How the Fed Boosts the 1%: Even the Upper Middle Class Loses Share of Household Wealth to the 1%. Bottom Half Gets Screwed

By Wolf Richter • Nov 13, 2019 •  It is ironic the Fed puts out this data, as if to show off its success, and how every time the wealth of the 1% is threatened, the Fed comes up with new bailouts, rate cuts, and other shenanigans. This is the transcript from my podcast last SundayTHE WOLF STREET REPORT:

OK, the Federal Reserve just came out with its quarterly data on the wealth of American households. It’s mostly the headline numbers that are being displayed in the media – how much wealth American households have – namely a new record of $107 trillion, thank you Fed, QE, interest-rate repression, and Wealth Effect. But the Fed’s data also shows the wealth distribution.

Everyone knows that if you’re in the bottom 50% of households in terms of wealth in this country, you’re essentially screwed. At the bottom 50%, you’re chasing after the American dream, and while a few are able to get out of the bottom 50%, for most, the American dream remains just a dream.

But the share that the bottom 50% of households have of the overall wealth, of that record $107 trillion, is minuscule. It’s just 1.9%.

That share is down by half from the already miserably low levels of 1999, according to the Fed’s data. So those folks in the bottom half of households are screwed and we knew that.

But today, we’ll take a closer look at the top 50% to 99% of households by wealth because even their share of the wealth is now declining, while the share of the 1% is surging.

This is the upper middle class and the top of the middle class, and they’re losing out to the 1%. And it’s a big deal in terms of dollars because those households have a lot of wealth, but their share is shrinking as the share of the 1% is gaining.

In other words, this economy – and I will point my finger straight at the policies of the Federal Reserve – is set up to shift an ever-larger share of the wealth to the top 1% and away from everyone else, according to the Fed’s own data. And the Fed is bragging about it.

We already know what is happening at the bottom half of the households: They’ve always been screwed. They’re just screwed even more today than they were 20 years ago, according to the Fed’s data.

As of the new data from the Fed, the bottom half of the households, owns 6.1% of all assets that Americans own. They own just 2.2% of all stocks and stock mutual funds. They own just 2.7% of what the Fed calls “pension entitlements.” The gold-plated executive pension plans are only for the few. They own just 13.5% of household real estate wealth. They own just 0.1% of the “private business wealth.”

But in terms of debt, the bottom half of households carry 36% of the total debt, such as mortgages, credit card debt, auto loans, and student loans. So they own 6.1% of the assets and they owe 36% of the debt.

And the wealth of the bottom half of households – wealth being assets minus debt – amounts to just $2 trillion, or 1.9% of the total household wealth.

These are the people who cannot save anything because their expenses for housing, healthcare, education, transportation, childcare, etc. are eating up their income. And because they cannot save anything, they have no means to invest. The whole system is set up that way.

Healthcare expenses cost roughly the same for rich and poor. The problem is that health care expenses are enormous in the US, and become an affordability issue for the bottom half of the households, a huge burden, and lots of people struggle to pay for it or cannot afford it.

The healthcare sector is now around 18% of GDP, or nearly $4 trillion a year. This business has become immensely profitable with its monopolistic structure, constant mergers, abuse of the patent system to prolong pharma monopolies, outrageous hospital bills as hospitals have become integrated into corporatized medicine. And so on. Paying even for basic healthcare has become a nightmare for the bottom half of households.

For the lucky ones who’re covered by an employer’s health plan, family coverage costs the employee on average $6,000, according to the Kaiser Family Foundation. This is just the insurance premium. Then there are copays and deductibles, etc. And those deductibles can be thousands of dollars.

For families without employer health coverage, the premiums alone for reasonable insurance plans run over $20,000 a year.

Then there are housing costs – whether people own or buy. They have surged in many places in the country. And for the bottom 50%, paying for a roof over the head in a lot of places is straining budgets, or exceeding budgets. Just check out the thousands of parked vehicles that people live in, around Silicon Valley, San Francisco, and other places. These are people with jobs that cannot afford housing.

The costs of higher education have become a huge burden at the bottom 50% of the wealth scale. This burden is carried by the family that now sacrifices in many ways, and it will be carried by the student who will end up with a pile of student loans.

