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William J. Bernstein

The Estate Tax — Does It Really Matter?

After abortion and gay marriage, few topics polarize the body politic as does the looming repeal of the federal estate tax early in the next decade. The right wing excoriates the "death tax" as an unfair double levy on our societyís most productive members, while the left worries about the erosion of the very fabric of the nation through the creation of a vast and powerful class of hereditary wealth. Less well-noticed is the fact that the venerable common-law strictures against the creation of perpetual family trusts are slowly falling by the wayside; recent statutory changes in Illinois, Alaska, Delaware, Idaho, North Dakota and Wisconsin now allow these perpetual trusts in one form or another.

I do have definite opinions on the matter, but I shanít reveal them here. Thatís because I donít believe estate taxation matters very much.

The reason is simple: even if the estate tax is permanently abolished, and even if perpetual trusts become the norm nationwide, long-lasting hereditary wealth is a pipe dream. Five powerful factors militate against it. While none is sufficient in and of itself to prevent permanent family wealth, together they virtually preclude its existence. The factors are as follows:

So letís tote up the damage. In a best-case scenario, we begin with a long-term after-tax portfolio return of one percent. Subtract out one percent for expenses, two percent for generational attrition, two percent for spending by thrifty beneficiaries, and two percent slippage of the relative standard of living because of increasing productivity. That totals up to a loss of six percent of relative spending power each and every yearóin other words, a halving of relative standard of living every dozen years or so.

And thatís the best case. How many families are able to maintain efficient and successful portfolio management for generations at a time? And how likely is it that the third and fourth generations of unearned wealth will be happy with distribution rates of a couple percent? Toss in a decade or two of lax or unlucky portfolio management and a few generations of spendthrift heirs, and familial wealth shrinks faster than the prawn plate at a Cajun wedding.

True, there are several blueblood lines that have cheated the ages, the Rockefellers coming most easily to mind. But the continued wealth of that storied family has as much to do with the transmission of old John Dís strength of character as with the transmission of his bank accounts. (The anomalously high security returns of the twentieth century didnít hurt either.) And even so, itís highly likely that a hundred years from now, the phrase "rich as Rockefeller" will draw blank stares.

Sic transit pecunia: While the permanent abolition of the estate tax, should it come to pass, will carry with it enormous symbolic impact, we donít have much to fear from an all-powerful class of hereditary wealth.

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