The real class war: when it comes t taxes, it's the rich against the rest of us.

April 21, 1997, is a date that will loom large in the memory of Deputy Treasury Secretary Lawrence H. Summers. Opening his mouth to comment on the ongoing budget negotiations, Summers promptly inserted his wingtip, remarking that the interests pushing for a cut in the estate tax were motivated by "selfishness". The deputy secretary went on to stress that "the overall tax package has to have as its thrust helping middle-class America". At the time, Summers probably assumed he was making a straightforward, albeit critical, observation about an economic policy debate. Turns out, he was fomenting class warfare.

Republican congressmen were the first to come out swinging: Within two days of Summers's remarks, Sen. Larry Craig (R-Id.) had whipped off a press release titled "Administration Says the Dead are Selfish." Newt Gingrich asserted that Summers "owes every American taxpayer an explanation for his unfair and irrational accusation." And the architect of the GOP tax plan, House Ways and Means Committee Chairman Bill Archer, decried: "It sounds like a comment that people who believe in socialism would make." Business and farm groups joined in the attack, with the head of the National Federation of Independent Business bashing Summers's remark as "pure ignorance." Just two days after his statement, Summers was forced to issue a public apology.

No matter. The fallout continued. The following week, pundit James Glassman suggested that a more accurate definition of selfishness might be "the powerful urge that compels bureaucrats to demand more and more of other people's hard-earned money." A seniors association submitted a letter to The Washington Times, calling for Summers to be fired for promoting "class warfare" and the tenets "of the Communist Manifesto.' GOP strategist and former Reagan speechwriter Ken Khachigian lambasted Summers for displaying "a predominant view of liberals who wallow eagerly in the rhetoric of class warfare and view with socialist passion the opportunity to confiscate another's wealth."

The beating Summers took at the hands of the right isn't surprising. Conservatives love to fling around terms like "socialist" and "class warmonger" whenever someone suggests that policy makers tend to favor rich, influential special interests. And, considering President Clinton's terror of rocking the bipartisan boat, it's no shock that Summers was encouraged to endure the humiliation of a public apology. (Particularly after Senate Majority Leader Trent Lott ominously noted that he hoped Summers hadn't damaged bipartisan efforts to reach a budget agreement.) Still, from the uproar spawned by Summers's comment, you'd have thought the deputy secretary had accused the House leadership of trafficking in child pornography.

It seems, however, that Lawrence Summers violated an even more sacred taboo. By suggesting that a select group's selfishness was driving the estate tax debate, Summers acknowledged that all tax cuts do not benefit all Americans equally, and that class is very much the defining issue.

With our tender cultural myth about how "all men are created equal," class prerogatives are a reality few Americans like to think about -- even as the affluent continue to migrate into upscale gated communities. Among the most ludicrous displays of our "classless society" delusions is the entire population's effort to classify itself as part of the mushy middle. With the gulf between rich and poor growing ever wider, identifying the middle-class American is like trying to catch a greased pig.

New York Gov. George Pataki, for example, has defined middle-class households as those making up to $175,000 a year. Similarly, Newt Gingrich claims his $171,500 House speaker's salary (and comfortable pension plan) makes him "a middle-class guy." Then, of course, there's former Rep. Fred Heineman (R.N.C.), who last year insisted that his $183,500 congressional salary and police pension put him squarely in the lower-middle class, while the true middle class comprises families making between $300,000 and $750,000. Now, I don't know how much folks make in Mr. Heineman's district, but last time the IRS checked, the median American income was less than $25,000.Fewer than I percent of U.S. households qualify for Heineman's definition of "middle class."

Only within such generous class parameters would it seem reasonable for Congress to tout as "middle-class" a budget pact that includes major reductions in both the estate tax and the capital gains tax rates. Summers's great sin, sadly, isn't that he's a socialist, but that he's the rare honest man in Washington. No matter how often Dick Armey, Bill Archer, and Trent Lott insist that these cuts are aimed at the hard-working middle class, the reality is that lowering the estate and capital gains tax rates would disproportionately benefit the wealthy. And regardless of your overall feelings about taxation, the way the rich and their political errand boys have sold their line of populist bull to the public should make the average taxpayer see red.

A Question of Distribution

A repeal or deep reduction of the capital gains tax has long been a favorite goal of the GOP. This year, congressional Republicans seized their chance to use the issue as a deal breaker in budget talks. In its June budget breakdown, the House Ways and Means Committee proposed cutting the top capgains tax rate from 28 percent to 19.8 percent. In addition, all capital gains realized from the sale of stocks, bonds, real estate, businesses, etc., that had been held for at least three years would be adjusted for inflation. Granted, this approach is less extreme than Gingrich and Co.'s dream of repealing the tax altogether, but it's still a gift to the rich. In this glorious era of bipartisanship, however, we're hearing few charges of elitism from Democrats who agreed to the budget pact. (Clinton now insists he was never "philosophically opposed" to such a cut.)

