A Tax Break's Unfortunate Legacy

Washington Post • May 25, 2001

By William H. Gates Sr.

The power of organized money has won another round, as the Senate's vote to repeal the estate tax has demonstrated.

The proponents of wholesale repeal were able to wage a campaign based largely on symbolism and distortion of fact. They cited the plight of farmers, but when a reporter asked for living examples of real small farmers who had lost their farms, they couldn't be found. The deliberative tradition of the Senate caved under the pressure of ideology over reality.

Missing has been a debate about the potential dangers of eliminating our estate tax. What will it cost in lost federal revenue? How will state treasuries manage without their revenue linked to the federal estate tax? What effect will it have on charitable giving and the nonprofit civic sector? What happens to democracy and equality of opportunity in a society with such great inequities of wealth and power?

And more technical questions: Are there ways to reform the tax to address concerns about family enterprises? How would a repeal of the "stepped up basis," which exempts estates from capital gains taxes, be administered? Instead of discerning these vital questions, our elected leaders have punted. By structuring full repeal to take effect 10 years down the road, they have obscured the cost and downside of repeal and shifted the burden onto future generations.

A hundred years ago, we did have a rigorous debate about the need to tax large accumulations of wealth. Then, as now, wealthy people took a stand in favor of inheritance taxes. Andrew Carnegie personally testified before Congress in favor of the estate tax.

The petition effort that I launched with Responsible Wealth is a similar effort. More than a thousand prominent investors and business leaders -- from families that have paid or will pay estate taxes -- have called for reform but not repeal of the tax. Many of the signers are owners of small businesses who understand that concentrations of wealth and power are not friendly to small enterprise.

The fate of the estate tax goes to the heart of the American experiment. What has made America distinct from Europe is our effort not to create hereditary aristocracies and our suspicion of concentrated wealth and power weakening our democracy. It was understood a century ago that the estate tax was an attempt to balance conflicting American values: on the one hand, our respect for private enterprise and personal wealth, and on the other, our concern for democracy and equality of opportunity.

Today's debate is missing this historical concern. In its place, we have come to worship a myth of individual merit and success. But the unspoken little secret is that great wealth is never entirely the result of individual achievement. We underestimate the role of luck, privilege and God's grace in our good fortune. And we dismiss the incredible contribution our society makes to creating the fertile soil for successful private enterprise through public investment.

My own perspective celebrates individual achievement and the hard work of entrepreneurs and leaders in our free-enterprise system. But I also recognize that society has played an important role in the creation of wealth. Take anyone of the Forbes 400 and drop them into rural Africa and see how much wealth they would amass.

Imagine that two infants are about to be born. God summons their spirits to his office and makes them a proposition. One child will be born in a prosperous industrialized country, the United States. Another child will be born into a country of society-wide abject poverty. God proposes an auction for the privilege of being born into the United States. He asks each new child to pledge a percentage of his earthly accumulation at the end of his life to the treasury of God. The child who writes the highest percentage will be born in the United States. Does anyone think either child would pledge as little as 55 percent, the current top estate-tax rate?

This is not a slight of the vibrant community and human qualities that exist in less-developed countries. I have traveled the world in my work on health and am struck by the quality of the human spirit. But our society has facilitated wealth-building by creating order, protecting freedom, creating laws to govern property relations and our marketplace, and investing in an educated work force. What's wrong with the most successful people putting one-quarter of their wealth back into the place that made their wealth and success possible? Many people repay their universities this way. Why not their country?

For the sake of our grandchildren, I hope we can revive this vital debate. It may not be happening in the halls of Congress, but perhaps we can take it to the town square.

The writer is co-chair of the Bill and Melinda Gates Foundation and co-founder of Responsible Wealth's Call to Preserve the Estate Tax.

Copyright 2001, Washington Post.