful at creating a compelling narrative against the tax, marshalling personal stories in support of their principles of thrift and hard work. The stories merged capitalist economics with Protestant ethics into a morality tale in which small business owners, family farmers and first-generation entrepreneurs combine success with virtue. And by calling the tax the “death tax” and thus placing undertakers and tax collectors side by side, the repeal coalition made the IRS seem like the avaricious beneficiary of personal tragedy. Thus did the travails of the very wealthy take on a universal hue; death is, after all, the ultimate leveler. Repeal advocates even created artistic renderings of IRS agents with a grim reaper’s hooded robe and scythe.
Even this was not all. Despite considerable evidence that much inherited wealth escapes income taxation, repealers claimed that the death tax created unfair “double taxation.” So what? Double and even triple taxation are everywhere. Our salaries are taxed by the wage tax to finance Social Security, another wage tax to finance Medicare, by both state and Federal income taxes, and again by sales taxes when we spend whatever is left. That is quintuple taxation. But the double tax argument captured one key player in this drama: George W. Bush. Whenever his advisers suggested to him in 2001 that he settle for a higher estate exemption and lower rates, he responded that the only cure for such an unfair “double tax” was to eliminate it. Having the President on your side makes a difference.
On the other side, those who fought to retain the tax relied instead on economic arguments that the tax had little or no detrimental effects on the economy, and on their oft-repeated argument that it burdened only the richest one or two percent of Americans. They made William Gates, Sr., the emblematic opponent of repeal. Gates does not come across as inauthentic or insincere, but the father of the world’s richest man isn’t a sympathetic figure to whom ordinary Americans can relate. Repeal proponents had no difficulty labeling him a “limousine liberal”, most obviously because he has no estate tax problem and everyone knows it. The advocates for wealth transfer taxes failed to understand the political power of storytelling long after Ronald Reagan had turned it into an art form.
They would have done better to follow the example of Andrew Carnegie, whom many considered a traitor to his class when he pushed for a death tax in 1889. He contended that “of all the forms of taxation”, a progressive tax on transfers at death “seems the wisest.” This self-made man thought that his fellow millionaires who wanted to leave “great fortunes to their children” did not recognize the dangerous implications of such inheritances. There is considerable truth to Andrew Carnegie’s concern that substantial inheritances tempt their recipients to lead less useful lives, and stories showing the distasteful face of tax-free inheritance might have effectively challenged the stories making human the case for repeal. Maybe re-runs of the old television show The Millionaire might have done the trick. Opponents also might have labeled repeal the “Paris Hilton Relief Act”, as people are far less sympathetic to repeal when they view the estate tax as affecting Paris Hilton rather than Conrad Hilton.2 Only with such emotional persuasion could the numbers and statistics have had a shot at persuasion. Opponents of estate tax repeal easily could have produced poster children of their own to accompany their reams of statistics, but they did not.
iven the political effectiveness of the coalition for repeal in 2001 and the underfunding and incompetence on the other side, the real mystery is not how a long-standing tax that was until recently considered an uncontroversial means of raising Federal revenue from those most able to pay was repealed. Instead, the mystery is why repeal took the bizarre and unpredictable shape it did: a slow and gradual rise in the exemption level and lowering of the top rate through 2009, followed by repeal (but with the carryover basis) applying only to 2010, which was theoretically (but not in the real political world) supposed to be followed in 2011 by an unpopular resurrection of the pre-2001 $1 million exemption and a 55 percent top rate.
The answer to this question lies in a messy combination of factors: arcane Federal budget rules; indefensible Federal accounting based solely on cash flows within a ten-year budget window and the gamesmanship it produces; the so-called Byrd Rule in the Senate, which would have required sixty votes rather than the 57 the 2001 Act was able to garner; and the competition among the Bush Administration and crucial House and Senate members to fit all of their favorite tax cut ideas within a $1.3 trillion budget reconciliation constraint that also served to avoid a sixty-vote requirement. The important point here is that, even though there were generous and sensible permanent compromises providing a higher exemption and lower rates readily available in the late 1990s, again in 2001, and in all the years following until Barack Obama’s election in 2008, repeal was the only thing that the estate tax opposition forces could all agree on. Thus once again we are reminded of the observation attributed to Max Frankel: “Simple-mindedness is not a handicap in the competition of social ideas.”
The extremely wealthy families financing the repeal movement were most interested in lower rates. In 2006, for example, two nonprofit organizations identified 18 families financing the repeal effort, including the Gallo, Mars and Walton families, with a combined net worth of at least $185 billion. The difference in the tax savings between a $3.5 and $10 million exemption is chump change to them, but a ten percentage point difference in tax rates is serious money. On the other hand, for most of the small business owners and farmers who served as the face and political force for change, the size of the exemption was the whole ball game: A $5 million or even a $3.5 million exemption ($10 or $7 million for a married couple) takes the vast majority of them out from under the tax altogether. So only repeal suited everyone’s interests. That is basically why, from 2001 until the end of George W. Bush’s presidency, the coalition held out for permanent repeal, which it failed to get. In the hopes of securing outright repeal of the tax, however, they were able to block any efforts at compromise. Congress remained stalemated when Barack Obama took office in January 2009.
