Of Public Interest

Volume 3, Number 4
April, 2001

Estate Tax Support by the Ultra-Rich: A Paradox Unraveled

Richard E. Wagner

A peculiar thing has happened recently in the politics of tax reform. A group of the wealthiest of all Americans has formed an organization called Responsible Wealth <www.responsiblewealth.org> to work against abolition of the estate tax. With much fanfare, Responsible Wealth has placed advertisements and editorials to support its position, including its "Call to Preserve the Estate Tax" in the 18 February 2001 issue of the New York Times.

Just last year Congress voted to abolish the estate tax. The estate tax is with us today only because of President Clinton’s veto. Since President Bush proposed to abolish the estate tax during his presidential campaign, the prospects for abolition seemed to be strong going into this year. The entry of Responsible Wealth into the picture has certainly attracted attention, and perhaps has altered the tone of the debate a bit. Just now, anyway, more emphasis seems to be placed on options that would reduce the bite of the tax while stopping short of outright abolition.

At first glance, it seems peculiar to see such representatives of the ultra-rich, with such names as Buffett, Gates, and Soros, sponsoring an organization dedicated to promoting the taxation of estates. We don’t typically hear of people volunteering to pay tax. If we did, we wouldn’t need taxation. We could fund government through voluntary contributions. When we find a cluster of the ultra-rich sponsoring a project to support high taxes on wealth, it attracts our attention because it is so unexpected.

What is going on here? At first glance, this situation is surely perplexing and paradoxical. Is this a public display of magnanimity? While magnanimity clearly does exist, we should not rush to ascribe all conduct that seems peculiar to such a sentiment. There may be other, simpler explanations that can account for Responsible Wealth’s support of the estate tax.

One of Responsible Wealth’s main claims is that abolition would promote a caste system based on wealth. This claim was advanced strongly by billionaire Warren Buffett in the New York Times. There he declared: "Without the estate tax, you in effect will have an aristocracy of wealth, which means you pass down the ability to command the resources of the nation based on heredity rather than merit." The image offered is one of an army of coupon-clippers who can live well indefinitely on the efforts of their forebears.

As a picture of reality, there is a small kernel of truth here that is mixed into a silo of falsity. The kernel of truth is simply that a large fortune bestowed upon a no-account heir can support a lot of dissipation by the heir. These things do happen on occasion, but only rarely. Parents are generally reluctant to support dissipation among their children, and have many options available to avoid doing this.

The plain fact is that this vision of a self-perpetuating class of ultra-rich doesn’t pass muster. In one well-cited study, Nobel Prize winning economist Franco Modigliani of MIT estimated that bequests account for only about 20 percent of wealth. Other studies have shown that there is a huge turnover among the wealthy from generation to generation. Under an economic system of free and competitive capitalism, effort and talent trump heredity when it comes to the accumulation of wealth.

If there is any aristocracy that might be perpetuated, it is through the ability of the estate tax to reduce the rate at which new fortunes might be created, and which might otherwise compete with existing fortunes. The estate tax makes it more difficult for large amounts of wealth to be created. If 100 significant fortunes arise each year in the presence of the estate tax, several times that number might arise without the estate tax.

Great wealth used wisely in our society can confer a significant post of honor to its possessor. A quick scan of the names of many organizations and buildings throughout the land testify to this. The estate tax reduces competition for these posts of honor. The ultra-rich often create foundations that carry their names. Buffett and Gates, for instance, are two such names that are leading Responsible Wealth.

In the aggregate there would be more foundations and greater support for philanthropy without the estate tax. Existing, incumbent foundations, though, would represent a smaller share of the total. Their relative status would fall. The estate tax protects those who are currently ultra-wealthy from competition from others that might have a chance of becoming ultra-wealthy.

The estate tax thus reduces competition for public acclaim for the ultra-wealthy supporters of Responsible Wealth. Economists have long recognized that incumbent producers may seek to limit competition from new entrants, and have often supported public regulation as the means to do this. The estate tax is a regulatory device that protects the ultra-wealthy and their pet projects from new competition.

Richard E. Wagner is Senior Fellow at the Public Interest Institute and Holbert Harris Professor of Economics at George Mason University.

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