Ode to the Death Tax

On January 3, 2017, the 115th Congress is set to begin. After three long days, our representatives will count the votes cast in the Electoral College and declare to the people who will be the next president of the United States. Two weeks later, at exactly 12:00 pm, Donald Trump will be officially sworn in as the 45th president by Chief Justice John Roberts. To the consternation of most, this is really happening.

And so, on that chilly January afternoon, our government will be left in complete control of a party whose members are ideologically opposed to taxation, just as they are financed to be.

Though little talked about in the press, of deep concern to the financiers of our coming government, the speaker of the house and the president-elect himself is the estate tax.

Trump laid out his position towards the end of his speech to the Detroit Economic Club:

Finally, no family will have to pay the death tax. American workers have paid taxes their whole lives and they should not be taxed again at death, it’s just plain wrong and most people agree with that. We will repeal it.

House Speaker Paul Ryan has “long supported the full and permanent repeal of the estate tax,” because he does “not believe that death should be a taxable event, and because it acts as a direct, job-killing tax on family-owned farms and small businesses, which have historically created countless good jobs in Wisconsin and across the country over the last decade.”

That these claims about the estate tax are not backed by any evidence is, of course, of no importance to our thoughtful leaders. David Cay Johnston disproved them a decade ago in his book Perfectly Legal, and found while working for The New York Times that “one of the leading advocates for repeal of estate taxes, the American Farm Bureau Federation, said it could not cite a single example of a farm lost because of estate taxes.” Not that the third-most powerful person in the federal government should care about factual accuracy, but the repeal of a tax that affects fewer than three in 1,000 households has nothing to do with jobs or revenue, and everything to do with the structure of American society. Which is of course why he, and the owners of this country, are so concerned with its abolition.

A “death tax” was actually one of the first taxes ever levied by our young Republic after Congress passed the Stamp Act of 1797. The tax was far from revolting to the average person — since, like today, most people did not have enough assets to be affected by it — but was repealed in 1802 when our aristocratic strain got the better of us.

But the idea kept popping up, and was again signed into law by Abraham Lincoln, only to once again be repealed in 1870 at the kick-off to the Gilded Age before, finally, this pillar of American society was implemented in its modern form in 1916. This was at the end of the Progressive era, which also saw citizens force our Republic into implementing child labor laws, universal suffrage, food and drug safety regulations, (progressive) income taxes, antitrust legislation and direct voting for the Senate.

Notably, our first attempt at forming a national government, the Articles of Confederation, failed because it did not have the power to tax. But does history, or factual accuracy, really matter in the current iteration of the United States?

In fact, House Speaker Ryan, a devoted fan of Ayn Rand, whose view on “involuntary” taxation was that it is synonymous with theft, has gone so far as implying that taxation is comparable to slavery.

In the real world, taxation, which is by definition involuntary, is used at the federal level to monetize an economy allowing the issuer of the currency to draw resources towards what is supposed to be the public purpose.

This is a way of saying that taxes drive money: The government imposes an involuntary obligation on its citizens that can only be paid off with the money that it must first spend into the economy before that obligation can be paid. If you want to see where money comes from, you can open up your wallet, grab any bill denominated in dollars, and read the words “Federal Reserve Note.” It is issued by the state. (Though most money today is little more than numbers on electronic balance sheets.)

The public sector spending is, as a matter of simple accounting, private sector income. The government deficit is equaled by a non-government surplus, and the public debt is the net financial dollar assets of the non-government sector, which we call treasury securities.

Once spent into the economy, users of the currency can pay their taxes, use the money to settle debts, invest, simplify everyday economic and social activities, and save for future consumption. Hence the “this note is legal tender for all debts public and private” verbiage on the Federal Reserve Note you walk around with in your pocket.

If you don’t pay the tax, you go to prison. Not very nice, but most people who evade taxes don’t go to prison anymore, and if you avoid paying enough taxes, like our president-elect, you may even be perceived as a genius.

Since the citizens of the currency-issuing state now use the state’s money, the state now free to purchase goods, services, natural resources and labor through spending the much-needed money in order to fulfill what it’s ruling representatives define as the public purpose. In the past, this was the provision of public utilities, employment, the expansion of social insurance, infrastructure, even undoing ecological damage as we did with the Civilian Conservation Corps.

