"Race, Poverty and the Estate Tax,"by Gary Bass, Ellen Taylor & Cate Paskoff September/October 2002 issue of Poverty & Race
Proponents for repeal of the estate tax, including the powerful independent business lobby, have spent the past decade portraying the estate tax as a “death tax” that destroys small businesses and family farms – the very heart of America. Those who would reform – but not repeal – the estate tax understand it very differently. We see it as a fair and effective tax that:
In April 2001, Black Entertainment Television (BET) founder and billionaire CEO Robert Johnson and 48 other African American business leaders placed a full-page ad supporting repeal of the estate tax in the Washington Post and New York Times. Using many of the inaccurate arguments that had already been made by conservatives and business lobbyists, Johnson and his cosigners also claimed that the estate tax is particularly unfair to African Americans.
The argument that the estate tax hurts the black community and that repealing it will be beneficial is contrary to the facts. The estate tax is not harmful to black prosperity; in fact, the tax actually helps to mitigate increasing income and wealth inequality in the United States.
An Estate Tax Primer
The estate tax is not a death tax. It is a one-time tax on the transfer of assets to heirs that occurs as a result of death. Death is not a taxable event, but transferring large sums of wealth is. Other transfers of assets result in other taxes – for instance, the capital gains tax. While few of us enjoy paying taxes, most of us recognize that taxes are necessary if we want (and most of us do), the protection and benefit of a sound government that gives us the opportunity to flourish and succeed. Or, as economist and columnist Julianne Malveaux reminds us, “Taxes are the price we pay to live in a civil society.” The estate tax fills an important niche in the tax code that otherwise would result in a huge loophole, since it is the only way to tax the appreciation of wealth that remains in the hands of a family – capital gains taxes do not apply to inheritances.
Because the estate tax is a very “progressive” tax, it does not tax low- or even middle-income people, only the wealthiest. Currently, an estate of $1 million ($2 million for a couple) is exempt from taxation, and the exemption levels are scheduled to rise annually to $3.5 million for an individual ($7 million for a couple) by 2009. An estate bequeathed to a spouse is totally exempt. These exemptions help to ensure that 98 of every 100 people who die face no estate tax whatsoever. Only the super-wealthy – the richest 2% of Americans – are subject to the estate tax. According to economist Edward Wolff, cited in the June 4, 2001 American Prospect, less than one-third of 1% of all estates that pay an estate tax are left by black decedents. It is only fair that people, of whatever race, who have amassed great wealth (a substantial part of which may never have been taxed before) be taxed when that wealth is passed on. Besides limiting concentrations of wealth passed down from generation to generation, the estate tax serves two other important purposes:
1. Since transfers of wealth from an estate to charities (or to create foundations that fund charities) are untaxed, the estate tax provides a way for the wealthy to reduce their estate tax liability, and, at the same time, to positively do good things that often give the less fortunate a hand up. Total charitable bequests of all estates amounted to more than $16 billion in 2000 – resources upon which nonprofits, charities and direct service providers are increasingly reliant for the important work they accomplish.
2. But charities can’t do it all. We also need government. The estate tax is an important source of federal revenue. The Congressional Joint Committee on Taxation (JCT) published a 1999 report projecting revenue from the estate and gift tax. According to JCT, from 2000 to 2008, the tax will generate $303.4 billion. On average, this is $33.7 billion per year, a sizable amount of federal revenue (this number is expected to increase to $56 billion for each full year the estate tax is repealed beginning in 2012). To put it in perspective, you could fund each of the following programs and still have a surplus left over.
The value of these programs and the needs they must serve only increase when there is an economic downturn, as we are now experiencing.
In spite of the fairness of the tax and the benefits it provides, an intense campaign has been carried out to eliminate the estate tax. A large part of the $1.3 trillion Bush tax cut passed in 2001 was partial repeal of the estate tax. Because repeal is so costly, Congress could only begin phasing the tax out. In 2010, the tax is fully repealed for one year, only to be re-instituted in 2011 as though the tax bill had never been enacted. Because the estate tax was not permanently repealed, we anticipate continued efforts to repeal it, as occurred this summer.