When confronted, conservatives are quick to argue that, contrary to popular belief, the majority of people benefiting from a capgains tax cut would be those in the middle class. Supporting this point, the Congressional Budget Office released a study in late May noting that a whopping 76.6 percent of U.S. families own an asset that could potentially be affected by a reduction in the capital gains tax. "It's not true ... that most people who have taxable capital gains have high incomes," the report concluded. "Nearly two-thirds of tax returns reporting capital gains are filed by people whose incomes are under $50,000 a year."

Yes, but the issue is not which income group contains the most people who stand to benefit, but which income group stands to benefit the most. Just how large a break could all those under-$50,000-income folks expect if the GOP succeeded in repealing the capital gains tax? According to the liberal research group Citizens for Tax Justice, the average savings for the 20.7 percent of households making between &30,000 and $50,000 would be a whopping $38. The richest 1.4 percent of households, on the other hand, would enjoy an average break of $21,850 apiece. All told, three quarters of the savings would go to households making more than $200,000 a year. So who's getting the real deal here?

But think about the resulting entrepreneurial boom, croon supply-side sympathizers. If only the government wouldn't tax capital gains so heavily, more people would invest more money in new enterprises, resulting in massive job creation and economic growth.

That's a beautiful theory, and it's certainly tough to argue with encouraging new enterprise. Unfortunately, an across-the-board capgains tax cut ain't gonna make it happen. Well under 5 percent of capital gains come from investments in new businesses. Cutting the rate on all capgains as a way to boost investment in this one tiny area, says Brookings fellow William Gale, "is like trying to increase consumption of green vegetables by lowering the price of all food "

Besides, the IRS code already taxes capital gains from investment in start-up businesses at half the regular rate, provided an investor holds onto his stock for at least five years. This type of incentive, which encourages long-term investment in new enterprise, seems like the kind of tax relief growth-oriented conservatives would embrace. (For more on how to strengthen these targeted tax breaks and give entrepreneurism a real boost, see below.)

Similarly, we could establish targeted capgains breaks to address the specific needs of all those middle-income groups that conservatives claim to be serving-homeowners, small-business people, farmers. These groups already enjoy certain perks under the current system. For example, profits from the sale of certain farm and small-business assets are taxed at half the regular rate. And although Republicans are preening about their plans to give people who sell their home a $500,000 exemption on the profits, most Americans already pay zero tax on such sales; homeowners can roll over the money from the sale of their residence into a new house within two years and not pay a dime in tax (unless the house they buy costs less than the one they sold; in which case, they owe tax only on the difference). As for senior citizens who might want to sell the family homestead and move into a retirement community, RV, or swinging apartment complex on Miami Beach, people 55 and older currently receive a one-time exemption of up to $125,000 from the sale of a home.

Perhaps the most ridiculous, but nonetheless wildly popular, argument for doing away with the capgains tax is that the filthy rich have the money and know-how to set up complex tax-avoidance schemes. So because a select group of people have found a way around a particular law, we should "just do away with that law? Now there's Aristotelian logic at its most twisted. (Of course, it is somewhat reminiscent of the right-wing position on gun control: "We'll never be able to get all the assault weapons off the street, so we might as well make things more equitable by allowing everybody to carry one.")

Even if you accept such logic, lowering the capital gains tax would merely exacerbate tax sheltering by the wealthy. The top capgains rate is already significantly lower than the top income tax rate of 39.6 percent. By increasing the disparity in different forms of taxation, we encourage the most affluent to restructure their finances accordingly. The rich will always manipulate the system to serve their self-interest -- as for that matter, will everyone else whenever they have the opportunity. But that's no reason to structure our tax code to facilitate the process. (How's this for a radical alternative: Close some of those tax loopholes and make certain we have an IRS that's effective enough to enforce them.)

Even the argument that a broad capgains tax cut would increase overall savings rests on shaky economic ground. For every tax analyst who concludes a rate drop would somewhat improve the nation's savings rate (Bruce Bartlett, National Center for Policy Analysis), another determines that it would have no appreciable effect -- or even a negative net effect (William Gale, Brookings). As Doug Henwood notes in his new book, Wall Street, "the U.S., which taxes wealth and savings very lightly, has one of the lowest rates of savings and investment in the First World" So regardless of what Jack Kemp and Jude Wanniski tell you, there is no reason to expect a capgains tax cut to produce an economic renaissance. In fact, in a recent survey by The Wall Street Journal, most economists predicted little or no positive effect from a cut in the capital gains tax.

