Every Baby a Trust Fund Baby


January 1, 2001
The American Prospect


Browse in Childhood Taxation

Estate taxes are a problem that most Americans would like to have. Not many do. To qualify, one has to have a nice piece of change–at least $1.3 million for a married couple and, taking loopholes into account, more like $5 million. At present fewer than 2 percent of Americans achieve that kind of affluence. Some 40 percent die with no assets at all to leave behind for the kids and grandkids.

That’s the problem today: too little wealth at the bottom and in the middle, and not too much burden on the wealth at the very top. The fortunes of the Rockefellers and Fords have survived through generations, despite the estate tax. New fortunes are arising at a staggering pace even though the estate tax looms. But the wealth of most Americans has not increased in a corresponding manner. On the contrary, for the lower 40 percent, net assets have declined by some 75 percent over the past two decades.

The estate tax doesn’t threaten wealth in America; a deficit of opportunity does. The first order of business in the United States should be finding ways to help young Americans create new wealth rather than seeking to entrench for perpetuity wealth already created. There’s a way we can do this, and the estate tax–with one significant adjustment–makes it possible. With the revenues from that tax, we could provide a grubstake for every child born in this country. Every baby could be a trust fund baby, not just those fortunate enough to be born into great wealth. Young Americans could add to that stake by finishing school and then, as adults, use it to create wealth or to build a nest egg for their retirement.

This is not a pipe dream. It can happen, without new taxes and with practically no bureaucracy. In fact, we can eliminate the estate tax where it truly does harm–when it forces the sale of a family farm or business that otherwise would be passed down to the next generation. At the same time, we can shore up the Social Security system–instead of depleting it, as many Republicans want to do. And we can provide hundreds of thousands of young people in America with something they have never had: absolute assurance that if they do their part, the system will help them take the next step.

We can do all these things; and we can do them with a revenue source that–with that one important adjustment–has virtually no negative consequences and many positive ones. It is a revenue source, moreover, that is directly related to the task at hand. The estate tax, after all, is essentially about the passage of wealth from one generation to the next. What better use of those revenues than to ensure that all children get a share of that wealth so they can pursue their education and their dreams?

The effort to abolish the estate tax has not been high on the integrity scale, even by the standards of recent tax debates. It has consisted of roughly equal parts hyperventilating polemic and focus group sloganeering. We heard, for example, that America must eliminate the heinous “death tax.” Yet America has no such thing. When 98 percent of Americans pass through the earthly veil with no tax consequences at all, that is not a death tax. Nor is it a death tax for the other 2 percent–unless one believes, like the ancient Egyptians, that the wealthy take their possessions with them to the next world.

In actuality the estate tax falls on the heirs of the largest estates. It affects trust fund babies, and it is not surprising that the advocates of repeal prefer not to remind people of this fact. When they weren’t talking about the death tax, they were lamenting the plight of small-business owners and farmers who have to sell the family enterprise to pay the tax. It was wonderful to have this outpouring of concern for beleaguered family businesses, especially from people who on other days are voting to enable large corporations to steamroll those same farms and businesses.

But on the estate tax, they were flogging a straw man. A bill to cut the estate tax for family enterprises would pass Congress in a minute. But the majority party wouldn’t let such a bill come to the floor. Instead, they used family farmers and small businesses as hostages for a total repeal of the estate tax primarily to help the billionaires of the land. That was the real debate–who should bear the tax burden, and to what end? It was a debate in which the proponents of total repeal were not willing to engage. They called the estate tax immoral. That means they must think it’s moral to overtax the earnings of working Americans–because that’s who’s left to carry an increasing share of the burden if the estate tax goes.

For all the commotion last summer over the repeal of the estate tax, relatively little controversy occurred when the tax was enacted in 1916. The press didn’t dwell much on the matter; and most of the debate in the congressional record–pages and pages–concerned a new Tariff Commission, which was part of the same package.

