Originally published on by SFGate.com

Drummond Pike: What Estate Tax?

The Wall Street Journal reports that the effort to extend the current Estate Tax regime through next year has failed. As part of the Bush tax cuts, the exemption, above which taxes are due, has been slowly rising. The Conservative plan, put in place in 2001, phases out the tax entirely next year, and then, in the following year, reverts to the 2001 rates and much lower exemption. They couldn’t make it permanent then, as they wanted to do, because it simply cut too much revenue out of the equation, even for the then-dominant Republican leadership on both ends of Pennsylvania Avenue.

Beneath the din of the healthcare debate, and Joe Lieberman’s stunning profile in cowardice and betrayal of his constituency, the inexorable process of displacing taxes from the super-wealthy to the middle class continues its stealthy pace. It is stunning to me that in these particularly dire economic times, the progressive majority in both the House and Senate has squandered the opportunity to extend current year provisions into next year. Neither the House nor the Senate could muster the will to adopt the extension. Lieberman-type leadership at its best?

And the conservatives – wow, they are a whole other kettle of fish. Cynical beyond measure, they figure a bankrupt government is better than no government at all. (Remember that stellar statement by neo-conservative, Grover Norquist: “I don’t want to abolish government. I simply want to reduce it to the size where I can drag it into the bathroom and drown it in the bathtub.” So helpful in tough times.)

But this Estate Tax matter is really serious for the non-profit sector – not that you’d really understand that from the way many in philanthropy have used their considerable resources. The Council on Foundations, for instance, does support making permanent the current estate tax regime, though the matter shows up way down their list of public policy priorities, and one has rarely if ever heard the Council’s leadership making the case for the Estate Tax. Even with the more broadly-based, and often far more insightful, Independent Sector, this issue has not really achieved traction with the membership despite the best efforts of its leadership to remind us all of its importance.

Best estimates suggest that the sector will lose $25 billion each year, if the estate tax is abolished. The incentives for the creation of new foundations or the making of very large testamentary gifts to churches and non-profit organizations shift from financial to purely altruistic. In other words, without the tax deductions, people give less. And it means that if a billionaire expires during the next calendar year, she will pass down that entire fortune to her children or other beneficiaries intact. No taxes. No obligation to share with the society that enabled the accumulation of that fortune in the first place. As Bill Gates, Sr. has often commented, these huge fortunes are not easily assembled in other parts of the globe. The infrastructure, educational systems, regulated financial markets (okay, so we still have some work to do!), transportation systems, and everything else that contributes to the creation of successful businesses needs to be supported somehow, and the Estate Tax is a valuable tool for this.

Even more compelling to me, though, are the tragic social and economic consequences evolving from the advent of a new, permanent Upper Class. Declining family size almost ensures that fortunes of $100 million or more can become self-perpetuating fiefdoms in economic terms. In a manner similar to the nobility of the Middle Ages, who reigned over their lands with impunity through primogeniture (i.e. the oldest son gets the whole thing), the new economic elite will become sequestered and insulated from the broader society. Taxes on the income or realized gains from a large fortune will hardly dent its ability to be self-perpetuating. I just fail to see how this benefits society, this diverse and dynamic set of economic and social forces that has created so much in the world. In Kevin Phillips’ Wealth and Democracy, the author draws out the inextricable tie between social equity and the vibrancy of our democratic practice. The fact is inescapable – government must dampen the accumulation of “super-wealth”, and use the proceeds to create opportunity for “the many,” for, after all, the latter is what has always produced the best that America has achieved.