That year, all the smart money was on a permanent compromise. The most likely compromise, which enjoyed majority support in the House and the support of the new President, was to make permanent the 2009 levels: a $3.5 million exemption and a 45 percent top rate. But Senate Republicans blocked that option. As late as December 3, 2009, when the House had again passed such a law, Senate Finance Committee Chairman Max Baucus was still describing fixing the estate tax as a “must do.” And virtually everyone wrongly predicted at the time that Congress would not allow the one-year 2010 repeal (along with carryover basis) to actually take effect. That would be congressional malpractice.
And so it was. When 2009 ended, and nothing had passed, pro-repeal forces rejoiced. They viewed abolishing the estate tax even for one year as a victory, and they were right to do so because now they could characterize, however disingenuously, any resumption of the tax as a tax increase. As we entered 2010, the 2001 law was still in place, with no obvious answer to what would happen for 2011. As Paul Krugman had predicted, 2010 became the year to throw mama from the train. A number of billionaires, including Mary Janet Cargill, Houston energy magnate Dan Duncan, California real estate baron Walter Shorenstein, television magnate John Kluge (who was once America’s richest man) and New York Yankees owner George Steinbrenner died that year. Roger Milliken, chairman of one of the world’s largest textile firms, died on December 30, 2010. The company’s Washington lobbyist, Jock Nash, said his timing “was impeccable.” About 25,000 people who would have been subject to the estate tax died in 2010, the year of its repeal.
We all know how the most recent chapter in this saga has turned out. The tax deal that President Obama reached with the Congress in December 2010 reinstated a unified estate and gift tax for 2011 and 2012 with a $5 million exemption and a 35 percent top rate. Estates of those who died in 2010 were permitted to elect between applying the carryover basis rule, which allowed appreciation in excess of $1.3 million to be taxed at a top rate of 15 percent, and the 2011 estate tax rules with its $5 million exemption and 35 percent rate. For large estates, the 15 percent rate was a bonanza.
The 2010 legislation not only made the transfer tax exemption portable between spouses, but also didn’t include any of the tightening provisions that had been floated in Congress, such as new limitations on trusts and curbs on excessive reductions in the estate tax value of inherited assets. The 2010 Act also created a unique year-end estate planning opportunity for tax-free transfers to perpetual trusts and for distributions from existing family trusts to grandchildren or even to new trusts for more remote generations. In the final weeks of 2010, many billions of dollars of assets were removed from future estate taxes through such transfers.
If you like the new law, you should thank John Kyl. The Republican Senator from Arizona and the Senate’s minority whip has long been a key advocate for estate tax repeal. Along with Blanche Lincoln, then the outgoing Senator from the Walton family’s home state of Arkansas, he had proposed similar legislation earlier that year. Knowing that Barack Obama would veto a permanent repeal bill, and fearing that, unlike 2009, a deadlock in 2010 might produce in 2011 a return to the pre-2001 law, in July 2010, 51 of the trade associations and other organizations that comprise the Family Business Estate Tax Coalition got behind the Kyl-Lincoln proposal for a $5 million exemption, a 35 percent top rate and repeal of carryover basis. When President Obama entered into tax law negotiations with congressional Republicans following the Democrats’ disaster in the mid-term elections, Senator Kyl seized the opportunity to turn this proposal into law. Many Democrats, especially in the House, were outraged. They balked and whined and threatened to derail the agreement, but in the end more than enough went along to secure passage.
So America still has a temporary estate tax law. Once again, if nothing happens, the law in 2013 will revert to its pre-2001 status—just as would have happened two years ago had not a temporary fix been passed—with a $1 million exemption and a 55 percent top rate. So what does the future hold?
aving insisted—even in the pages of the Wall Street Journal—until nearly the end of 2009 that Congress would not fail to act to avoid the 2010 debacle, I am reluctant to make more predictions. But I think it unlikely that the $5 million exemption level will be reduced. Portability of that exemption between spouses also is probably here to stay. The rate structure, on the other hand, seems much more vulnerable to future changes; after all, the rate of tax on large estates has gone up and down over the years. Some proponents of taxing large accumulations of wealth may even push to transform the current tax into an inheritance tax on recipients or to tax large bequests as income to recipients to better align the structure of the tax with those people it actually burdens. That would change both the narrative about the tax and its politics. Whatever Congress does, it may once again do so only on a temporary basis. Most importantly, it would be a mistake to believe that the tax’s opponents have given up on permanent repeal, even though the tax will now apply to only a fraction of the wealthiest 1 percent of Americans who die in any year. This year Mitt Romney joined a long line of Republican presidential candidates who have vowed to repeal the tax.