It boils down to this: The households in the bottom half of the wealth spectrum are spending all their money just getting to the next paycheck, and they cannot accumulate money to invest, and they cannot benefit from the Fed’s ingenious Wealth Effect.

The wealth effect is reserved for the already wealthy that have the most assets, and when asset prices surge, those that hold the most assets benefit the most.

So now let’s look at the bottom 99% – and I mean, this sounds really funny, “the bottom 99%.” But that’s what it is coming down to.

And we’ll look at the top 1% to see how the share of wealth has changed since the Fed started its wealth effect, QE, and interest-rate repression. And we may soon add to this strategy the fantastical repo market bailout.

So over the past 10 years, the Fed has engineered an enormous amount of asset price inflation. And over those 10 years:

  • The wealth of the top 1% has soared by $18 trillion to $34 trillion.
  • The wealth of the next 9% has soared by $16 trillion to $39 trillion.
  • The wealth of the 50% to 90%, so that’s the upper middle class, has risen by a more modest $13 trillion to $31 trillion.
  • The wealth of the bottom half of households has ticked up by $1.4 trillion to $2 trillion, a tiny fraction of the wealth of the 1%.

In terms of percentage share of all household wealth, it looks whacky:

The top 1%’s share of household wealth over those ten years increased by 5 percentage points to 32%. The 1% now own nearly one-third of total household wealth,

But over those 10 years, the share of household wealth owned by the next 9% fell by 3 percentage points to 37%.

And the share of the 50% to 90%, the upper middle class, also fell by 3 percentage points to 29%.

Today, the share of the 1% is nearly 4 percentage points higher than the share of the 50% to 90%.

Back in 2002, it was reverse: The share of the 1% was about 10 percentage points lower than the share of the 50% to 90%.

The first time that the 1% had a larger share of household wealth than the 50% to 90% was in 2013, and the gap has ballooned since.

So what is going on here? How is the 1% able to hog more and more of the household wealth that the Fed has so strenuously inflated, even at the expense of the next layers down?

There are several factors:

The Fed’s interest rate repression has destroyed returns on bank savings products. Households own about $10 trillion in these savings products, such as CDs and savings accounts. These types of products are a classic way of saving money at the lower income levels, and people have mostly gotten screwed doing it.

The stock market is open to all who have money to invest. And returns have been huge since the last collapse, and those with the most money invested in stocks gained the most.

But the wealthy have access to other types of investments. Many hedge funds, private equity firms, and venture capital funds require a $5 million minimum investment. Households that don’t have an extra $5 million to invest, in addition to their broader investment strategies, are excluded from the club.

Then there is a very small group of people who are super wealthy, who are billionaires and multi-billionaires, such as Amazon’s Jeff Bezos or Warren Buffett and others. Some of them, like Bezos, made their money on the immensely inflated stock price of their companies.

Warren Buffett’s entire finance and insurance empire got bailed out during the Financial Crisis, and he is probably the single biggest beneficiary of those bailouts. Then after the bailouts came QE, and his finance and insurance empire hugely benefited from that.

Then there are stock compensation plans. This includes people like Tesla’s Elon Musk. Tesla has been a financial nightmare throughout its entire existence, but its shares have been pushed by hook or crook to a valuation of $61 billion, and Musk has already awarded himself a bunch of them, and in addition has given himself an extraordinarily rich share compensation package valued at $56 billion that is now heading to court.

While Tesla fans have to buy shares, Musk just gets them – to the tune of billions of dollars. This principle is spread far and wide with stock compensation plans at the top of Corporate America.

Then there is the startup craze. Even if the shares flop after the IPO, the pre-IPO investors, such as VC funds made huge returns. These funds hold money that was invested by the top 1%. Again, a big minimum investment is required. Small fry cannot play in the VC arena.

And there are the stock compensation plans in the start-up craze where early employees make out with huge stock positions after the IPO. They’re also part of the 1%.

But this money at the top gets plowed into various real-economy things such as housing, and is one of the reasons why housing costs have skyrocketed over the past five years in areas where this wealth is, such as the San Francisco Bay Area. This is where the bottom half of the households suddenly find themselves tangled up in a housing crisis.

It is ironic that the Fed puts out this data on a quarterly basis, as if to show off its handiwork, its success, as measured by how much of the wealth is increasingly concentrated at the 1% of households, and how every time their wealth appears threatened even a tiny little bit, the Fed comes up with new bailouts, rate cuts, and other shenanigans, such as the repo market bailout recently. This data is like a report card that the Fed issues of how successfully its policies help the 1% gain an ever-larger share of household wealth.

