A Commentary On Wealth And Our Commonwealth

By

One of the best known citizens of Tucson, Arizona, was the late Ettorino “Ted” De Grazia (1909-1982), a world-renowned impressionist artist and sometime musician.

He was born in Morenci, an Arizona mining town, of Italian immigrant parents. He worked his way through college as a musician and later paid his way by painting murals in bars in the United States and Mexico. He studied art in Mexico in the late 1930s and early 1940s, returning to Tucson in 1947. Legend has it that his first “home” in Tucson was in a culvert under one of the citys streets–a testimony to his humble beginnings.

His specialty as a painter was of angels and faceless Indian and Mexican children with large eyes. In time his work became very popular, and copies of the thousands of works he produced were sold by the millions around the world. As his wealth from these sales accumulated, he was soon made aware of the federal estate tax. He became so enraged over the likelihood that the paintings still in his possession would be taxed at his death, he burned them in protest of the tax. Some have estimated that the paintings he burned were worth millions.

De Grazia was generous in lending the use of his paintings as fund-raisers for UNICEF, the American Cancer Society and other charities, but he was adamant in his objection to paying taxes. It is worth noting that his cost basis for the paintings he burned was near zero, and since they had never been sold, they had never been subjected to any kind of tax, despite their great value.

I was reminded of this incident, which received a great deal of attention at the time, during a recent discussion. About two weeks ago, I was invited to participate in a conference call hosted by Bill Gates Sr. and Chuck Collins. Gates and Collins are the co-authors of a book entitled “Wealth and Our Commonwealth.” The main theme of the book centers on why America should tax accumulated wealth.

Gates made the point that some 60% of current wealth has never been subject to taxation and that if allowed to be passed tax-free to future generations, might possibly never be taxed. Such wealth is primarily appreciated assets such as a business interest, land, homes, stocks or works of art.

His second point, relative to the De Grazia incident, was that the estate tax was a means by which the wealthy could help pay for the environment that allowed the wealth to be accumulated in the first place. His point was that absent a free society of prosperous people, a business or other enterprise would not likely be successful.

We are interdependent, and so much of our own success and good fortune is the result of the good works by other people, society at large and a democratic government. Gates referred to this as a “social price” that ought to be paid.

Other points made during the call were the damaging effects upon the states if the estate tax was repealed and the actions by some states to de-link their own tax from the federal system. In addition to the devastating effect repeal would have upon the states, the federal treasurys loss will not be insignificant. Given the fact that as much as $41 trillion of wealth will be transferred to the next generation, the loss of revenue could run as high as $750 billion over the next 10 years. That is a lot of revenue loss and, of course, raises the issue–who will make up the loss? It does not take much imagination to realize that this is essentially a transfer of the cost of running government from the wealthy to working people paying income taxes, according to Gates.

Or, as Paul Volcker put it in the forward to the book, “What we cant escape is a simple piece of logic. Once we agree on total expenditures and revenues, if we lose one existing source of revenue–say from the federal estate tax–we will have to find a replacement. That will become harder and harder to do a few years ahead, when estate tax revenues will likely increase rapidly, reflecting the enormous rise in wealth during the 1980s and 1990s. Its hard for me–hard in terms of economic analysis–to think of practical alternatives with fewer adverse effects than a (reformed) estate tax.”

“Wealth and Our Commonwealth” more than anything else champions the basic concept of fairness in taxation and equality in opportunity–hallmarks of our democracy. The book is a compelling argument for reforming our estate tax system rather than outright repeal.

Ted De Grazia had every right to burn his paintings–but in so doing, he was also refusing to pay back to society any debt he may have owed for the opportunity and environment he had been provided.


Reproduced from National Underwriter Edition, April 28, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.