SYNOPSIS: The repeal of the inheritance tax is a great example of the power of the rich
The distribution of wealth does not look like the "bell curve" beloved of statisticians. Instead it is best described by a "power law," a sort of elongated ski slope. Power-law distributions, unlike bell curves, have a lot of their mass far out in the right tail -- which means, in this particular case, that a large share of the total wealth is held by a small number of families.
To give you an idea of the implications: You may or may not be impressed to hear that 25 percent of U.S. families own more than 80 percent of private assets. But well over half of the wealth of that 25 percent is actually in the hands of the top fifth of that group, that is, the wealthiest 5 percent of families. Roughly the same proportion of that wealth is actually in the hands of the top fifth of that group, the top 1 percent of families. And although our statistical vision starts to blur at high altitudes, it's more or less certain that most of the wealth of the top 1 percent is actually in the hands of the top 0.2 percent, and so on up to Bill Gates.
The hate-mailers and right-wing pundits are already firing up their word processors. Wealth distribution is one of those subjects where even a bland statement of the facts is met with furious attacks on the messenger. If someone says that a small number of people own a lot of assets, and does not assert in the same breath that this is a good thing -- the politically correct statement is not that people "have" wealth but that they "create" it -- he will immediately be denounced as a dangerous leftist.
And the protesters have good reason to be upset: it's important to suppress these facts if at all possible. If middle-class Americans had any realistic sense of how rich the rich really are, policy moves that cater specifically to the wealthy -- like the repeal of the inheritance tax, voted by the House last week -- would face a much rougher ride.
The current inheritance tax applies only to estates of more than $675,000, with the cutoff scheduled to rise to more than $1 million over the next few years; as a result, only about 2 percent of estates pay any tax at all -- a fact that opponents of repeal tried in vain to publicize. But even that 2 percent figure quite literally doesn't tell the half of it. Because of the power law, a good deal more than half the value of that top 2 percent of estates actually lies in the top 0.4 percent. And since only the amount over $675,000 is taxed, and the tax rate rises with the size of the estate, the bulk of each year's inheritance tax is actually paid by only a few thousand multimillion-dollar estates. This really is a tax levied almost entirely on the very, very well off.
So why did most members of the House vote to repeal a tax that yields $30 billion per year, yet doesn't touch the vast majority of their constituents? Perhaps they were moved by sob stories about salt-of-the-earth family farmers and small-business men forced by estate taxes to abandon their heritage -- although a quick check of the facts would have revealed that such stories are actually quite uncommon, and that the compromise bill offered by the Democratic leadership would have made them vanishingly rare.
Or maybe Congress is really, truly worried about incentives -- about the potential entrepreneur who thinks to himself: "Why bother? Even if I make millions, I can only pass 61 percent of it to my kids. So I'll stick with my job as an insurance salesman."
Or, finally, maybe Congress just figured that $30 billion a year isn't a lot of money -- although it is roughly what the federal government spends on the earned-income tax credit, a program that helps millions of poor workers but draws a constant barrage of criticism from economy-minded conservatives. Oh, and it's more than twice our total spending on foreign aid, and around five times as much as the non-military component of that aid.
But if you believe any of these explanations of last week's vote, I've got this bridge you might be interested in buying. The truth is that the vote to repeal the inheritance tax was just an unusually blatant demonstration of a much simpler power law -- the one that says that money talks.
Originally published in The New York Times, 6.14.00