The Tax That Started the Tea Party

September 3rd, 2010 at 6:03 am | 65 Comments |

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Jane Mayer in the New Yorker pursues what I think has been common knowledge in some realms, namely, an attempt by the billionaire Koch family of Wichita, Kansas to catalyze and influence opposition to the Obama administration.

That more has been afoot than meets the eye is not news.  After Rick Santelli, a CNBC reporter, called on the floor of the Chicago commodities exchange for folks to converge in Chicago for a Tea Party, a spontaneous series of demonstrations emerged.  Being a former intelligence officer, however, I could not but note that a tell-tale clue had been left that sophisticated hands had long been at work.  Apparently, chicagoteaparty.org had been registered quietly as a domain name the preceding year, in 2008, before the election had even taken place.  A little Googling seemed to connect those strings (and more) that Jane Mayer has identified related to the Koch brothers.

But why the Koch brothers?

At least one obvious answer is the estate tax.  The estate tax for the past century has been a mechanism by which majority control of our major family held corporations has since 1900 systematically been transferred to the public, either as direct payment to the federal government or as donation to charitable foundations.  It is little discussed or understood outside of rarified circles, but as an objective matter — agree or disagree with it — the estate tax has been at the core of America’s particular system of capitalism. (It may take a separate discussion to explore the magnitude of the impact of the estate tax on 20th century American economic and social capitalism.  Wait for it.)

Until the Bush tax cuts, the estate tax stood at 55%.  As a result of the tax cuts initiated by the Bush administration, by 2010, it was zero.  Unless Congress acts, it will return full-force to 55% in 2011.

To understand the impact on the Koch family, consider that some reports place the wealth of the Koch brothers at $36 billion dollars, their company second at times only to Cargill as the largest privately held company in America. To the Koch family, a 55% estate tax means they must contemplate a corporate re-organization, the result of which would conceptually be to go public and sell off 55% of their shares in order to pay the tax or, more likely, that they would donate the majority of shares to a charitable foundation.   Either way, the estate tax at 55% would entail a transformation of Koch Industries and a diversification of ownership, with ramifications for the family’s long term control.

If the Koch family concerns do indeed total $36 billion, every 1% change in the estate tax has an impact of $360 million upon them personally.  Every 10% change has an impact of $3.6 billion.  A similar calculation could be applied to Rupert Murdoch’s concerns, as he had to become an American citizen, subjecting him to the U.S. estate tax, in order to acquire American media.  It is no wonder that both families would have an interest and ability to direct virtually unlimited sums of money to influence American political outcomes.  Whether by creating and funding a wide and mutually reinforcing network of think tanks, or seeding and funding local grass roots organizations, it is no surprise to learn that a sophisticated and well-funded hand has been active.

It is also interesting to note the divide that now exists in the corporate and media landscapes based possibly on the ramifications of the estate tax.  NBC (GE – once Edison’s Company), ABC (Walt Disney’s company), MSNBC (a Microsoft/GE partnership) are all now publicly traded and controlled and, like all publicly traded American corporations, would no longer have an institutional interest in the estate tax.  Fox and the Wall Street Journal, controlled by Murdoch, would have an institutional interest.

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65 Comments so far ↓

  • drdredel

    Fake America!!! I’m stealing that. Awesome.

  • busboy33

    “The estate tax for the past century has been a mechanism by which majority control of our major family held corporations has since 1900 systematically been transferred to the public, either as direct payment to the federal government or as donation to charitable foundations.”

    Interesting. I was under the impression that the Estate Tax was the mechanism wherein Estates in excess of a defined value (1.2 million or such) paid an additional tax upon inheritance. The Estate of the desceased was so large that the inheritor had to pay a tax to the Feds in addition to State inheritance taxes, under the theory that if you are inheriting millions and millions of dollars you’re getting that much cash because of the unique benefits of living in Capitalist America, and America deserves a little taste.

    I had no idea it was a corporate title tax.

    I wonder why they use the word “Estate” then? And why did the GOP change the name of it in their speeches to the Death Tax? That doesn’t have anything to do with Corporate ownership. Strange.

    Can’t weait to read your in-depth analysis of the tax.

