Arguments for estate tax repeal are a sham

Posted: Friday, July 14, 2000

The following editorial appeared in today's edition of the Washington Post:

Government has been maligned in many ways, but now it's being called a grave robber. ``The idea that the federal government would reach into the grave and pull back half of a life's work offends people,'' intones Trent Lott, the Senate majority leader, explaining why his Republican colleagues support abolition of the estate tax. But this tax does not rob anyone. On the contrary, its repeal would drain the budget surplus and increase inequality, all in the name of family farms and businesses that would scarcely feel the difference.

The vast majority of Americans are untouched by the estate tax. Individuals can pass on $675,000 tax free to their heirs; couples can transfer $1.35 million. Moreover, farms and family-owned businesses enjoy a further exemption, allowing tax-free transfer of $2.6 million in assets. Thanks to these rules, the estate tax affects only about 50,000 of the 2.5 million Americans who die each year. Data for 1998 suggest that 1,000 to 2,000 of these affected estates are made up largely of a farm or family-owned business. Many of them make compelling cases, but their estates could easily be sheltered without abolishing the estate tax altogether.

So the idea that repeal is needed to protect family farms and businesses is just plain wrong. Pretty much the same applies to the argument that the top rate of 55 percent is unjustly high. Estates grow big with the help of generous rules on capital gains, which allow taxes to be deferred so long as shares or property are not sold. Moreover, the deferred capital gains liability is canceled at death, allowing heirs to sell shares that have quintupled in value without paying any tax whatever. These concessions do much to offset the estate tax's high rate. Besides, if rates were the issue, the Republicans could back rate cuts rather than abolition.

The abolitionists also argue that the estate tax penalizes entrepreneurs who build up firms, and so discourages job creation. But they do not say which taxes they would like to raise to make up for the lost revenue. Higher corporate taxes would discourage job creation too; higher income taxes might harm work incentives. The option of not raising any taxes sounds nice. But the retirement of the baby boomers will make the budget surplus disappear as fast as it arrived. So nice is not an option.

Given the need to choose among possible tax cuts, it is almost incredible that the Republicans should go for this one. Three-fourths of the benefits would flow to the highest-income one percent of all taxpayers; moreover, this windfall would go to heirs who may not have worked for the money. It is one thing to support tax cuts that allow hard-working risk-takers to enjoy more of the fruits of their labor. But repeal of the estate tax would come at the expense of that kind of cut. The president should veto it.

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