Note: Spending must come first before the taxes are paid. Alan Greenspan, a direct disciple of Ayn Rand and member of her “inner circle,” has actually testified under oath that the government does not need to tax in order to spend, and it is not financially constrained in the same way that you, me, a household or business is.

This — what we can imagine as painful — admission was under questioning by none other than Congressman Paul Ryan, who wanted to justify the privatization of Social Security as a matter of the program’s preservation. Greenspan had to explain that, as the issuer of the currency, the federal government is not financially constrained from creating the money with which to credit the accounts of Social Security recipients, and that the constraint lies in whether the real goods like food, housing, entertainment or whatever exist to be purchased with the newly created money. In economic terms, this real constraint on the government’s capacity to spend manifests itself as inflation.

In 1946, Greenspan’s temporally displaced colleague, the former President of the New York Federal Reserve Beardsley Ruml laid out in a simple paper called “Taxes For Revenue Are Obsolete” the budgetary differences between state or local governments and the federal government:

The United States is a national state which has a central banking system, the Federal Reserve System, and whose currency, for domestic purposes, is not convertible into any commodity. It follows that our Federal Government has final freedom from the money market in meeting its financial requirements. Accordingly, the inevitable social and economic consequences of any and all taxes have now become the prime consideration in the imposition of taxes. In general, it may be said that since all taxes have consequences of a social and economic character, the government should look to these consequences in formulating its tax policy. All federal taxes must meet the test of public policy and practical effect. The public purpose which is served should never be obscured in a tax program under the mask of raising revenue.

Ruml then went further to explain what Federal taxes are for:

Federal taxes can be made to serve four principal purposes of a social and economic character. These purposes are:

1. As an instrument of fiscal policy to help stabilize the purchasing power of the dollar;

2. To express public policy in the distribution of wealth and of income, as in the case of the progressive income and estate taxes;

3. To express public policy in subsidizing or in penalizing various industries and economic groups;

4. To isolate and assess directly the costs of certain national benefits, such as highways and social security.

These were the fiscal lessons beaten into shape by New Dealers through the experience of fighting both the Great Depression and the Second World War.

What does this mean from a policy perspective? Federal taxes, particularly those like the estate tax, which are imposed on very small and elite groups in society, do not fund the federal government. Their purpose is not to raise revenue, but to guide the structure of the economy and society in which they are enforced.

As the esteemed Economist James K. Galbraith points out in his critique of Thomas Piketty’s Capital:

The main point of the estate tax is not to raise revenue, nor even to slow the creation of outsized fortunes per se; the tax does not interfere with creativity or creative destruction. The key point is to block the formation of dynasties. And the great virtue of this tax, as applied in the United States, is the culture of conspicuous philanthropy that it fosters, recycling big wealth to universities, hospitals, churches, theaters, libraries, museums, and small magazines.

But thanks to anti-tax organizations such as the Heritage Foundation and language engineers such as Frank Luntz, the estate tax has become known as the “death tax,” and tax politics, in general, has shifted from a foundational “no taxation without representation” to simply “no taxation” over the last two-and-a-half centuries. Well, at least for the rich. Worse, such taxes appear as ways of “just transferring wealth through government bureaucracies,” as Paul Ryan complained about government generally in his book The Way Forward.

We would do well to remember since we will be taking many steps backwards over the next four years, what Ruml’s generation struggled through immense tragedy to learn the first time: that taxes such as the estate tax are not a way of funding social programs by taxing the rich. Financing the government or its programs play no role in their function. Rather, they are laws limiting the amount of power over society that private individuals can pass down to their children, written in such a way that incentivizes them to give away their claims on society to public purposes, of their choosing, through charities and nonprofit organizations. It is the official American policy against private monarchy, a rare occurrence even in countries that are otherwise far more progressive and equal than our own.

But that’s the problem, isn’t it? The tax marks a point in our history when “We the People” asserted that a society without hereditary monarchs in public life must be matched by an absence of hereditary monarchs in private life if it is to continue. A bold proposition, even if its implementation has been porous, at best.

Well, the kings and queens of our past have made a comeback. Walton, Koch or Trump — they will make sure that their bloodlines stay in power.