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A French economist finds that America’s tax structure lies at the heart of inequality.

As the old refrain goes, “Nothing can be said to be certain except death and taxes.” However, as University of California, Berkeley, economists Emmanuel Saez and Gabriel Zucman point out in their new book, The Triumph of Injustice: How the Rich Dodge Taxes and How to Make Them Pay, for the corporations and the wealthy, there is no certainty about paying taxes at all. In fact, in the United States, evading taxes has become as simple as creating a shell company in Bermuda.

Saez and Zucman outline how tax injustice has led to vast inequality in wealth and power, but they also offer some solutions – some of which have been embraced by Democratic presidential candidates Elizabeth Warren and Bernie Sanders. They have also started a raging debate – mostly among economists – about their facts and their prescriptions.

Gabriel Zucman spoke by phone with Capital & Main from his Berkeley home about the book. This interview has been edited for brevity.

Capital & Main: You open your book with an anecdote from a presidential debate between Donald Trump and Hillary Clinton, in which Trump is challenged that he didn’t pay federal income taxes one year and he responds, “That makes me smart.” That exchange must have told you something about our political culture.

Gabriel Zucman: I think that comment reflected two things. One, it has become common for some billionaires to pay very little in taxes, and second it has also become accepted, at least in some parts of the population, for them not to pay taxes, which reflects the dramatic changes in social norms that have happened in the U.S. and the triumph of a certain ideology according to which taxes are a bad thing and that it is morally right and a good thing for everyone not to pay taxes. More importantly, Clinton didn’t have a good answer to that. She had lots of technocratic fixes to the tax system but not [a] big and radical and compelling solution to the problem of tax injustice. That’s why we wrote the book — we wanted to understand why the U.S. arrived at that point where some billionaires don’t pay anything and they brag about this.

Can you describe the state of our tax system in a way that a layperson can grasp?

When you take into account all taxes paid at all levels of government – federal, state and local taxes – the U.S. tax system looks like a giant flat tax where each group of the population pays about 25 to 30 percent of their income in taxes except the very, very wealthy who pay 23 percent, a lower rate than the working class and the middle class. So the short characterization is that the U.S. tax system is a giant flat tax that becomes regressive at the very top.

Well it’s now a part of any Democratic candidate stump speech that Mark Zuckerberg or Warren Buffett pay less as a proportion of their income than their secretaries or gardeners. How did we get to a situation where that assertion is actually true?

The main reason is the big decline in capital taxation. For instance, the corporate income tax which historically was the main tax paid by the wealthy, which used to be big in the 1950s and ’60s, now almost has disappeared. And other forms of capital income [are] also taxed less and less – dividends are taxed less than wage income, same for capital gains, same for retained business profits. So you have this process where capital income is taxed less and less and at the same time labor income is taxed more and more because of the rise in payroll taxes. That’s the key driver of what has happened to the progressivity of the U.S. tax system.

Your colleague Thomas Piketty’s most recent book is called Capital and Ideology. Let’s focus on the ideology part of this for a moment because that deals with a society’s and a people’s belief systems. It seems like you are arguing that the media, think tanks, conservative politicians have convinced people who don’t have wealth that the people who do have it deserve it, should keep it and if you tax them bad things will happen

Yes, that is exactly what has happened. And what we are trying to do in the book is ask, what’s the merit of this ideology? Do we see that when we tax capital less do we have more growth and more income for the rest of the population? And what we find is that there is no evidence. When you tax capital less and less, what you get is that the wealthy have lower tax rates, and there is no evidence that it benefits the rest of the population in any measurable way. The main effect is that it boosts inequality because the wealthy can just save and reinvest a higher portion of their income and you have a snowballing effect where wealth is taxed at a low rate and is saved again adding up to more wealth and so on.

One of the interesting things you point out in the book is that during a number of periods the U.S. led the world in progressive taxation and tax innovation.