The Role of Government in the Creation of Wealth
While we recognize the important role of individual achievement in the creation of wealth, it is equally important to recognize that our government and the social, economic and political benefits it confers play a significant role in establishing the conditions for wealth creation. Our system of property law protection and the investments we make towards equality of opportunity, such as education, public health, food and nutrition programs, or libraries and museums – though admittedly imperfect – make a social claim on individual wealth.
Many wealthy people recognize this – the role of a strong government, the benefits they have received from such a government, and their obligation to support government, as well as charities, through taxation and bequests. Almost 1,000 wealthy Americans who will owe estate taxes, who are part of the Responsible Wealth Project of United for a Fair Economy, signed a petition urging Congress to reform, but not repeal, the estate tax because it is essential in protecting true equality of opportunity. Billionaire Bill Gates, Sr., a leader of the Project made this point well when he said in the June 13, 2002 New York Times, “[the estate tax] is a very legitimate claim of society on an accumulation of wealth which would not have occurred without an orderly market, free education and incredible dollars spent on research."
The BET ad argues that the estate tax is particularly unfair to blacks because of America’s history of racial discrimination, but, ironically, repeal of the estate tax would mean less federal revenue to more effectively enforce civil rights; or provide the resources to give disadvantaged kids decent child care and pre-school programs and nutrition, so they, too, can have the equal opportunity to succeed; or to fund or job training or housing or drug and alcohol treatment programs that would allow many people a chance at a good life. Revenue from the estate tax is important to the continuation of programs like Small Business Loans for minorities, or FCC ownership rules that benefit minorities, or public subsidies of historically black colleges – to mention only a few. As Malveaux wrote shortly after the ad ran in the April 12, 2001 Sun Reporter, “[s]ome of the very programs that African American business executives used to climb their ladder will be jeopardized by budget cuts” that will likely result from repeal of the estate tax.
The Estate Tax and the Wealth Gap
The BET ad states that, “Elimination of the Estate Tax will help close the wealth gap in this nation between African American families and White families … permit wealth to grow in the Black community through investment in minority businesses that will … allow African-American families to participate fully in the American dream.” Since the ad’s signers constitute fully 22% of the estimated 223 African Americans who had to pay the tax (as estimated by Edward Wolff) the one point the ad does make very clear is that there is a massive racial wealth gap in the U.S.
The wealth gap in this country – the phenomenon whereby the top 1 or 2 percent own a disproportionately large amount of the nation’s wealth – has grown at a disturbing rate over the last 20 years. From 1976 to 1999, the top 1% of America’s wealthiest went from owning 20% to more than 40% of the nation’s wealth. Over the last 30 years, the percentage of families “with zero or no net worth” – that is, those families who owe the same or more than they own – has doubled.
As disturbing as the general trend of an increasing wealth gap is, the country’s widening racial wealth gap is even more pronounced. NYU sociologist Dalton Conley, writing in the April 5, 2001 Salon.com, has said that wealth or net worth is, among others, the “one statistic [that] captures the persistence of racial inequity in the U.S.” While the racial income gap has narrowed, the wealth gap remains wide and is growing larger. According to 2000 Census data, median income of blacks is about 66% that of whites. According to a U.S. Census report based on 1995 data (the most recent available), however, there are even greater differences in the net worth of whites and blacks – at all income levels. In each of the bottom two categories of income, black households have just 15% of the wealth of their white counterparts. Even in the top two income brackets, black households have only 48% and 33%, respectively, of the wealth of comparable white households.
As Conley explains, this “equity inequity is, in part, the result of the head start that whites have enjoyed in accumulating and passing on assets.” Though there are many factors, including different savings rates and investment choices that contribute to this wealth gap, sociologists Melvin Oliver and Thomas Shapiro have estimated that, “at least one half, but likely more” of wealth is inherited – and that the majority of these inheritances go to well-educated, white professionals. Economist Edward Wolff cites data that show white households are more than three times as likely to receive inheritances than are black households, and that the mean value of inheritances for whites is more than two times that for blacks.
