The Merits of Merit - Government Activity

Industry Standard, The, Feb 26, 2001 by Jonathan Weber

IT WAS REFRESHING TO SEE WARREN BUFFETT AND George Soros and a number of other extremely wealthy luminaries stand up last week in opposition to President Bush's proposed repeal of the estate tax. While the policy has some emotional attractions -- it would protect the inheritors of some small businesses from having to sell the companies to pay taxes, and it is true that most people have been taxed on their savings once already -- in practice the tax repeal would mainly be a windfall for a very small number of very, very rich people. The proposal makes little sense as economic policy, and it also makes for bad social policy in that it would remove a huge incentive for charitable giving.

Buffett and company cite these factors in their petition calling for opposition to the estate-tax repeal. They also discuss something that's equally emotional and far more complex: the principle of meritocracy. The idea that everyone in America has an equal chance, that our fates are not determined by accidents of birth, is not only one of our core values but also the one that most powerfully distinguishes us from most other nations. And nowhere is this principle more revered than in the technology economy; entrepreneurship is almost by definition an expression of meritocracy.

Clearly, the very idea that inherited wealth should be a target for tax collectors is an expression of meritocracy. Yet even if the estate tax remains in place, there is still an enormous amount of work to do in making meritocracy more of a reality. It's easy to find plenty of examples of immigrant entrepreneurs or sons and daughters of poor families who have made it big in high tech, but it's hard to deny that previous membership in the elite makes things a whole lot easier. We need look no further than the president himself to see the advantages of being well-born.

I would suggest that the virulent backlash against the dot-com economy is spurred in part by a sense that these companies were conjured up and populated by a bunch of spoiled rich kids who thought they were entitled to make quick-and-easy millions. It's one thing for an Indian immigrant to bury his head in his engineering studies, toil away for years and eventually make a mint on a startup. It's quite another for a brash twentysomething out of Harvard Business School, by way of Amherst and Palo Alto, to do the same thing.

Class issues are not often discussed openly because they are so confounding, and because we'd all like to believe that they're less important than they are. The obvious answer to them -- redistributive social policies -- has an uneven history and doesn't currently enjoy a broad base of support. Yet resentment toward those who are perceived not to have earned their way is always simmering and could well boil up in bad times.

This topic always reminds me of that old brokerage commercial with the tagline: "He made his money the old-fashioned way: He earned it." There was a perfect parody of the ad in which the line read: "He made his money the old-fashioned way: He inherited it." In 20 or 50 or 100 years, which of these lines will be right? Buffett and Soros and friends, to their credit, want to help make the first one real. Let's hope this is only one step in that process.