With a tax bill tilted to benefit the wealthiest Americans poised to pass Congress this week, U.S. income inequality will exceed the records set in the months preceding the crash of 1929 and the financial crisis of 2007. One key to that shift -- a tax code modification that will enable people with larges estates pass them on to their heirs at the lowest tax rates in decades.

Income inequality is already extreme even within the highest level of incomes. According to The American Interest, in 2004, the top 25 hedge fund managers combined to earn more than all of the CEOs from the entire S&P 500. In short, America is becoming a country where a handful of people get extremely wealthy, while the other 99% tread water at best.

But thanks to some clever spin, the party that is pushing tax relief for that tiny fraction at the top has been able to convince a big chunk of that 99% to support tax policies that aren't in the best interests of the majority of Americans. Because let's be clear: If the wealthy aren't paying their fairs share of taxes, the rest of Americans will have to make up the difference.

Passing on Fabulous Wealth Nearly Tax-Free

This compromise tax bill -- which, if passed as is, will add $858 billion to the deficit -- will offer a sweet deal to heirs of large estates. According to the The Washington Post, the package would exempt as much as $5 million from the inheritance tax, and tax the portions of estates in excess of that amount at just 35%. Based on those numbers, the Tax Policy Center concludes that in 2011, the estate tax will bite the fewest inheritances of any year since 1934 -- except for 2010, when there was no estate tax at all.

To get an idea about how many people this limited estate tax will touch, in 2009, just 4,296 people died leaving estates greater than $5 million, according to BloombergBusinessweek. And for those few, there are still options to reduce the tax burden on their heirs, such as Grantor Retained Annuity Trusts. In a GRAT, parents loan stocks or shares of a private business to the trust at the lowest interest rate legally allowed by the IRS -- now 1.8%. If the value of those assets increases over time, the trust's beneficiaries reap any benefit above that interest rate.

While President Obama and Democrats sought to limit the use of GRATs, they failed. As Jennifer Immel, senior wealth planner at PNC Wealth Management, proudly bragged to BloombergBusinessweek, "That's a wonderful technique for parents looking to pass assets on to children at nearly zero [tax rates]."

Those tax benefits come on top of the favorable treatment already embedded in the tax code for the richest 1%, who get most of their money from investments, rather than wages. The average American earns 64.5% of their income from wages, while a mere 18.1% of it derives from business ownership or capital investments, according to BloombergBusinessweek. By contrast, those in the wealthiest 1% derive 53.6% of their income from business and capital investments. Wages account for a mere 35.3% of their income. That why the 15% tax on dividends and capital gains is so valuable to them.

A Democracy Where Votes Are Counted in Dollars

All this clever tilting of the tax code to favor the richest 1% will only exacerbate America's already growing income inequality problem. As I wrote in an August 2009 DailyFinance article, one of George W. Bush's many lousy legacies was a level of income inequality greater than in the Roaring '20s. In 2007, for example, the top .001% of American earners took home 6% of total U.S. wages -- about twice the figure for 2000. That year, the richest 0.01% (the 15,000 richest families) had 6% of national income, six times their 1% share in 1974.

In a supposedly democratic political system, how do economic policies flourish that favor a few thousand individuals at the economic pinnacle at the expense of the majority? It is simply a matter of creating effective myths and causing them to be repeated over and over on TV, radio and the Web, in newspapers and magazines.

Those messaging machines are paid for through a system that gives even more power to those willing to write the biggest checks. The New Yorker's Aug. 30, 2010 edition did a brilliant job of profiling the Koch brothers, the billionaire owners of Koch Industries, who quietly invest vast sums of money to promulgate messages that help their businesses while harming the rest of us.

The ancestral source of those myths is America's parent -- the U.K. -- which continues to pay for a flourishing monarchy. It's no wonder that U.S. news networks were instantly obsessed with the engagement of Prince William. A commoner, Kate Middleton, was about to marry into a royal family with limitless economic support from its subjects: Such Cinderella stories allow everyone to imagine that they might someday be so lucky. The mythic power of Miss Middleton's long-odds victory in the royal marriage lottery sends a subtle messages that helps preserve the British monarchy: This could happen to you -- but only if you keep the system in place that allows the winners to win big.

It's essentially the same idea that the U.S. income inequality messaging machine has been spewing out for decades: Go along with economic policies that help a few thousand people to get and pass on fabulous levels of wealth, because you never know -- you might be one of them someday.

Of course, most Americans won't -- and they won't even come close -- because the system is stacked against 99% of us, thanks to the millions of Americans who buy into those messages, and vote to keep giving themselves the short end of the economic stick.


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ALEX TURNBULL

The man who wrote this artical is only repeating what many have known for years. We Americans who beleive in equalty freedom and fareness now live in a plutocracy ruled by an olglarcy. It is corporatism equal too facism. It owns you and yet you don't see. It stares you in the face, it controls your attention and leads you to a dead end. The crime, you people drag the rest over the cliff with you.

