Listening to the Republican rhetoric, you might get the idea that making children of wealth work for a living is a radical, confiscatory assault on family farms, property rights, fairness, and the American way. In one of countless screeds in The Wall Street Journal, Melik Kaylan, of Forbes.com, likened the idea of taxing inherited wealth to "the Maoist notion of `perpetual revolution,’ where every generation must embrace the struggle anew," and noted approvingly that "the Renaissance was built on a society of dynastic privilege." Less-extravagant critics denounce what they call the "death tax" as a manifestation of class warfare.
But if there is a plausible argument for repealing this tax-which applies to only 2 percent of all estates-I’ve missed it. So, it appears, has President Bush. The estate tax is not some recent innovation cooked up by Bolsheviks, or even by Democrats. It dates to 1916 and was championed by Republicans Teddy Roosevelt and William Howard Taft. They wanted to put a brake on America’s drift toward becoming a hereditary plutocracy with a privileged class of idle rich people at the top. An inheritance tax on "such enormous fortunes as have been accumulated in America," Roosevelt said in 1907, "would be one of the methods by which we should try to preserve a measurable equality of opportunity for the people of the generation growing to manhood."
From that perspective, the estate tax has hardly gone too far in fostering equality of opportunity; rather, it has not gone far enough. Republicans who see it as egalitarianism run amok should ponder the remarkable durability of the Kennedy fortune, which has kept politicians, playboys, and plenty of other people pretty prosperous during the 40 years since the only member of the clan who ever earned much money-patriarch Joseph P. Kennedy-suffered an incapacitating stroke. The Rockefellers, Fords, Vanderbilts, and DuPonts aren’t hurting too badly, either.
Of course, the poster children of the anti-estate-tax movement are not Kennedys or Rockefellers, but not-so-rich families who have been forced to sell small farms or businesses to pay the tax. This is a real problem and has resulted in some very sad stories. But family farms and businesses represented the majority of assets in only 3 percent of all taxable estates in 1997, according to government data. Congress has already adopted several special protections for them. And Democratic congressional leaders have proposed to ease the estate-tax burden further.
The Republican plan would give a $55 billion estate-tax cut-over and above all individual income tax cuts-to the 64,000 estates that would otherwise be taxed in 2010, according to the Congressional Joint Committee on Taxation. Half of these savings would go to the largest 4,500 estates processed in 2010. That $28 billion is equal to the total annual tax reduction, from all provisions of the Bush plan, that would be received in 2010 by the nation’s 81 million least-affluent families, the liberal Center on Budget and Policy Priorities projects.
House Democratic leaders, on the other hand, would not let a billionaire’s heirs keep the whole billion. But they would raise the threshold at which the tax kicks in to $2 million per individual estate next year, and $2.5 million a few years later. (The threshold is already slated to rise from $675,000 this year to $1 million by 2006.) A $2 million estate-tax exemption would let parents leave their heirs a combined total of $4 million in assets, tax-free. Under the Democratic plan, more than two-thirds of all estates that would be taxed under current law would no longer owe any federal estate tax. That would cut the percentage of all estates subject to this tax to a little more than one-half of 1 percent.
This is "class warfare"?-as The Wall Street Journal calls any position on the estate tax short of abolition. If so, who started it? The Democrats, who would exempt the sort-of-rich altogether and ease up on the really rich, if not on the super-rich? Or the Republicans, who want to make all rich children much richer, at the expense of everyone else?
To be sure, the heirs of a family business worth, say, $50 million could still face an estate tax in the range of $10 million to $20 million under the Democrats’ proposals. But even in such a case, any son or daughter of the founder who has worked in the business and proved to be a worthy successor might well be able to keep control by borrowing money to pay the tax, with the help of long-term, low-interest government loans, or by selling interests to investors. And if the founder’s children are not worthy successors, it would be no great tragedy for them to have to sell the business and scrape by on the after-tax proceeds of $30 million or more.
Once the family-enterprise problem is addressed, the case for repealing the estate tax becomes almost frivolous. Weakest of all is the claim that, as Bush asserted in his Feb. 27 speech to Congress, "it’s not fair to tax the same earnings twice-once when you earn them, and again when you die." Wrong. For one thing, a large percentage of the wealth subject to the estate tax consists of capital gains that have never been taxed. More important, multiple taxation of earnings is not some special burden on the rich; it is the lot of everyone who works for a living. We must pay four taxes before we even see our paychecks: federal income tax, Social Security tax, Medicare tax, and state or local income tax. From what’s left, we pay sales taxes when we buy groceries, medicine, or gasoline; still more taxes on any income from our savings and investments; transfer taxes when we buy homes; and property taxes forever after. The estate tax is just one more, and it is imposed only on a tiny fraction of all estates.
Even at 55 percent, how unfair is a tax that lets many millionaires leave more to their children than most Americans will acquire in a lifetime of work-not to mention the kind of education and family connections that enabled a late-blooming young man named George W. Bush to get rich by buying and selling a baseball team? Those who insist that they should be able to leave their kids everything are admirably motivated, but they have no right to control their wealth from the grave.
I’m all for the rich getting richer-but not when the consequence is to make other people poorer. And that would be one consequence of repealing the estate tax, which would deny the government some $236 billion in revenue over the next nine years, according to the Joint Committee on Taxation, and another $60 billion per year after it was fully phased in. Uncle Sam would have to collect those revenues from someone else, probably by keeping marginal income tax rates higher than they would otherwise be. Consider the cost of buying $25 million worth of Army tanks a few years from now. Under current law, the money could come from the tax paid by the heirs to a single $60 million estate. Under the Bush proposal, it might come from raising (or failing to lower) the income taxes of 25,000 working families by $1,000 apiece. How fair would that be? Shall we put it to a vote?
Repeal might also have the unfortunate effect of cutting charitable bequests by up to $6 billion a year, according to a Treasury Department estimate. This at a time when the Bush Administration is counting on faith-based groups and other charities that depend on such bequests to play a much larger role in helping needy people.
The strongest Republican argument against unduly high marginal income tax rates is that they blunt work incentives by denying people the fruits of their labor. But the estate tax denies nobody the fruits of his or her labor. Nor has it deterred our nouveau billionaires and multimillionaires from creating and accumulating wealth as frenetically as any free-market libertarian could want. On the other hand, repealing the estate tax would leave many of their children so rich that they would never have to work.
When welfare programs are the issue, conservatives stress that unrestricted handouts for poor families can hurt these unfortunate people and society alike by fostering a culture of idleness and dependency. They should recognize that the opportunity to live in idle inherited splendor can deaden the work ethic and self-respect no less than the opportunity to live in idle government-subsidized squalor. That’s what Andrew Carnegie meant when he said, "Great sums bequeathed oftener work more for the injury than for the good of the recipients."
The estate tax does have one economically counterproductive feature: the gaggle of loopholes that tempt rich people to pay lawyers, accountants, and insurance companies small fortunes to draw up exotic tax-avoidance gimmicks that serve no economic purpose. But the solution to this problem-and to the related problem of massive tax avoidance by many of the richest families-is not to repeal the tax. It is to close the loopholes.