FOR NAKED class warfare, it is hard to beat the estate tax.
"If we were to give a prize for the single worst idea to come forward from a group that's been rife with them, it would be this," fumed Barney Frank as the House of Representatives voted by a healthy margin to phase out the federal tax on inheritances. "Their idea is this: 'Let's make the tax code of America better for very rich people. Let's give substantial tax relief to the richest people we can find.' "
 The estate tax doesn't affect the superrich, contrary to what liberals believe. |
Does Frank really believe that? "The richest people we can find" don't pay death taxes, and neither do their heirs. They hire estate planners and take advantage of the Internal Revenue Code's loopholes to make sure that most of their wealth does not go to Uncle Sam when they shuffle off this mortal coil. So well known is this effect among economists that two prominent ones — the Brookings Institution's Henry Aaron and Alicia Munnell of Boston College, a former member of President Clinton's Council of Economic Advisers — have described estate taxes not as taxes but as "penalties imposed on those who neglect to plan ahead or who retain unskilled estate planners."
The superrich, and those whose families have long been wealthy, can always arrange their affairs to minimize the tax bite, which kicks in when the value of an estate surpasses $675,000. But it is a particular cruelty of the estate tax to fall most heavily on those whose wealth is newly acquired, or who may not even have realized they were "rich."
By way of example, Kerri Houston of the Institute for Policy Innovation describes a farmer, land-rich but cash-poor, who lives modestly and works hard. At his death, he passes to his children his only meaningful asset — his land. "Although our farmer eked out an income of just $40,000 last year, he had the misfortune of purchasing his land a quarter-century ago," Houston writes. "It is now worth $800,000, and Uncle Sam wants $56,500 of it. Now."
That is a nightmare scenario for small business owners. A 1995 survey on the impact of estate taxes found that 51 percent of family businesses would have trouble surviving the death of a principal owner, largely because of taxes. Thirty percent of respondents said they would have to sell all or part of the business to pay the tax bill; 14 percent said they would have to shut the business down.
It is not only the heirs who suffer, of course.
"At the death of our founder," says W. J. Grundy, the former chairman of Jomac Inc., a manufacturer of protective gloves, "we spent over $3 million to redeem stock so estate taxes could be paid and control of the company could be maintained. This was $3 million not available for operations, and the division in trouble was sold — reducing our employment by about 30 employees and our sales by about $5 million."
It may please the class warriors to imagine that death taxes sting only the rich. Those 30 laid-off Jomac employees know better.
President Clinton promises a quick veto if the estate tax repeal reaches his desk. (A Senate vote hasn't yet been scheduled.) "The House has jeopardized our fiscal discipline" with its "costly, irresponsible, and regressive plan," he said after the vote last week.
In truth, the tax nets the Treasury almost nothing. It brings in just $23 billion a year, or a little more than 1 percent of federal revenues. Of each dollar raised, more than 65 cents is eaten up in "compliance costs" — the expenses of collection and administration. If the estate tax were wiped out tomorrow, the Treasury would barely hiccup. Which is not to say repeal wouldn't cause some pain: The 16,000 members of the American Bar Association who specialize in trust, probate, and estate law would doubtless be very sorry indeed if Americans no longer had to spend lavishly to protect their families from the estate tax.
At the end of the day, the estate tax should be abolished not because of finances or economics, but as a matter of simple decency. It rewards the worst kind of behavior, while punishing parents for doing something admirable and deeply rooted in human nature: leaving the fruit of their labor to their children.
A multimillionaire who wants to avoid all death taxes can readily do so without even hiring a lawyer: He can simply spend all his wealth before he dies. A recent bestseller — "Die Broke" — advises doing just that. The estate tax cannot reach the wealth of someone who uses it to finance a life of luxury and indolence, spending instead of saving. A rational tax code would smile on individuals who work hard, live simply, and save for the future. Ours rewards the opposite.
Since 1980, the estate tax has been repealed in 20 states, including such liberal bastions as Oregon, Vermont, and Massachusetts. It has recently been abolished in Canada, Australia, and Israel. It ought to be junked in America as well. Any tax that penalizes people who provide for their families is immoral and indefensible. One that does so at the very hour when those families are bent with grief is worse than senseless. It is sadistic.
Jeff Jacoby is a columnist for The Boston Globe.
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