December 20 2010 at 6:56 AM Report abuse +1 rate up rate down Reply
wdcarterjr

Tax your boss into poverty...When he can't buy his wife a new Mercedes Benz, you can have a big laugh....When he can't meet payroll, will you still be laughing?....when he can't afford to replace equipment at work and has to lay-off a few people...will you still be laughing?.....Does it really matter, congress will take care of you with food stamps and welfare, if you qualify....that is if there is another boss to tax into poverty to pay for it..........What happens when congress runs out ot people to tax into poverty?....I guess they wont have anything to give away....We will then have achieved financial equality

December 19 2010 at 10:19 PM Report abuse -1 rate up rate down Reply
silas

Nice try Peetie. Great colomn! Only it's not..you can't legislate a winning attitude and it's not nice to take people's hard earned money away from them against their will no matter who you think you are or who you think "they" are. IT DOESN'T WORK. Look at all the states and municipalities that are broke and owe billions. Too many years of liberal policies and programs that don't work.

December 19 2010 at 10:10 PM Report abuse +2 rate up rate down Reply
wdcarterjr

Is this guy nuts?

How much is fair?

If someone earns money and someone else doesn't, why does that create an obligation on the successful?

Should it be that once a certian amount is earned and saved that you shut down your business and fire all the workers? If you can not pass it on to your children, why not stop earning and take the grandchildren fishing?

This "from each according to his ability to each according to his need" did not work in the old Soviet Union and will destroy the US the same way.

The democrat party wants illegal aliens to vote. They also want felons to vote. You know bank robbers, murderers, and rapist. Birds of a feather flock together.

All these scumbags in congress want is the money to buy votes. No wonder they have a 13% approval rating.

December 19 2010 at 10:06 PM Report abuse +1 rate up rate down Reply
Wendy

I sense the rage and frustration in this article. How do you explain to people the simple economics of oppression? If you give to the rich, you take from the poor. The rich will not give back to you by some magic. Wake up.

December 19 2010 at 4:43 PM Report abuse -2 rate up rate down Reply
2 replies to Wendy's comment
heinerscar

I don't understand the jealousy. I've hardly ever been robbed by a rich person, have you? They don't steal their riches from me, and I applaud their success just so long as it's honest (which it usually is).

But where then does wealth come from? We make it, we work, we build and sell and do things to create it. It's not a bowl of grapes where someone has taken my share, and left me with less.

It's the government that takes 40% of everything I earn, not rich people. That is by far the greatest limit on my ability to succeed, to save for my future, and have a family.

December 19 2010 at 5:39 PM Report abuse rate up rate down Reply
JRNYCWilliams

Americans are adverse to information. Wake up....? They haven't since the country expanded from colonies for very wealthy, slave owning plantation owners - who insisted the capital be moved from New York to a district in Virginia. We worship the monied - even equate their wealth with wisdom. Wake up....? Why speak any longer of racism when we're all slaves?

December 19 2010 at 8:27 PM Report abuse +1 rate up rate down Reply
change to englis

He teaches business strategy to undergraduate and MBA students at Babson College and has also taught at Stanford, MIT, Columbia, and the University of Hong Kong. He has appeared on ABC's "Good Morning America," CNBC, CNN, Fox Business News and the Boston ABC and CBS affiliates. He has been quoted in The New York Times, The Wall Street Journal, Bloomberg News, Time, Newsweek, Fortune, and Business Week.

See full article from DailyFinance: http://srph.it/amV8DC
JUST NOTE WHERE THIS GUY TEACHES AND WHO INTERVIEWS HIM. lIBERAL LEFTIES ALL. So he is quoted by the WSJ. That doesn't say in what context. No wonder the column is so slanted to the far left.

December 19 2010 at 1:04 PM Report abuse +1 rate up rate down Reply
1 reply to change to englis's comment
Wendy

Liberals and lefties ... who are you, anyway? Wake up.

December 19 2010 at 4:44 PM Report abuse rate up rate down Reply
change to englis

Big difference between earning money and receiving money from the government just because one is alive. I don't see the likes of Oprah, Nancy Pelosi, the Hollywood A listers, sports stars, rappers, etc. standing in line to give their money away or refusing financially huge contracts. The writer of this article is certainly spinning the information to suit his own viewpoint.

December 19 2010 at 12:57 PM Report abuse -1 rate up rate down Reply
1 reply to change to englis's comment
Wendy

Wake up.

December 19 2010 at 4:45 PM Report abuse rate up rate down Reply
mstallent

This guy has a real chip on his shoulder. Every time I read about the "growing" inequality problem I keep trying to figure out why it is a "problem" that Bill Gates or Oprah Winfrey or Tiger Woods or Derek Jeter make a ton more money than the rest of us. As far as I can tell they earned it. Earn is a word that Cohan, and others like him, seem to dislike very much. He usually notes that these people "received" their wealth, as if someone is arbitrarily passing around wealth to the lucky few. Lastly, in the case of Britain's Royal family, they did "receive" the money, unlike the case of the four Americans who EARNED it. Good for them. I know I have received great pleasure watching 3 of them perform and am using a product enabled by the fourth to write this note.

December 19 2010 at 12:44 PM Report abuse rate up rate down Reply
1 reply to mstallent's comment
Wendy

I earned millions last year, I just didn't get paid for what I did. Wake up.

December 19 2010 at 4:45 PM Report abuse rate up rate down Reply
dirkadom

what did the 60's or was it 70's song say: "should we start a revolution, or should we leave things as they are". americans are docile and dumb and they only have themselves to blame. the song was not american.

December 19 2010 at 12:43 PM Report abuse rate up rate down Reply
handyxman

Didn't we just go through all of this a few centuries ago? I wonder how it will turn out this time?

December 19 2010 at 12:15 PM Report abuse +2 rate up rate down Reply