Scenario 1: It's 2005. While Republicans are fighting to permanently repeal the estate tax (or "death tax," in their phrasing), a nonprofit called the Coalition for America's Priorities spearheads the counterattack, deriding the proposed repeal as the Leave No Heiress Behind Act. One television spot, run by a coalition partner called United for a Fair Economy, features a lithe, flaxen-haired, Paris Hilton-esque narrator named "London" thanking the GOP for trying to maximize her inheritance.
The anti-repeal campaign is suffused with populist rhetoric. ("This is not a country of inherited wealth," coalition head Steve Ricchetti tells USA Today. "This is a country of earned wealth.") Yet the entire thing is funded by the life insurance industry.
Why? Because the death tax creates business for life insurers. A major selling point of life insurance is that its benefits, unlike inherited money, can be totally tax-free. Take the estate tax away, and that selling point disappears. Hence the campaign.
Scenario 2: It's 2010. William Hambrecht, a Bay Area financier, has donated more than $1 million to Democrats since 1993. More than $13,000 of that money has gone to Nancy Pelosi, a San Francisco congresswoman who once gave a House floor speech praising "a business pioneer, a philanthropist, and a longtime friend, Bill Hambrecht."
She could have added "business partner." When Hambrecht founded the United Football League in 2009 to try to compete with the NFL, Paul Pelosi Sr. -Nancy's husband-invested $12 million in one of the league's first four teams. In a fortuitous coincidence, Hambrecht's small investment bank has employed Paul Pelosi Jr., the congresswoman's son, for years.
In the waning days of Pelosi's term as speaker of the House, Hambrecht comes to Capitol Hill to testify before the Financial Services Committee. The committee is meeting to discuss a proposed tweak to regulations that govern initial public offerings (IPOs). Hambrecht's company would be the prime beneficiary of the proposal.
Committee Chairman Barney Frank (D-Mass.) pointedly notes at the beginning of the hearing that the regulatory change was not his idea. "I should note also that it was Speaker Pelosi who first called this to our attention earlier in the year.â€¦It is something that the speaker has taken a great interest in because of her interest in job creation, so we have had to find a way to have this hearing."
Both of these scenarios sound sleazy: the kind of influence-peddling, insider-colluding tales that make Americans cynical about Washington. But in fact, only one of the two lobbying campaigns is genuinely objectionable. Explaining why means tackling one of the most important questions for libertarians observing our modern crony-capitalist economy, where the government's tendrils are so intimately entwined with the business world: What sorts of corporate lobbying are morally justified?
Baptists and Bootleggers
The life insurers' partnership with the left to save the estate tax is a classic case of Baptists and bootleggers, to borrow a famous phrase from the economist Bruce Yandle. In Yandle's account, the Baptist preacher provides the anti-alcohol campaigner with a moral cover story for his efforts, while the bootlegger, who will profit from Prohibition, bankrolls the effort.
George W. Bush's 2001 tax cut included a gradual repeal of the estate tax. But because the Bush bill was scheduled to sunset in 10 years, the tax was set to rise from the dead on January 1, 2011. After voters re-elected Bush and increased the Republicans' Senate majority in 2004, permanent repeal of the estate tax became a GOP priority.
Many liberals wanted to keep the tax, arguing that it helped slow the growth of economic inequality. But the real muscle opposing permanent repeal came not from liberals but from insurers. Steve Ricchetti and his brother Jeff founded Ricchetti Inc., a K Street firm, in 2001. (Jeff still runs the lobbying firm; Steve is now Joe Biden's chief of staff.) In 2004 the Association of Advanced Life Underwriting hired the Ricchettis to lobby on "issues affecting estate tax repeal," according to a filing with the Senate Office of Public Records. Ricchetti Inc. was also retained by a larger industry group, the American Council of Life Insurers (ACLI).
The inheritance tax gives wealthy people two artificial incentives to buy life insurance. The first is that insurance enables them to avoid paying the tax. If a woman died in 2001 and left her son $2.5 million, the son would have owed about $1 million to the government. But if the mother had a $2.5 million whole-life insurance policy and assigned ownership to her son, he wouldn't pay a penny in either estate or income tax on that money. Considering the tax savings, the policy would be a good deal even if she paid $3 million in premiums to get the $2.5 million benefit.
The second incentive is not about avoiding the tax; it's about affording it. If you want to hand down a family business, an art collection, or some other illiquid item, you might buy a life insurance policy adequate to pay the tax on the inheritance. Wealthy people "quite often use life insurance as a means to generate the cash to pay the tax on the transfer to the next generation," Jim Swink of the Planning Corporation of America told On Wall Street, an investing publication, in 2007.
You can see why the insurance industry lobbies like crazy. In years when the estate tax is on the legislative table, ACLI reliably makes the top tier of K Street interest groups; in 2004 only five single-industry lobbies spent more.