The Estate Tax and the Nature of Wealth


June 28, 2006


Browse in Taxation

When I read last week that the U.S. House of Representatives had voted to eliminate most of the federal estate tax (75% of it to be exact), I was at a conference at the former Rockefeller family estate in Pocantico Hills, New York. There is a connection, but it is not the one that many assume.

One reason I never will be a bona fide member of the Left (at least as portrayed on the Wall Street Journal editorial page et. al.) is that I do not feel resentment of the very rich, nor for the most part do I envy them. More often I think how pathetic some people are, to feel compelled to pile up lucre upon lucre long after they have enough hundreds of times over. Donald Trump is in love with being Donald Trump; and I say he can have it.

At Pocantico I could not stop thinking what it would be like to grow up at such a place. You’d be insulated from the world by a guardhouse and stone wall. The stone house is not exactly ostentatious. But it has the solemnity of the bank lobbies of old. There is a silent staff that attends invisibly to life’s details. Beyond them, one senses a machinery that is equally silent, operating in the innermost sanctums of Wall Street and from there on up to the Highest. No wonder some accustomed to such settings could believe in an Invisible Hand, and think themselves bishops of it.

What would it be like to grow up in a house that is really an institution, in a family that one cannot escape, with a yard that is a sculpture garden, and with so much money that the sense of cause and effect that most of us experience becomes hypothetical? What would it do to a child’s sense of reality to see separate buttons under the light switch for summoning the maid or the valet? By most accounts, and by my own experience, the Rockefeller family itself has done a praiseworthy job on the whole of producing sane and responsible adults.

But that’s not always the case. I have known heirs of large fortunes who were seriously messed up. There is shame at being handed so much, and a craving to be more like the rest of us; or else an overweening sense of entitlement, and/or, on the part of males, a grandiose need for the prince to prove himself greater than the king. Some such persons achieve high public office.

The very day I read about the estate tax vote in the New York Post, that paper carried a column about James Dolan, son of the Cablevision fortune, and head by bequeathal of the New York Knickerbockers pro basketball team. Dolan has achieved both the highest team payroll in the NBA – by far – and one of its most miserable records. Even dedicated fans call the franchise a mess. Here’s what Mike Vaccaro, the Post columnist, wrote recently:

“The Knicks are a franchise rotting from the top down, a basketball team owned by a man, James Dolan, who has proven time and again that America can be an awfully fun playroom if you happen to be born with the proper DNA. Born into a different tax bracket, young James would be living in his parents’ basement, strumming his guitar and playing with his computer while his old man talked about Junior ‘finding himself’ someday.”

That does sound a little like a certain high public official. Just three days before, the Post had run a story about a “boozed up rich kid” who ran his Jaguar into a crowd of bystanders, in a peevish fit at having been tossed from a bar. It is a truism that you can ruin a child by giving him or her too much. An estate tax can do such heirs a favor, even if they don’t appreciate it. No one to my knowledge has missed a meal because of it. (The “death tax” routine is a polemical ploy. The dead don’t pay the estate tax. Trust fund babies do. Even then, heirs of less than 1% of estates pay anything at all.)

But there is a more basic reason for an estate tax, one that goes to the nature of wealth itself. Wealth is not an island. The most rugged entrepreneur in his or her own estimation, has a silent army of helpers — co-producers really – to whom he or she owes a large if unacknowledged debt. Take John D. Rockefeller. His wealth came from petroleum, which is a gift of nature, not the fruit of his own toil. He drilled and refined it, for which he deserved compensation. (I’m leaving aside the business practices that made Jeffrey Skilling a Trappist by comparison.)

But he did not create the oil; and his taking left succeeding generations poorer to that extent. The oil he extracted, they will not have. The industry he helped create has been a source of jobs and financial wealth. But it also has created a large and growing burden of fouled air and water and land that will take perhaps equal wealth to undo, if ever it can be undone. Should not his own fortune help pay?

Then there’s the social assist that helped make Rockefeller’s oil so valuable. Where would his industry have been without the massive public outlays for railroads and then highways; and without the military protection of the sea-lanes? (You thought the Sixth Fleet was in the Persian Gulf to protect democracy in the region?) Where would it have been without the many discoveries and inventions that enlarged the market for oil, and that arose from the public investment in schools and research institutions? The federal patent system played a large role as well.

For all this and more, it is not unreasonable to ask compensation from the heirs of large fortunes derived from oil; and the same applies to fortunes from other sources as well. “I personally think,” said Warren Buffett, “that society is responsible for a very significant portion of what I’ve earned.” Buffett has pledged to give most of his estate away; and he supports the estate tax.

That is one reason for an estate tax that has nothing to do with class resentment or envy. Another is philanthropy. That wealthy people devote a portion of their holdings to the public weal, is a tradition of which we Americans can be justifiably proud. In many countries, perhaps most, support for good causes comes much more from government, if it comes at all.

This tradition is something the estate tax encourages. It does so not just by way of crude financial reward (contributions to foundations are exempt from the estate tax), but also by creating a way for the topic to come up in the first place. Estate lawyers have told me that they value the tax for this reason. They see the harm that large inheritances can do to young men and women; and the turmoil that large fortunes can cause within families.

By its mere existence, the estate tax provides an opening. It enables them to raise the question of charitable giving in a practical and non-intrusive way. Dilworth Sr. won’t be taking money from Dilworth Jr. to give to his favorite causes, with all the emotional static that could entail (especially in families in which there is static to begin with.) Rather, he’s giving to a good cause money that otherwise would go to the government.

Nobody loses, unless you think Dilworth Jr. will suffer deprivation for inheriting, say, $500 million instead of a billion. To the contrary, everybody wins.

Evidence of this thinking is on display at Pocantico. I don’t know the extent to which tax planning played a role in the Rockefeller family’s charitable arrangements. I suspect it was less than in many others. (The Ford Foundation originally was a device to enable the Ford family to maintain control of the auto company.) Whatever the motive, the result is that the estate today is a conference center and museum. A large tract that used to be attached to it is now preserved for hiking and wildlife.

One could argue that such uses are not public enough, in that most of the immediate benefit goes to people who are not needy. I would not agree, given the uses (or potential uses) of larger portions of the Rockefeller fortune. But one could make the argument. To say, though, that the land would be better used as a private estate; or that one disgruntled heir should have been able to force a sale to developers – well, there are journals of opinion that would applaud that view. I would not join them.

Timothy Leary, the pied piper of the ‘60s drug culture, made his headquarters in Milbrook New York, at the family estate of Peggy, Billy and Tommy Hitchcock, who were heirs to the Mellon fortune. Is that what the advocates of abolishing the estate tax want more of?

If these advocates have their way, charitable giving will decline by between $12 billion to $24 billion a year in the U.S, the Congressional Budget Office says. Federal revenues will drop by $1 trillion over ten years. There will be more problems and less means – private as well as public – with which to meet them.

But the main reason for the estate tax is just compensation. When we take from the common pool, a part of it should go back in, so that others can have a share too.