Of Death and Taxes

For conservatives, an even greater challenge than claiming the capital gains tax cut is middle-class has been pitching the estate tax cut as such. Those following the Lawrence Summers brouhaha know that the term "estate tax" is verboten for populist tax cutter/spin artists. "Death tax" now dominates the lingo, ridding the issue of those nasty, elitist overtones.(Some estate tax abolitionists have come up with even more creative terminology: Rep. Chris Cox calls it "the grave robbers tax," and Sen. Jon Kyl has dubbed it "the grim reaper's reward.") But given that this tax affects only the fattest 1 percent of U.S. inheritances each year, in this article we're going to stick with "estate tax" and its elitist implications.

A look at the accusations leveled at Summers provides a pretty clear sense of how completely the right has succeeded in defining the estate-tax debate. Every outraged conservative from D.C. to L.A. leapt up on his or her soap box to condemn Summers for calling the dead selfish and implying that the proposed cut was for the benefit of the wealthy.

Let's address the second part of that accusation first. According to IRS figures, approximately 1 percent of all inheritances in 1995 were subject to estate taxes. All others fell below the $600,000 exemption ($1.2 for married couples) that has been in place since 1987. The tax rates start at 37 percent for estates valued at just over $600,000 and rise to 55 percent for estates over $3 million. Of the 31,564 estates subject to taxation in 1995, those valued at more than $1 million paid 95 percent of the taxes.

Ever-ready to rebut charges of elitism, estate tax opponents cry: But what about the farmers and smallbusiness owners? As a result of such impassioned spin, it is almost impossible to find a news article on the estate tax written in the last year that doesn't bring up how the heirs of "land rich, cash poor" farmers are hit hard by the tax, often forced to sell off part of the family land in order to pay the bill. What's more, contends Senate Agriculture Chairman Richard Lugar, by breaking up farms, the estate tax threatens many rural (i.e., middle-class) communities that depend on these farms. To stop the destruction, Lugar introduced three bills in January aimed at repealing, or at least radically increasing the exemption for, estate taxes.

Indeed, every conservative politician and organization seems to have adopted an agricultural poster child to wheel out whenever the topic of estate taxes comes up. In at least three of its articles on the "death tax," for example, The Washington Times has featured Chester Thigpen, a Mississippi tree farmer who, after 55 years of toil, now faces an estate tax burden that may force his heirs to sell off much of the tree farm.

Chester's plight is admittedly troubling. As the price of land and farm equipment rises, more and more farmers are being pushed up against the $600,000 ceiling. So if Congress wants to raise the exemption for farms to $2.5 million, as Senator Lott has proposed, so be it. But to hold up farmers as a justification for broad-based cut or repeal of the estate tax is absurd. Less than one half of 1 percent of the value of all estate property reported in 1995 was made up of farm assets. Taxes due on these assets accounted for only 3.5 percent of estate tax revenues. Translated: We could exempt family farms from the estate tax altogether and the IRS would barely notice. But contrary to Congressman Lugar's dire warnings about the numerous farm communities being destroyed by the existing "confiscatory" tax, in 1995, only 4 percent -- fewer than 1,500 -- of estates containing farm assets were even subject to taxation.

Similarly, stocks from family businesses account for only 6.5 percent of estate property reported in 1995, and 65 percent of the taxes due were owed by "family businesses" worth $10 million or more. Already, the executors of these estates can take up to 14 years to pay off their tax debt, with interest on the first $153,000 of the balance charged at only 4 percent.

Despite existing tax breaks for the middle class, the push to kill the estate tax has escalated in recent years. According a June 12 New York Times article, no less than 105 lobbying groups have joined forces to push for a major reduction. Much of the pressure certainly stems from the rising number of yuppies in line to be affected by the tax. Congress's Joint Committee on Taxation estimates that, over the next eight years, the percentage of estates subject to taxation will climb to 2.8 percent. Droves of politically powerful baby boomers are on the brink of inheriting the not-insubstantial fruits of Mom and Pop's labor -- an estimated $10 trillion over the next 20 years.

In defense of these thrifty families, Ken Khachigian writing in the May 11 edition of the Los Angeles Times, complained: "When the state takes your prosperity and spends it in the fashion it chooses, liberals call it good government. But when you want to keep a fair share of what you lawfully earned, it's called selfishness." Unfortunately for Khachigian's argument, by the time estate taxes become an issue, the people who lawfully earned the money aren't keeping a dime. They're dead. (Although technically it is the deceased's estate that is taxed, this is semantics. After all,if someone leaves his estate to charity, the inheritance isn't subject to a dime in taxation. Nor is any part of the estate bequeathed to a spouse.) If Summers's reproach of selfishness applies to anyone, it is not to frugal seniors, but to their fortunate offspring. These are the people facing taxation -- on a hefty chunk of income they will receive without necessarily having done a lick of work.