  • C.H. Douglas

    Co, the links didn’t die of their own weight, nor were they debunked. As I observed, I invited readers to follow the links you supplied and read them carefully, including the so-called debunking. It seems to have dawned on McArdle in her updates that there was a connection between Koch’s and the organization that gave rise to Freedomworks, Dick Armey’s organization which from the beginning has given so much logistical support to Tea Party efforts. By the way, in another post, you refer not to the estate tax, but to the reduction in capital gains taxes…. good point…. perhaps that was freudian on your part. What is the impact of the capital gains tax vs. the estate tax on the finances of the super-wealthy? Having built their companies from the much smaller concern of their father, the capital gains tax for them might be a major consideration as well. It’s worth understanding.

    Good Question and comment, Fake America, which is to say admirably substantive in comparison. First of all, there had been mammoth amounts of funding for years going into such places as Cato and the American Enterprise Institute to develop opposition to the estate tax, (including rebranding it as the death tax.) The Koch’s would not deny (I don’t think) their leading funding of that agenda in think tanks. Those efforts in part produced the 2001 tax cuts and the elimination of the estate tax. (Surely, Co Independent, even if you would discount inquiries into the Koch’s relationship to the tea party, you would not deny their funding of institutions that are central in opposition to the estate tax? It doesn’t discredit the Koch’s; it’s just factual, is it not?)

    The timing then should be understood in this way. The 2001 tax cuts produced a gradual reduction until 2009, and then whole-sale elimination in 2010, of the estate tax. Through and beyond the election of 2004, there would have been a basis for hope, perhaps even expectation, that the Republicans could retain control of the houses of Congress and of the Presidency. By 2007, the situation was dire, however. The war was going poorly and the fiscal situation was problematic. I am saying that based on a briefing I attended in Washington in the summer of 2007, the rumblings among business lobbyists on the hill were that the Republican Party’s split between social conservatives and moderates focused on business was creating a sense that the GOP was in serious trouble, with doubt growing on our ability to hold either congress or the Presidency. At that point, an alternate plan became necessary to develop leverage, to try and force a coming Democratic adminstration to adopt lower, rather than higher, taxes.

    In short, the hope had been to depend on the Republican Party and Republican control. That had to be abandoned when Republican negatives went through the ceiling.

  • Posting From Fake America

    C.H. Douglas,

    I see. So tea party funding can be seen as both re-branding of a tarnished brand as well as a bit of a late desperation move to gain leverage. With tea party protesters taking out Murkowski, giving Dems a shot in Senate races in Nevada and Kentucky, and showing up at Senator Cornyn’s offices chanting “RINO,” one wonders whether the Koch’s have released a force that will only damage the long-term viability of the Republican Party.

  • C.H. Douglas

    Fake America, I am reluctant to attribute the whole kit and kaboode to the Koch family; they are not the only ones who are affected by the estate tax. But they perhaps are the most prominent.

    There are throughout human history interesting historical parallels to attempts to mobilize the passions of populations for political leverage, which passions then cannot be controlled by hidden hands. Aristrocats in Europe regularly drummed up Catholic or Calvinist passoins in order to achieve political aims, but then saw passions over-flow in ways that they neither predicted nor desired nor found favorable.

    Watch also for tension between the the freedomworks wing of the Tea Party and other wings that have roots that are more socially conservative. If one might believe that Dick Armey is reading from a commonly agreed script, then it is clear that in 2007 there was felt a need to put the social conservative movement in a box. Where there was specific discomfort in the business world was the anti-gay rhetoric of the social conservatives and the problems it was creating for the GOP. Corporations were beginning to have difficulty supporting Republicans when they had non-discrimination and domestic partnership policies protecting their own gay employees. Now that Glenn Beck has both expressed support for same sex marriage and seized a religious mantle, the folks around Tony Perkins realize they have a major problem on their hands. They’ve been outfoxed (so to speak.)

  • C.H. Douglas

    One last comment, Fake America. The battle lines are drawing among the super wealthy. I surmise that Warren Buffett by collecting the names of super wealthy who are going to give their wealth to charity is establishing the line of defense of the estate tax. The individuals and families on his list are likely those who have already and willingly accomplished estate planning which turns the majority of their fortunes over to charitable trust in order to position in the standard manner for the estate tax. Those approached by Buffett and not on his list may perhaps be assumed to oppose the estate tax.