The Estate Tax and Family-Owned Business and Farms
One of the most commonly used arguments for repeal of the estate tax is that it causes the destruction of small family farms and businesses, because heirs are unable to pay the estate tax, forcing the sale of the farm or business. There is little evidence to support the notion that the estate tax causes the ruination of family farms and businesses, which are given a more favorable treatment, including a higher exemption and a provision allowing the tax to be paid in yearly installments.
There is extensive data showing that the family-owned small business or farm is actually left largely untouched by the estate tax. In their analysis of the “Rhetoric and Economics in the Estate Tax Debate,” economists William Gale and Joel Slemrod find that “the vast majority of family businesses are not subject to the estate tax, either because they fail well before the death of the owner or because their value is well below the estate tax exemption.”
Likewise, New York Times investigative reporter David Cay Johnston on April 8, 2001 concluded that, “Even one of the leading advocates for repeal of estate taxes, the American Farm Bureau Federation, said it could not cite a single example of a farm lost because of estate taxes.”
While we have no information on how many black-owned firms actually went under because of the estate tax, it is fair to surmise from the small percentage of all businesses that pay the estate tax and the even smaller fraction of a percent of black estates that have any estate tax liability, that the percentage of black-owned businesses that fail or must be sold as a result of the estate tax would be much, much smaller. As noted, family farms and businesses are already given special protections, and the estate tax law could easily be reformed to ensure that it is not an obstacle to the continuation of family-run enterprises.
Repeal of the estate tax will not lift Blacks from economic dependency. It won’t increase Black savings. It won’t increase the number of black-owned businesses. The estate tax itself provides the revenue to more effectively support black economic self-sufficiency and independence over the long term.
Recent Public Opinion and Action on the Estate Tax
Despite all the misinformation included in arguments for repeal of the estate tax, it enjoys broad support among the public. Many Americans think that reforming the estate tax, to make sure that it continues to affect only the very wealthy and allows the preservation of family farms and businesses, but not repealing it, is the best way to go. In a May 2002 survey, among 1,000 registered voters who indicated they are likely to vote in the November 2002 elections, a solid majority indicated that reforming the estate tax was a higher priority than repealing it. Sixty percent of voters said they strongly or somewhat supported reform, whereas only 35% said they strongly or somewhat supported repeal. Only 24% of blacks support elimination of the estate tax, whereas 36% of whites do. Interestingly, the poll revealed also that even though less than one-third of 1% of estates that pay an estate tax are paid by black decedents, 34% of black voters thought someone in their household would have to pay the estate tax, indicating the need to get the true facts out more widely. (For a full discussion of the poll results, see the resource box.)
Opponents of the estate tax mobilized earlier this year to make repeal of the tax permanent. They were able to move permanent repeal through the House, but in June 2002 they fell six votes short of the Senate’s 60-vote requirement for passage. In an earlier Senate test vote last spring, they thought they were only 3 or 4 votes away from permanently repealing the tax; so they actually lost ground.
Nonetheless, repeal advocates have vowed to bring permanent repeal of the estate tax back to the Senate floor again, even this year -- either before November, since many see it as a key election issue, or later, depending on what changes the Senate undergoes. Either way, because the estate tax is scheduled to revert back to its pre-2001 provisions in 2011, it’s inevitable that the topic will regularly be revisited and the issues raised in this article will continue to resurface until Congress either repeals or reforms the law. This means that the public interest community must get more involved in the estate tax debate and better help the public understand the estate tax’s role in generating needed government revenue, encouraging charitable contributions, and working to address the country’s wealth gap. And if the tax is to be reformed, the public interest community needs to be prepared to comment on how changes would impact issues pertaining to race and wealth.