Despite the fact that the Joint Committee on Taxation said it would lose nearly $300 billion over the next decade relative to current law, leaders of the repeal coalition have made it clear that they view any extension of the estate tax as a tax increase, the only tax increase in the 2010 Act, they claim. Repeal proponents emphasize that there was no estate tax in 2010 and there was one in 2011 and 2012—no matter that it is relatively small compared to previous versions. And, despite the fact that the Joint Committee on Taxation scores extension of this year’s rules as costing tens of billions each year, repeal advocates are sticking to their interpretation of what the one-year repeal means politically.
When you think seriously about the appropriate future of wealth transfer taxes rather than their past, two fundamental facts loom large. First, our nation has never in modern times faced such a dangerous ongoing imbalance between Federal spending and revenues. The Federal debt as a percentage of our economic output is greater than it has been at any time since the end of World War II. And back then we had all the money: Europe and Japan were in shambles, and China was entering a dark communist era. Our economy was poised to grow for decades at an unprecedented pace, and our government owed 98 percent of the money it had borrowed to finance the war to Americans. The Congressional Budget Office now projects that, under current policies, in less than a decade our national debt will exceed $20 trillion—nearly 90 percent of GDP—with more than half owed to foreigners and foreign governments, some of which are not our friends. If we are able then to borrow at a 5 percent interest rate, interest on the Federal debt alone will cost us more than $1 trillion a year. Then comes the really bad news: The long-term fiscal outlook is even worse. Our population is aging, with fewer workers for each retiree, and we currently have no reliable plan to control excessive and rapidly rising healthcare costs.
If we fail to get control of the Federal budget, rising interest costs will gobble up an ever larger share of it. The value of the dollar will weaken and accelerate challenges to its role as the world’s reserve currency. Our growing national debt increases the risks of substantially higher interest rates, inflation and another financial crisis. Over time, it will threaten the living standards of the American people. We are heading toward a cliff, not just an artificial one concocted by Congress, but a real one that risks the economic well-being of our children and grandchildren.
Second, the distribution of income growth over the past four decades has been highly skewed in favor of those at the very top. The share of income earned by the top 1 percent of earners is now more highly concentrated than it has been at any time since the 1920s, and the share of income earned by the top tenth of 1 percent is greater than it has ever been. Wealth is even more unequally distributed than income; the wealthiest 1 percent of the population owns more than 40 percent of the wealth.
Under such circumstances it is amazing that our political system cannot even manage to maintain an estate tax that contributes less than 1 percent of Federal revenues from those Americans best able to afford it—the most progressive tax government imposes. This past year we have witnessed not only the difficulty of collecting any substantial wealth transfer taxes from the wealthiest among us, but also widespread resistance to raising income tax rates on the most prosperous Americans back to their level in the 1990s. Chuck Schumer’s 2012 proposal for a surtax on those who earn more than $1 million per year got no traction in Congress. Moreover, for several years now, Congress has also considered—and failed to enact—proposals to tax the compensation of hedge fund and private equity managers as ordinary income rather than at capital gains rates, despite its obvious derivation from their services, not their capital.
What this means is that the 2001 repeal of the estate tax must not be viewed as an isolated political event; rather, it marks a larger shift in our nation’s politics. Make no mistake: the death tax repeal effort is a critical piece of an attack on the very idea of progressive taxation in America. And the attack is hardly over and done with; the very principles of tax justice are now in jeopardy. Indeed, anti-tax forces are sharpening their weapons for more successes, because they think they have perfected the formula for it. They have learned that aiming high, relentlessly carrying on despite setbacks and building momentum inside the Beltway and throughout the country can lead to great payoffs. And they know that throwing lots and lots of money into the fight works, as long as the big-money families remain mindful that success depends on repeal’s retaining its populist hue. So they have stayed in the background, even as their money has not. As Michael Crowley showed in the June 2009 issue of Rolling Stone, the 11 Democratic Senators who voted for the Kyl-Lincoln bill received campaign contributions and other soft money funds from the Walton, Mars and Gallo families, among others. You really don’t need a weathervane to know which way the wind is blowing.
1Note, for a prominent example, an April 2003 cover story in the Washington Post Magazine by Bob Thompson, a former staffer for the CATO Institute.
2I and my co-author, Yale political scientist Ian Shapiro, actually suggested this in our book Death by a Thousand Cuts: The Fight over Taxing Inherited Wealth (Princeton University Press, 2006), and many years after repeal had been enacted, those who wanted to retain the tax took up this point. But the repeal train had left the station.