Yes, the U.S. invented some of the progressive fiscal institutions. For instance the highly progressive income tax system with marginal tax rates of more than 90 percent in the middle of the 20th centuryThat is a U.S. and to some extent a U.K. invention. No continental European country, not even Scandinavian countries, ever had such high marginal income tax rates. The same is true for the second key U.S. invention, which is the very progressive estate tax with estate taxes up to 80 percent from the 1930s to the 1980s which no continental European country ever had. So you have these two traditions in U.S. history – a sharply progressive fiscal tradition and also an anti-tax, anti-government and anti-democracy in the Southern states and in many ways associated with slavery. We contrast in the book states like Massachusetts, which taxed wealth as far back as the 17th century, and states like Virginia, where taxes where kept low because slaver owners were afraid that taxes would be used to abolish slavery.

You write that what we have now is this flourishing tax-avoidance industry that employs hundreds of thousands of lawyers and accountants that help the super-wealthy and corporations shelter their money. You mention off-shoring money in places like Ireland and Bermuda. How does this work?

It’s quite simple. Companies try to locate their profits in low tax places. And the way to do that is by manipulating the price of inter-group transactions like inter-group purchases of goods and services or by locating assets in low-tax countries. The most striking example is Google, which, just a few months before being listed as a public company in 2003, sold its own intellectual property, its own algorithms, to its Bermuda subsidiary. So ever since then the Bermuda subsidiary has been the legal owner of the right to use these intangibles for the non-U.S. market and licenses the right to use its technology to Google affiliates all over the world and receive the royalties. Subsidiaries in Germany or France pay billions of dollars in royalties to the Google holding company in Bermuda, reducing the tax base of Germany and France and increasing it in Bermuda by the same amount as the tax rate in Bermuda is zero.

You have some policy proposals for dealing with this. Put a stop to companies’ ability to do this, penalize countries that allow these strategies, and somehow integrate policies on a global scale. That’s a big political lift.

The main idea is pretty simple. Some countries choose not to collect taxes with zero tax rates, but the U.S. should act as the tax collector of last resort. If these profits are booked in Bermuda and taxed at zero percent, the U.S. could say, “Okay, we are going to tax those profits at, let’s say a U.S. rate of 30 percent.” And if these taxes are booked in and taxed in Ireland at the rate of five percent, then the U.S. is going to tax these profits at 25 percent, so if these companies choose to move their profits to places where they are taxed at low rates we can always say, “Okay, don’t pay taxes abroad, but you have to pay the difference in the U.S.” Nothing prevents the U.S. from doing that. Sometimes people have the view that there is nothing you can do to make the corporations pay in a globalized world because they will always move to low tax places but that’s wrong.

Why is the pressure to abandon progressivity happening all over the place? Every year some journalist writes an article about “The decline of the Swedish Welfare State.”

It’s happening everywhere but not at the same pace. The U.S. is the most extreme case of a country that used to have perhaps the most progressive system in the world but now has this particularly regressive tax system. The reasons are ideological and political. And also the failure to think about the real challenges of globalization, a kind of intellectual laziness where people think that in a globalized world nothing can be done. We are trying to explain how globalization and progressive taxation can be made compatible.

The part of your list of proposals that has received the most attention is the wealth tax part of it, perhaps because Elizabeth Warren and Bernie Sanders have embraced some version of it. What would a wealth tax do?

The wealth [tax] is the proper way to tax billionaires. Because these extremely wealthy individuals can own a lot of wealth while reporting little taxable income. Warren Buffett is worth $80 billion, but he instructs his company Berkshire Hathaway to not pay dividends, so his taxable income is low compared to his true income or his wealth. So even if we increase the marginal tax rate to 90 percent it makes no difference to Warren Buffett’s effective tax rate. He would pay maybe $3 million in taxes, which is nothing compared to his true wealth. So the proper way to tax the super-wealthy is through a wealth tax. The wealth tax is not going to replace the income tax, but it has a role to play in the overall tax system along with more progressive income taxation, along with better corporate taxation and estate taxation.

Let’s deal with the arguments against progressive taxation and wealth taxes. The wealthy will simply find more complex ways of avoiding paying these taxes, too heavy of a tax on capital and wealth will actually hurt the economy and workers, and conservatives like to say progressive taxation is confiscating people’s money who earned it and giving it to people who didn’t.