There were a number of reasons for the relative quiet. For one thing, some prominent millionaires of the era had a responsible attitude toward their wealth. They were ardent regarding their right to earn it, but they felt just as strongly about their responsibility to bestow that wealth in a way that served the public good. Most notable among these millionaires was Andrew Carnegie, who cheered the enactment of estate taxes. “Of all forms of taxation this seems to be the wisest,” Carnegie wrote in an essay entitled “Wealth.” “Men who continue hoarding great sums all their lives, the proper use of which for the public ends would work to the good of the community, should be made to feel that the community, in the form of the state, cannot thus be deprived of its proper share.”

Another reason for the lack of opposition to the estate tax was that America was preparing to enter the First World War. For the wealthiest Americans to shirk their part in supporting that effort would have been unseemly in the extreme. And a significant bloc in Congress insisted that the wealthy had a particular duty to pay because America was entering the war primarily to protect their interests. Representative Warren Worth Bailey, a Democrat from Pennsylvania, expressed the mood on this point. “The demand for huge naval and military appropriations did not originate in the ranks of labor,” Bailey said. “It did not spring from the humble firesides of the land. It was not inspired by the farmers or the artisans or the plain men in overalls. It had its origin among the very elect. Trace it to its source and we find it has proceeded from Wall Street and from those whose greatest interests center there.”

It all seems very long ago. Yet the circumstances today are not that much different. Prominent individuals of great wealth–Warren Buffett, George Soros, and even Bill Gates, among many others–have urged that fortunes go toward charitable and public uses rather than just to spoiled heirs. An organization of heirs of large family fortunes, called Responsible Wealth, ardently opposes the repeal of the estate tax.

Then too, there’s still an enormous defense budget to meet, and the main beneficiaries of this spending continue to be those with large aggregations of wealth. To paraphrase Congressman Bailey, the advocates of a global economy ought to pay their share for the protection of that economy. As it is, some two-thirds of the largest global corporations doing business in the United States pay not a penny in federal income taxes; and if Congress abolishes the estate tax, major holders of the stock in those corporations could end up paying little, too.

What’s missing from the debate today is not enlightened billionaires or pressing defense needs but a sense of high national purpose. Liberal postulates about progressive taxation just don’t do it by themselves, nor do warnings about vast concentrations of wealth. We need to focus on the creation of wealth, not just on reining in excessive concentrations of it–especially in the case of young Americans who start life without any assets at all.

For decades this country has debated how to achieve genuine economic opportunity for those most in need. We have enacted countless programs, some effective (such as Head Start) and some not so effective. But we have never taken the truly important step, which is to make certain that each child starts life with at least some financial assets. I’m not talking about a government program, or a bureaucracy, or welfare. I’m talking about an asset base with which to make individual choices and achieve individual dreams.

In the first century of America’s existence, there was no need to worry about this kind of security; wealth resided primarily in land, and there was plenty of it to go around. There was a happy confluence between the nation’s economic ideals and the accident of its geography, and Congress passed the Homestead Acts to realize this to some degree. But then the frontier closed, and the economy became urban and industrial. Land no longer was the main source of security and wealth, so the nation had to devise other means.

We enacted Social Security to ensure a minimal income for the end of life. But we have made no corresponding provision for the beginning of life, even though the cost of education has made financial resources increasingly important. Happily, we have in place a revenue source that is made to order for this task. Just as the payroll tax provides the funds for retirement, the estate tax can provide resources for every child at the start of life.

To implement this plan would be surprisingly simple. It would not take a big new government program or much in the way of government at all. Rather, it would require just a small change in the financial plumbing. All children born in this country would get at birth an individual investment account, much the way they later get a Social Security account. Estate tax revenues would go directly into these accounts instead of into the federal Treasury. There would be, say, a lump sum deposited at birth, and then additional amounts for each year of school completed. Upon each child’s graduation from high school, there would be another lump sum. Along the way, parents’ employers and others could contribute to these accounts and get a tax benefit for doing so.