  • C.H. Douglas

    Busboy, that is coming. Agree or disagree with the estate tax, it is important to understand what its role has been, as well as that of the corporate and income tax. Corporate taxation, income taxation, and estate taxation have all been fundamental components of the American economic and social capitalist system for the last century. 20th Century American society was a product, for good, for bad, for both, of their impact, interworkings, and results in macroeconomic ways. Whatever level we settle upon for any of them will produce natural results also. As we discuss what levels are appropriate or healthy, or what other types of taxes should or should not replace them, it is important to understand how each influences the whole body of the American system. Like reaching into the engine of an automobile and adjusting a valve, changing taxation changes how our society functions and will produce results that are commensurate, though not necessarily desirable, undesirable, or predictable. There is no such thing as neutral policy.

  • busboy33

    I agree wholeheartedly with the “aggregate functioning beyond the parts” concept, and I also agree that whatever the primary intended impact of something such as a tax, there are anciliary impacts that while not the direct intent are nonetheless real.

    I was always of the understanding that the limit on wealthy inheritance was the primary and intended goal, whereas that caused, in an ancilary manner, the impact on large-value assets (such as high-value corporations).

    Example: Assume that the Estate Tax is set at a trigger value of 2 million. Your great-uncle dies and he leaves you 5 million worth of stock (aren’t you glad now you put up with all his “pull my finger” jokes?) from the Estate. The first two million, you get free and clear (in a Federal sense . . . there could be other State taxation issues or other inheritance taxes, but we’re just talking about the Estate Tax right now). The rest of the bequeathment (3 million total) is subject to the Estate Tax (lets say hypothetically 50%). The result would be your inheritance from his Estate would be 3.5 million worth of stock (50% of 3 million = 1.5 million + 2 million = 3.5 million). To be more accurate, you’d get 5 million, but then Uncle Sam would want his 1.5 million cut, and you would nost likely have to liquidate that value of stock to write the check.

    Here is a textbook example of Estate Tax. Take the exact same example and values, but change “5 million worth of stock” to “a painting worth 5 million”. The same result would apply. You’d owe 1.5 million, and unless you had that sitting around you’d most likely have to sell the painting to raise the payment.

    The painting example is an application of the Estate Tax that involves no corporations whatsoever. The stock example only involves corporations in an ancilarry manner (the value is in corporate ownership certificates). The issue isn’t the asset, but the value of said asset. If your Uncle left you 5 million in cash instead of 5 million in stock, the Estate tax application would function the same, but you wouldn’t have to liquidate anything (just give the Feds 1.5 mil). The Estate Tax isn’t targeted at corporations, but at “extreme” value.

    Now, private owned corporations will often trigger the Estate Tax due to their value. This can certainly cause a problem in some circumstances. For example, if you inherit a 5 million dollar corporation, and don’t have 1.5 million laying around to pay the Estate Tax, you’ll have to sell the corporation to pay the tax. That is true . . . but that is a danger with ALL inheritance taxation issues. If your Uncle dies and leaves you his house (his only asset), and you owe State inheritance taxes on the value of that house, unless you have the money to pay upfront you’ll probably have to sell the house to pay for getting it.

    (btw, There is an entire industry dedicated to preying on people in this exact real estate situation. You inherit, but your Uncle only had a Will, meaning his estate has to go to Probate. The Estate is getting sucked dry for the maintenance and upkeep costs on the house, and ewven if the beneficiary ginherits it they can’t pay the tax. Swoop in and offer them way below market value for a quick sale while they are frustrated by the system, still in mourning from the death, and panicked because of the looming tax burden. Sleazy, but perfectly legal.)

    I agree with everything you’ve said about the Estate Tax’s role in the ecconomic and capitalist system in this country for a long time. What I’m not 100% on is the tenor of your post which seemed to imply that the Estate tax had as its focus the regulation of corporations. That is a consequence, but not the intent. Its not the intent because the tax applies even if there is no corporation involved. Contrawise, even if you DO inhereit a privately held corporation, as long as its valus is below the trigger the Estate tax does not apply. Its focus is on reigning in “superwealth” inheritances, not on corporation busting. Under the same logic you could posit that its intent is to promote the sale of pieces of high art, since most people inheriting them will have to sell them to pay for the Estate Tax on the piece.