The moral case against taxing the rich is very weak because while wealthy entrepreneurs have great ideas and work a lot, the reason they have become wealthy is because in many cases they have been able to use the public infrastructure, they had workers who were trained by public education institutions funded by taxes, and they became wealthy because government institutions allow robust economic markets to exist – so you don’t create a billion-dollar fortune just by yourself. It is something that is created by society to a large extent. In terms of how much revenue there is, we have a calculation in the book that says, here is how much revenue that could be collected from the top one percent if we really wanted to maximize tax collection. Today the top one percent earns about 20 percent of U.S. income and they are taxed at a rate of about 30 percent, so they pay about six percent of the national income in taxes. And what we are saying is that they could pay as much as 10 percent. So just by taxing the one percent more we could generate four percent in extra tax revenue.

How much tax revenue are we losing with all of the tax havens, shell companies and other schemes that the wealthy and corporations have set up?

It’s hundreds of billions of dollars.

You say that the stagnation of the income of the working class over more than a generation is the most fundamental development in the U.S. economy. We have a presidential campaign where the challengers to Trump are going to have to win states where a sizable percentage of the voters are non-college-educated whites and there are slow rates of ethnic and racial change. Can this strategy of taxing the wealthy appeal to these voters?

Look at opinion polls of the Warren wealth tax, which is two percent tax above $50 million and a three percent tax above $1 billion – when you ask voters if they support the policy even before you tell them how the money would be used, an overwhelming majority of the electorate is in favor of taxing the super-wealthy – about 70 percent. So I think the evidence suggests that this kind of redistributive tax policy is extremely popular and could be a winner in the general election.

It seems that a good deal of the anti-tax sentiment is based on the fear or assertion that higher taxes means more money is directed towards “foreigners, immigrants and “darker people” — in other words, the “unworthy” poor or “lazy.”  It splits working class people apart.

It’s how the Republican Party has been able to be successful electorally with a low tax on the rich with anti-civil rights and now with their anti-immigration platform.

The left in all societies creates institutions to mitigate some of the more destructive dynamics of capitalism — unions, the Environmental Protection Agency, public education. What new institutions will have to be created to enforce the proposals you are advocating?

A Public Protection Bureau has to be created.

That sounds like something from a Monty Python skit. I can hear Mitch McConnell making fun of it now.

The idea is that tax avoidance [and] tax evasion [are] largely driven by the industry that supplies tax dodges – the supply side of the market for tax evasion. If you want to reduce tax dodging you have to regulate that industry. If new schemes are created to avoid taxes this agency should be informed by law of this new product. And if this product violates the economic substance doctrine, which is a tax law that is designed to outlaw transactions that are only designed to avoid taxes, then they would be illegal. Another institution is the wealth tax. The new institution that we are proposing is the progressive tax on wealth and on billionaires. That would be a new invention. We are saying that the U.S. innovated in the past with the income tax, the estate tax, and now we can innovate with a very progressive wealth tax.

You put a lot of emphasis on the international dimension in all of this — that there has to be a great deal of international agreement to get rid of these tax dodging schemes.

You can have tax harmonization and tax coordination as a function of globalization too. You can make these policies a central part of free trade agreements. You can have a more sustainable globalization that emphasizes cooperation instead of competition.

You end your book with a discussion of politics and power. If we can’t muster the politics and power to dramatically alter the current situation, my sense is that inequality will increase with ongoing popular protest like what is happening in Chile at the moment, repression and authoritarian regimes as a response. Why should we be more optimistic?

The main risk is the one that you describe, but I think that the reason to be optimistic is that when you look at history and you see change happen. Actually the debate that we are having today is very much the same that you had in the late 19th century and early 20th century, where you also had rising inequality, an unfair tax system and a growing demand for progressive taxation. Many people at the time said it will never happen, it will never work and the rich will evade – and it happened.

In 1913 the [U.S.] income tax was created, and in 1917 the top marginal income tax rate was increased to almost 70 percent. So in just a few years you moved from a tax system that was extremely unfair — that was relying on tariffs and no income tax – to a tax system where the very rich, the highest income earners are taxed at 70 percent. So history is full of U-turns and dramatic reversals. That’s the main reason to be optimistic.


To reduce inequality, tax inheritances

Henry J. AaronThursday, November 14, 2019

Editor’s Note:

A version of this op-ed was originally published in the New York Times on October 15, 2019.