To the highly emotional and often rhetorical debate already surrounding the estate tax, the BET ad attempted to up the ante – to the point of implying that elimination of the estate tax could be a form of partial reparations to the entire black community. The estate tax and the nation’s growing racial wealth disparity, as well as the reparations for slavery proposal, are complicated issues that demand and deserve a sincere debate and resolution. The points made in the BET ad and in many other pro-repeal arguments, however, only further complicate these issues by implying that the superrich are owed more by society than are the rest of us; and specifically, in the case of this ad, that super-rich blacks are owed more than are low-and moderate-income blacks. The country’s growing racial wealth gap must be confronted, but repeal of the estate tax will not help us move down this path.
Repeal of the estate tax will benefit many, many more super-rich whites than the 223 super-rich blacks in this country who are currently subject the tax. It will, as Conley explains, be a “windfall for the wealthiest whites in America …[and] only exacerbate the black-white asset gap.” Repeal will not only enable the very wealthiest to hold on to more of their wealth tax-free, but will almost surely worsen the condition of poor and low-income Americans by forcing cuts in spending on programs which target the poor – or, at the very least, by pushing more of the tax burden onto low- and moderate-income families.
The implications of the wealth gap are varied – from poor health care to a lack of educational opportunities to delayed retirement or the ability of a family to weather an economic “slowdown” – not to mention the significance such gaps have on the long-term welfare of a country that is supposed to value the well-being of all of its individuals and not just the wealthiest 1.4% of them. Eliminating a tax that affects less than 2%, or 47,000, of the wealthiest estates each year, is not the solution, but will add to the problem. By the end of this decade, repeal of the estate tax will begin costing $56 billion each year in lost federal revenue alone. With 11.5% of all Americans living in poverty – nearly 23% of blacks and 22% of Hispanics – plus cuts in current federal spending on social programs, the estate tax should be retained.
Dalton Conley, some members of Congress and others have suggested creation of Individual Development Accounts (IDAs) that would enable the asset-poor to save through a government-matching savings program. Others have suggested "Kidsave" accounts, whereby the government creates and contributes to a savings account for every child until age 5 – or even age18 in other proposals. Resources from the estate tax could be used for seed funds to assist minority businesspeople in struggling communities in starting their own businesses. Or, as Conley suggests in the March 26, 2001 Nation, resources could go to create a federally-funded “integration insurance” program to protect the value of homes in neighborhoods that suffer when white homeowners abandon them. These are just a few of the examples of ways to use federal revenue to positively work towards narrowing the wealth gap.
Even without these innovative programs, the money saved by retaining the estate tax will help to ensure in a time of growing budget deficits the availability of the funds necessary to provide a social safety net, and even to shore up some of the holes in it. Repeal of the estate tax will do nothing for those who are still trying to climb the ladder of success; it will only benefit those already at the top. Repeal of the estate tax will have negative effects on the rest of us, especially on the most disadvantaged – those who are still struggling to make it to the first rung. The way to address racial economic disparity is not to cut the taxes of the wealthy, of whatever race, but to continue to put federal resources towards ensuring that every American is allowed the basic opportunities necessary to succeed.
Gary D. Bass (email@example.com) is the Founder and Executive Director of OMB Watch (http://www.ombwatch.org), a nonprofit research and advocacy organization that promotes increased citizen participation in public policy and greater government accountability. Under his direction, OMB Watch leads the Americans for a Fair Estate Tax Coalition of nonprofits.
Ellen Taylor (firstname.lastname@example.org) has been with OMB Watch since May 1999, and is a senior budget policy analyst; she coordinates the Social Investment Initiative, a project aimed at engaging state and local nonprofits in federal budget issues and priorities.
Cate Paskoff (email@example.com) joined OMB Watch in November 2000 as a budget policy analyst.
The authors also want to acknowledge the careful reading and thoughtful suggestions offered by Ryan Turner, OMB Watch’s Nonprofit and Technology Analyst.
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