The accounts themselves would be tax-free until the money was withdrawn. In effect they would operate like IRAs and 401(k) plans, except that the child’s contribution would be completion of school rather than annual earnings. The funds would vest fully upon the child’s graduation from high school or upon his or her 21st birthday, whichever came first. They could be used for higher education, to buy a home, to start a business, or just to accumulate a nest egg for retirement.

As with Social Security, the accounts would be available to all; but families of substantial means would have the option of declining them. That money would then go back into the pool for others. The list of those who gave up their account would be a public record, so these people would receive recognition for their generosity. The amounts deposited in the funds would depend on estate tax receipts in a given year. A very rough estimate suggests that, after the exemption for family farms and small businesses, there would be somewhere in the vicinity of $9,000, on average, per child. Sums of that magnitude would make a real difference, especially for children in the worst financial circumstances; and the system could be adjusted to give them somewhat more.

At last in America, every child would have a tangible stake in the future. And among other things, this equitable distribution could mean a major change in the culture of inner-city schools. Often the biggest obstacle for children in these predominantly black schools is not a lack of resources but, rather, a peer culture that encourages bad performance. With boys in particular, the kid who does well is ridiculed as a chump or for trying to be “white.” The rewards for strong effort, meanwhile, can seem remote at best. The new nest egg accounts would help change that. With a tangible reward on the table, you’d be a total chump if you didn’t graduate.

From a young age, moreover, kids would have the experience of watching their savings grow, and this would encourage a habit of saving over a lifetime. With these savings available, young people could leave college with less debt and so continue to build their nest egg faster.

This in turn would help to bolster Social Security in the best possible way–by helping people prepare for retirement without draining the Social Security trust fund in the process. President-elect George W. Bush wants to take the money for individual accounts out of Social Security. Instead, we ought to add such accounts to Social Security; and what better time than at birth to provide the most life options and the most time for growth?

The estate tax comes only from the heirs of large family fortunes, not from the pockets of working people, as the payroll tax does. Yet it is a tax that encourages work and enterprise. “Great sums bequeathed oftener work more for the injury than for the good of the recipients,” Andrew Carnegie observed. Or as Warren Buffett put it more recently, “All those people who think that food stamps are debilitating and lead to a cycle of poverty are the same ones who want to leave a ton of money to their kids.”

No less important, the estate tax encourages charitable giving. Many private foundations began as efforts to avoid the estate tax, and rarely does tax avoidance serve such constructive social ends. Estate attorneys say that this tax enables them to raise the question of foundations and charitable giving among people who otherwise might not put that at the top of their list of priorities.

The stakes here are high. Over the next half-century or so, some $41 trillion dollars will pass between generations, and possibly double or even triple that. At current rates of giving, that will mean over $6 trillion in charitable bequests. Not all that giving is prodded by taxes, of course. But a significant amount is. “Not only would the IRS be cut out” if the estate tax is repealed, says Spencer Adler, an attorney in Washington, D.C.; “charities also would be cut out.” Politicians who preach private voluntary solutions to social problems have yet to explain why they want to undermine a major source of funds for those private voluntary efforts.

To put this another way, using the estate tax to fund a nest egg for every child would accomplish much of what those pushing repeal of the estate tax say they want. It would promote the work ethic, enterprise, education, and self-help. It would enable individuals and families to control their own financial assets, and it would encourage charitable giving and voluntary approaches to social problems. Surely these politicians would not let their allegiance to the very wealthy stand in the way of real opportunity for young Americans.

The debate over the estate tax is really a debate over the future versus the past. Are we going to have a tax system that promotes the creation of future wealth or one that serves to entrench further the large aggregations of wealth already created? Will it reward enterprise or the good fortune to have wealthy parents? Some may argue that the first priority of government should be to ensure a tax-free end of life for billionaires. If we believe, however, that the promise of America lies in the future and not in the past, then we will choose instead a resource-full start in life for every American.