Bill Gates, put a sock in it.
2/21/2001 12:00:00 AM - Bruce Bartlett
A man-bites-dog story occurred on Feb. 18, when a group of rich people signed an ad in The New York Times opposing elimination of the estate tax.
Since the estate tax only affects those with net assets greater than $675,000, it is per se a tax only on the "rich." Thus, when those upon whom the tax is levied protest its abolition, it is news. But in reality, it is not at all surprising that some rich people support the estate tax, because they benefit from it in many ways.
The truth of the matter is that those with great wealth pay little in estate taxes now. The bulk of the tax is paid by the modestly wealthy -- small businessmen, farmers and long-term investors -- who may never have had much income. They often die not even realizing that they were wealthy, but without the elaborate tax shelters of the very rich. Their assets frequently have to be sold to pay the tax collector, making it impossible to keep them in the family.
Thus one consequence of the estate tax is that it makes it very hard for small businesses to become big businesses, and for modest wealth to become great wealth. It is no coincidence that many of the richest families in the United States -- such as the Duponts, Mellons and Rockefellers -- are heirs to wealth first created during the 19th century, when there was no federal income or estate tax. Those with such "old money" have always disdained the "nouveau riche" and done what they could to protect their social position against upstarts. The estate tax serves this purpose extremely well.
It is important to note that most of those who signed the Times ad did not create the wealth that they enjoy. For example, one of the signers of the ad was William H. Gates Sr. The casual observer probably thought this is the guy who founded Microsoft. In fact, that person is his son, William H. Gates III. Gates Sr. is co-chairman of the Bill and Melinda Gates Foundation, an entity that exists mainly to keep Gates III's fortune out of the hands of the tax collector. Since Gates Sr. owes his position to the estate tax, it is hardly surprising that he supports it.
Setting up tax-exempt foundations is just one of myriad ways the wealthy have of avoiding the estate tax. Another is setting up trusts, such as those from which Steven C. Rockefeller, David Rockefeller Jr., Eileen Rockefeller Growald and other signers of the Times ad have long benefited. However, foundations are particularly useful as tax avoidance devices because they help ensure that family fortunes stay in the family.
A good example of how this operates is the Ford Foundation, which owns much of the voting stock of Ford Motor Co. This large bloc of stock has allowed members of the Ford family to remain in control of this large company since its founding. William Clay Ford Jr., great grandson of Henry Ford, is chairman of Ford Motor Company. No doubt, the voting shares of the Bill and Melinda Gates Foundation will guarantee that someone named Gates will always control Microsoft.
Ensuring continued control without direct ownership is in fact one of the principal means by which the wealthy pass on their wealth, free of tax. Ira Stoll of Smartertimes.com made this point well in a Feb. 14 commentary on Warren Buffett's statement that getting rid of the estate tax would be like "choosing the 2020 Olympic team by picking the eldest sons of the gold medal winners in the 2000 Olympics."
Buffett, No. 4 on the Forbes 400 list of the richest people in America, would have us believe that the estate tax is all that stands between democracy and plutocracy. But in fact, as Stoll points out, Buffet has already taken steps to guarantee that his son Howard will lead his empire, even though most of his wealth will be owned by the Buffett Foundation.
There are many other ways as well through which the wealthy benefit from the establishment of private foundations. For some rich families, they create employment for themselves and family members. Forbes Magazine reports that Walter H. Annanberg pays himself $500,000 per year from the foundation that bears his name. Others use their foundations to buy themselves social status or to advance their businesses. In the latter case, some foundations give money to think tanks that promote policies helpful to the underlying business or make grants to buy off groups that make trouble for them. This last is a key reason why so many corporate foundations make donations to left-wing activist Jesse Jackson's various organizations.
The point is that when rich people set up foundation, they are doing more than just avoiding estate taxes. They are able to continue using these resources for various purposes that benefit them and their families directly, while at the same time passing effective control of their assets on to their children. So the idea that these people are making a selfless gesture by giving away their wealth is utterly disingenuous. If they really wanted to make a selfless act, they would give their wealth away to existing charities, such as the Salvation Army, rather than setting up self-promoting, self-named private foundations.
Thus we see that for those who are already wealthy, the estate tax is no barrier to the maintenance of family wealth and may even serve a useful purpose in limiting competition. If the signers of the Times ad really cared about the poor and others alleged to suffer from abolition of the estate tax, they would give their wealth away and work for a living like everyone else. They will not do this, of course, because they want to have their cake and eat it, too. Keeping their wealth and the estate tax, while taking out ads extolling their selflessness, is the way to do it.