Their Parallel Universe

Estate and gift taxes seem discriminatory and unfair. Shouldn’t a wealthy family be able to pass that accumulated net worth to their own? They earned it, right? But in a society where 42% of the wealth is confined to 1% of the population, where wealth and earning inequality is only accelerating (95% of the income gains since 2008 have gone to that 1%) and access to affordable education is dropping, the ability to transfer vast wealth intergenerationally results in the creation of family dynasties. It’s the hallmark of banana republics, where a small coterie of families control the wealth, and hence the political systems, of the entire nation. In some of those banana republics, however, there is at least a growing middle class and some folks being lifted out of poverty. Not the story in the United States of America.

On September 16^th, the Census Bureau released numbers showing that percentage of the U.S. population living at or below the poverty line remained “stable” – at 15% - between 2011 and 2012, but a significantly higher number than the 11.1% in 1973. And we already know, as supported in my earlier blogs, that the middle class is shrinking both in raw numbers and in buying power. Real income is falling, energy costs have risen, tuition costs have soared, medical costs are still out of control, housing costs are rising again and discretionary income is clearly reduced for almost everybody at the bottom and the middle.

As pointed out in my September 17^th blog, Totally Growthed Out, this polarization of wealth and earning power is considered, by organizations like the International Monetary Fund, a growth killer in the long term. What’s worse, in my opinion, is that it is a hope killer as well. We know that if you generate your income by running an investment fund or investing in growth instruments, you have a wonderfully lower, capital gains tax rate. If you have enough money to have corporations that can, with good tax advice, park international earnings and values to your underlying intellectual property (e.g., patents, copyrights, etc.) overseas, you may be able to keep that money outside of the U.S. taxing arm altogether.

Think of it this way. If I transfer my most valuable patents to an overseas entity that is parked in a low tax venue and structured so that it does not report earnings to the IRS, even for products I sell in the United States, I can attribute virtually all of the profits to that patent… which is conveniently offshore.

But estate taxes are a way for dealing with assets here in the United States. “Estate and gift taxes raised only about $14 billion last year. That’s about 1 percent of the $1.2 trillion passed down in America each year, mostly by the very rich, former Treasury Secretary Lawrence Summers estimated in a December blog post on Reuters.com. The contrast suggests ‘our estate tax system is broken,’ he wrote.” Bloomberb.com, September 11^th. It isn’t supposed to work that way: “A 40 percent tax is levied at death on estates of more than $5.25 million for an individual or $10.5 million for a couple. Total lifetime giving to heirs that exceeds those thresholds is also taxed at 40 percent, preventing people from avoiding the estate tax through early handouts.” Bloomberg.

There are too many ways around that estate tax structure, if you have the money to employ the cadres of tax lawyers and super-accountants to manage your estate, carefully plan your charitable contributions and, most importantly, create massive trusts that skirt under the taxing laws most effectively. It’s not illegal. It’s just not fair. Bloomberg examined how the Walton family, the Wal*Mart heirs – estimated to be worth collectively around $100 billion, have pretty much kept the family fortune intact with these planning techniques.

“Alice Walton’s mother and brother poured more than $9 billion into trusts since 2003 that fund charitable projects like Crystal Bridges [a charitable organization that houses a substantial portion of the family’s art collection] and are also designed to protect gifts to heirs from taxation. Another Walton pioneered a tax-avoidance maneuver that is now widely used by U.S. billionaires.

“‘I hate to say it, but the very rich pay very little in gift and estate tax,’ said Jerome Hesch, a lawyer at Berger Singerman LLP in Miami who reviewed some of the Walton family’s trust filings for Bloomberg. ‘At the Waltons’ numbers, the savings are unbelievable.’… A family spokesman, Lance Morgan, said in a statement that ‘any charitable or estate planning practices employed by the Walton family are broadly available and commonly used.’” Bloomberg. It’s certainly not the Walton’s fault that they are doing what anyone else in their positions would do.

You have to be mentally ill, if you are wealthy, not to take advantage of these intentional loopholes. But given the massive need of those running for public office for campaign contributions, it cannot come as a particularly big surprise how much Congressional support there, particularly in the “this is where appropriations bills must start” House (where elections are every two years), for these tax avoidance loopholes. At time where we are hitting debt ceiling limits and the impact of the Sequester is slowly creeping into our daily lives, can we really afford to lose those tax revenues… and perpetuate a social system that is literally bad for most Americans?

I’m Peter Dekom, and short term benefits for the mega-rich may actually someday force “regime change” that could threaten that wealth in a much bigger way.