If you play by the rules, working to earn a living and saving to provide for the future, taxes take a piece of your earnings. If you win a state lottery, you owe tax.  But if you get lucky in the lottery of life and land an inheritance, you owe no federal tax.  That isn’t fair, is it?  Extending the federal income tax to include inheritances would end that inequity.

Extreme inequality is troubling for various reasons. It fosters gross and wasteful consumption.  More importantly, it undermines the principle of political equality: Nearly unencumbered transfers of wealth permitted under current law perpetuate those imbalances, creating dynasties of the rich and hampering economic and social mobility.

Henry J. Aaron

The Bruce and Virginia MacLaury Chair

Senior Fellow – Economic Studies

“Ah,” you may be thinking, “Don’t we have an estate tax to break up wealth dynasties?”

Not ‘have’–‘had.’

As recently as 1976 the estate tax applied to more than 7 percent of all descendants at a top rate of 70 percent.  In 2019, however, just 0.07 percent of all descendants will owe any estate tax, a 99 percent decrease. Successive increases in the estate tax exemption over the last political generation have let all but the wealthiest — and those who neglect to consult lawyers and accountants — escape estate tax almost entirely.

The latest increase in the estate tax exemption came in the 2017 Tax Cuts and Jobs Act.  It doubled the already generous estate tax exemption from $11.4 million to $22.8 million for couples, a limit that, as under prior law, will rise with inflation. Congress hid much of the long-term revenue loss from the 2017 law by scheduling many provisions, including the estate tax exemption increase, to expire in 2026.  It is a good bet, however, that before 2026 rolls around Congress will make the exemption increase permanent.


The main entrance of a for sale, $37 million dollar luxury home at One Pelican Hill Road North is seen in Newport Beach, California April 13, 2012. It has 17 bathrooms, a 17-car garage, marbled floors, gold leaf ceilings, a vineyard, horse stables, tennis courts and a lake - and occupies the largest parcel of residential real estate on southern California's exclusive Newport Coast. This empty, never-sold, soon-to-be-auctioned mega-mansion is a gaudy symbol of the runaway extravagance that gripped the top end of the U.S. real estate market before the housing crash of 2008. Once valued at $87 million, it could be sold for a quarter of that price at an auction next week. Picture taken April 13, 2012. REUTERS/Lori Shepler (UNITED STATES  - Tags: BUSINESS REAL ESTATE) - GM1E84I09X002


Progressive wealth taxation

Emmanuel Saez and Gabriel ZucmanThursday, September 5, 2019

bernie sanders


Repeal or replace: Two opposing estate tax proposals

Robert PozenMonday, March 11, 2019

Democratic 2020 U.S. presidential candidate and U.S. Senator Elizabeth Warren (D-MA) speaks at the New Hampshire Democratic Party state convention in Manchester, New Hampshire, U.S. September 7, 2019.      REUTERS/Gretchen Ertl - RC11A0B565F0


What’s Elizabeth Warren’s wealth tax worth?

Isabel V. Sawhill and Christopher PulliamMonday, September 9, 2019

The soaring exemption accounts for only part of the erosion of the estate tax.  Well-remunerated tax attorneys routinely help the wealthy avoid estate tax in other ways as well.  For starters, the wealthy can make annual, tax-free gifts to children and grandchildren and use other tax-avoidance devices.  Business owners can transfer many times more with little or no estate tax because gross understatement of the value of businesses for estate tax purposes is often legal and, when not legal, poorly policed. These are just a few of the myriad and commodious avoidance devices that led Ed McCaffery, law professor at the University of Southern California, to describe the estate tax as close to a “voluntary tax.”

Given the emerging concern about inequality, it is hardly surprising that two Democratic presidential candidates have proposed large plans to curb wealth concentration.  Senator Elizabeth Warren proposes an annual tax on net wealth—starting at 2 percent on holdings of $50 million and rising 3 percent starting with holdings more than $1 billion. Senator Bernie Sanders first proposed to cut today’s estate tax exemption – from $22.8 million for couples to a still-generous $7 million – and boost today’s flat 40 percent rate to a range of 45 to 77 percent, with the highest rate applicable only to billionaires.  Later, he also proposed a wealth tax that would impose rates of up to 8 percent per year on wealth holdings exceeding $10 billion and yield more than twice as much revenue as Warren’s.

Despite vigorous advocacy by these two candidates, the chances of enacting and — of equal importance — sustaining such taxes are poor.