If anything, passing along large estates (and that's really the only kind we're talking about here) increases the likelihood that a person's heirs will never have to work hard, take significant financial risks, or save a penny on their own. Is this any way to foster the Republicans' much-touted work ethic? Or does that particular virtue apply only to the poor? Already today's 30-,40-, and 50-somethings are famous for their spendthrift ways. A recent study by Public Agenda found that close to 40 percent of baby boomers (ages 33-50) have saved less than $10,000 for retirement. (And lest you bemoan how impossible it is to make ends meet these days, 68 percent of those surveyed admitted they could put more away for retirement -- they just don't.)

Now, I'm sure my dad would agree that I was an angelic child and a joy to raise, but I did not technically earn one penny of the money he will leave me. So why should my inherited windfall be tax free, unlike income I might actually earn?

In a piece in the May 26 Weekly Standard, the American Enterprise Institute's Irwin M. Stelzer raises that very question. Taking a poke at conservatives, Stelzer likens the estate tax abolition that conservatives dream about to the affirmative action that they abhor. Both, notes Stelzer, are designed to give specific groups "an unfair advantage in life's race for success." He suggests that perhaps it would be a better idea to raise the estate tax dramatically and use the additional revenue to help arrange a cut in income tax. After all, he asks: Why should people be taxed more heavily on their labor than on their fortunate birth?

Columnist George Will's prompt response: "family values." "The surest way to strengthen family structure is by encouraging an ethic of provision that will braid the generations through the loving transmission of advantages," wrote Will in a May 18 column. Similarly,the estate-tax repeal bill being sponsored by Rep. Cox and Sen. Kyl is titled "The Family Heritage Preservation Act." " It seems that, for many conservatives, accumulation of wealth has become a family value. (Of course, not all rich folks agree that the best thing for children is to inherit their life's worth. Self-made billionaire Warren Buffett believes that, rather than lovingly braiding the generations, showering children with money they did not earn is a form of "food stamps" that spoils them.)

The larger economic reality is that, if the rich aren't paying their taxes, somebody else has to. The proposed GOP reduction in capital gains and estate taxes would cost the Treasury an estimated $64 billion over the next 10 years, with revenue losses during the subsequent decade ballooning to roughly (and conservatively) $250 billion. With the race on to balance the budget by 2002 -- ostensibly without abandoning the middle and underclass -- why would congressional Republicans make their job any tougher than it has to be? Why not just offer hefty tax breaks to all of the Joe Average Americans for whom they profess such concern -- and leave the rest of the capital gains and estate taxes alone?

Why not? Because when all the bull is brushed away, the heart of this debate is about the privileged class protecting its pretty privileges. This is economist Paul Krugman's "spiral of inequality" in living color: The rich, who have disproportionate political influence,alter the economic rules in their favor, which makes them richer, giving them even more political power, and on and on it goes. If this is the plutocracy the majority of Americans want -- or that the minority of wealthy Americans are able to buy and con the rest of us into swallowing -- so be it. But let's not couch the debate in populist rhetoric. For once, let's call a spade a spade. There may be class warfare brewing over the current tax-cut proposals -- but it sure wasn't started by Lawrence Summers.

A Better Way

If America really wants to get serious about economic growth, forget piddling 10 or 20 percent tax cuts on all types of capital gains. We need to stack the deck heavily in favor of new businesses by eliminating all capgains taxes on profits from investment in start-ups and raising the rates on investments less beneficial to the economy. (Of course, true ground-floor investment would need to be distinguished from Initial Public Offerings in which well-established ventures -- think Netscape in 1995 -- issue stock to the general public.)

Under such a system, investors' rewards for taking a chance on a promising new venture would increase relative to their buying a piece of, say, IBM or General Motors. By contrast, lowering rates across-the-board actually makes other investment options proportionally more attractive.

In addition, to cut down on short-term stock swapping, the tax rate could start at 100 percent during the first year an asset was held, and decline to zero over a period of several years. This would foster the type of long-term financial commitment new businesses need, freeing them from the pressure of stockholders looking to turn a quick profit. (Those who scoff at long-term investment plans should keep in mind that they're the strategy of choice for multi-billionaire investment genius Warren Buffet -- who, incidentally, has long advocated tying capgains tax rates to the length of time an asset is held.)