TCS Daily

Americans Despise this Tax, So Why Compromise at All?

By James K. Glassman - April 29, 2005 12:00 AM

The clock is ticking. Unless Congress acts -- who knows? -- we could see a wave of suicides, patricides, matricides and rich-uncle killings in 2010.

That's the year that the federal tax on estates -- also known as the "death tax," the most hated tax exacted by the U.S. Treasury -- will be repealed. If you die in 2010, you can pass along all your assets to your heirs without a penny to Uncle Sam.

But the repeal recedes. If you die after 2010, only $1 million of your estate is exempt from tax, and the rest gets hit with a top rate of 55 percent. Those are the loony terms of the tax law Congress passed in 2001. The Senate lacked a super-majority of 60, so, under the Byrd Rule, the repeal had to sunset after 10 years, when conditions revert to what they were before the law. Cinderella's coach turns into a pumpkin.

Congress could fix things. On April 13, the House, for the third time, voted to make repeal permanent, but the Senate still seems to lack those 60 votes.

Negotiations have opened to find a compromise. "We need certainty," says a Finance Committee aide. Estate planning is impossible if you don't know the rules.

Most Republicans appear willing to back a deal that exempts $10 million in assets and taxes the rest at 15 percent. Democrats may support a $3.5 million exemption and a 45 percent rate. (Those are the terms set for 2009 under current law. Changes are being phased in; the 2005 exemption is $1.5 million with a rate of 47 percent.)

But Americans despise this tax, so why compromise at all? A survey last month by Harris Interactive found that 30 percent ranked the tax on estates the "worst federal tax," with the income tax (26 percent) second and Social Security taxes far behind (15 percent).

These results are remarkable when you consider that in 2003, of the 2.5 million people who died, just 31,000 (or about 1 percent) left estates that paid any federal tax at all. And only 1 in every 1,000 people who died left an estate in which a family farm or business represented a majority of the assets.

In preparing to launch an organization called Investors Action Alliance, my colleagues and I recently conducted extensive research. In focus groups, I was shocked to see small investors of all political persuasions and ages excoriate the estate tax.

Why? They said the tax was flat-out unfair. They earned the money and paid the taxes while they were working. Why should their heirs have to pay taxes on the same assets again? And forget class-warfare appeals. Here in America, folks believe they can eventually become rich enough to get whacked by the death tax. They're right.

Still, the animosity seems surprising in a society that also believes equal opportunity benefits both poor and rich. "The parent who leaves his son enormous wealth," wrote Andrew Carnegie in 1891, "generally deadens the talents and energies of the son and tempts him to lead a less useful and less worthy life than he otherwise would."

Academic research has found that large inheritances (or lottery prizes) encourage people to quit work. But economists have also found that entrepreneurs who get large bequests tend to stay on the job.

Whether an inheritance is good or bad for your kids, however, is a decision that you -- not the government -- should have the freedom and responsibility to make.

What about the deficit? Critics say that repealing the estate tax would cost $40 billion in 2011, but that's a phony number. In fact, the contribution of the tax to federal revenues "may be zero or negative," says Harvard's Greg Mankiw, who formerly headed the Council of Economic Advisors. The reason is that the tax "encourages people to take avoidance actions" -- financial decisions that actually hurt the economy, not to mention the deadweight losses from accounting and legal costs.

I want to see the estate tax eliminated entirely, preferably in a general reform that taxes only what we consume -- and that only once.

But I also want more certainty now. The best solution is to try to get those 60 votes. If a vigorous attempt fails, then simply extend death-tax repeal through 2014. That will provide a few more elections to find enough good Senators to make elimination permanent.


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