Opponents of the estate tax have successfully branded the estate tax as a ‘death tax,’ arousing primal instincts against burdening a time of emotional pain and loss with an economic penalty.  As a result, the estate tax continues to poll badly, even though almost none of the poll respondents will face the tax. Critics have conjured up a claim that broader estate taxes would threaten the ongoing viability of family farms and small businesses.  Even before the 2017 legislation doubled exemptions, fewer than three dozen decedent owners of small businesses and farms would have faced estate tax, and no one has shown that the continuing viability of any of those enterprises would have been threatened by the estate tax.  Nonetheless, many members of Congress say they believe these unsupported claims.

Prospects for wealth taxes are poor, in part because the wealthy have shown themselves quite able, with the help of current campaign finance laws, to shape tax legislation in their own interest.  Nor is foreign experience encouraging.  A dozen or so countries used to impose wealth taxes, although none at rates approaching those Warren and Sanders advocate. All but three countries have abandoned them.  One reason is that a wealth tax can work only if the value of all or most assets of every potentially taxable person are valued every year.  That is a Sisyphean task under the best of circumstances.  It would be an impossible challenge in the United States where chronically underfunded tax administrators even now cannot prevent hundreds of billions of income tax dollars from being lost each year to evasion.

Another reason a wealth tax would struggle to sustain itself is that even the seemingly modest 2% or 3% rates of Warren’s tax are close to confiscatory.  The safe rate of return on financial assets is about 2 percent a year more than inflation. The wealth tax, at rates that Warren and Sanders have proposed, would take all that return or more, and capital income would still face federal and state income taxes. Senator Sanders has candidly stated his belief that billionaires should not exist in the United States.

Fortunately, a better alternative is available — taxing inheritances.  Here, in brief, is how such a tax would work: Cumulative inheritances over a lifetime exempt amount, plus gifts over an annual exempt amount, would be taxed to the recipient.  The ultimate tax rate paid would be the inheritor’s personal income tax rate plus a surtax, or some flat percentage, whichever is greater.  The size of the exemptions and the rates would determine how much tax would be collected.

Preliminary estimates by the Urban/Brookings Tax Policy Center indicate that a tax on cumulative inheritances in excess of $1.5 million plus annual gifts more than $16,000 a year, levied either at a rate of 35 percent or at the recipient’s income tax rate plus 15 percent, whichever is higher, would yield more than $600 billion between 2022 and 2030.  That yield is two and one-half greater than the current estate tax is estimated to yield if the exemptions introduced by the 2017 tax cuts remain in place after 2025.

A more aggressive inheritance tax would yield still more.  If inheritances above $1 million were included in the income tax and the minimum tax rate was 40 percent, the tax would yield nearly $1 trillion, four times the estimated revenue from the current estate tax.  The annual yield of the inheritance tax will grow, as the base of the tax, total inheritances, cumulates over each taxpayer’s lifetime.

An inheritance tax has two key advantages.

The first is that it is transparently fair.  By taxing windfall inheritances along with earnings and capital income, it would correct the worsening unfairness of taxing income from work and saving but leaving inheritances untaxed.

Critics of an inheritance tax might respond that the person who gave you the inheritance already paid tax.  But that just isn’t so for most bequeathed property. According to data compiled by the Federal Reserve most inheritances consist of gains on financial assets or on businesses that were never taxed and under current law never will be.

The second major advantage of an inheritance tax is that it creates an incentive to divide estates among multiple inheritors.  For the wealthy, splitting bequests among multiple heirs reduces tax liabilities. Splitting estates will modestly reduce the concentration of wealth — and of its attendant economic and political power — a primary goal of any of these reforms.

Taxing inheritances is not the only way to reduce inequality. Boosting top-bracket income tax rates and ending the practice of taxing capital gains at lower rates than are applied to earned income are at least as important.  So are measures that equalize pre-tax income, such reducing the cost of college or other post-secondary training for those of modest means.  But measures to narrow inequality in pre-tax incomes will take time to enact and even more time to take effect.  Meanwhile, a little help from an inheritance tax would be welcome.  It is a tax that fits logically within our current income tax framework.  It cannot reasonably be cast as a ‘death tax,’ and will be seen as fair.  And it will help reduce the deficit or pay for needed public services.