    Does the Estate tax force the Kock brothers to break up their corporation? No. In the first place, they aren’t gonna pay it . . . whomever inherits their corporation will. They want to make sure that the corporation doesn’t have to be broken up? Then just give the beneficiary enough cash to pay the inheritance tax on the receipt of the corporate title (plus enough cash to pay for the tax on the gift of money), and they can inherit the corporation and still keep it 100% private. I agree that the this is an untenable scenario . . . but the point is the tax doesn’t want the destruction of the corporation, it just wants some cash. Its intent is cash. That most beneficiaries have to sell their corporate inheritances to raise that cash is an ancillary consequence of hte tax, not its design and goal.

    If I misunderstood your implication (the Estate Tax is designed and intended to “corp-bust”) then that is my error. But if that is your contention, I look forward to the more in-depth explanation.

  • drdredel

    I don’t know if you’re right about the estate tax’s effect on the scenario involving a corporation or a painting, but if you are right, it seems like a pretty short sighted and idiotic law (not that the tax code isn’t full of those). By forcing you to sell the corporation (or the painting) they are depriving you of much more than what you’re paying them. It seems that they ought to be some sort of payment plan that you should be able to arrange so as not to have to part with the thing that’s being taxed.

    Please do something about this! :)

  • busboy33

    @drdredel:

    There are certainly negatives to the application of the tax . . . but on the other hand, that applies to all taxes. For that matter, that applies for all bills too.

    Look at it the other way. You’re not losing a Matisse, you’re gaining 3.5 million dollars. You want the Matisse, go get it. Nothing prohibits you from owning it. Like I said, if you happened to have a spare 1.5 million, then you can keep the painting no problem.

    The idea is that if wealth can be inherited without restriction (and inheritance has had a cut for the government for well over a thousand years), it will eventually grow to a socially detrimental level. That can certainly be debated, but again this is an aspect of all taxes, and especially inheritance taxes, and inheritance taxes have been around for a millenia. We were told in Law School (can’t confirm that this is actually true and not just a scare tactic) that at one time the Bar exam consisted of a single question — “What is the Rule Against Perpetuities”?, which was an obscure inheritance rule.

  • C.H. Douglas

    busboy33, thank you for the comments.

    I was indeed speaking of the effects of the estate tax, not (necessarily) its intent. But I hope you will find interesting some coming thoughts about the systemic consequences of the estate tax, the most significant of which are well beyond what many attribute to it.

    Much as I am tempted to say more here, the topic deserves it’s own piece and discussion, so I’m loathe to reveal these thoughts in piecemeal format.

  • busboy33

    @C.H. Dougls:

    The the error was on my interpretation. Fair enough.

    “so I’m loathe to reveal these thoughts in piecemeal format.”

    Congratulations — you are the first person I have ever heard of that has successfully combined “Estate Tax” and “suspense” ;)

    I am indeed interested in your next piece. You are a thoughtful writer, and I can’t ask for more.

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  • markhu

    Leave the re-distribution to the free market and keep it out of the hands of the Government. A common misconception, even sadly among fiscal conservatives, is that if Government doesn’t tax or at least regulate, then a free-market economy would be monopolized/wrecked by robber barons. Historical facts should teach us that Government becomes a tool of the uber-greedy to self-perpetuate. Think about it: who is hurt more by an aggressive estate tax: the (few) billionaires, or the (many) modest millionaires? Talk about a war on the middle class! The arbitrary limit of a few million $ is a joke in these inflationary decades. Many retirees bought a house for $30,000 in the ’60s, and now it’s worth $1 million–if they have any other assets, then they would be paying estate tax.

    Don’t forget this: (quoted from Wikipedia) “In Democracy in America, Alexis de Tocqueville argues that the abolition of the laws of primogeniture and entail in the law of inheritance of private property result in the more rapid division of land and thus force landed people to seek wealth outside the family estate in order to maintain their previous standard of living, accelerating the death of the landed aristocracy.”