Raise, Don't End, the Estate Tax

Just in case you thought campaign contributions to Congressional Democrats and Republicans didn't have the desired effect, consider the passage of the estate tax repeal in the House the other day.

The Bush Administration can hardly argue with a straight face that repealing the estate tax is part of its effort to stimulate a weakened economy, as nobody knows how many of the super-rich are going to die on any given year. No, it was pure and simple payback for the largesse these folks provided to the 2000 election campaign.

The goal when the estate tax was first enacted in 1916 was to break up great concentration of intergenerational family wealth, so America wouldn't look like the European aristocracy. But a glance at the richest 400 Americans named each year by Forbes Magazine tells us the estate tax hasn't accomplished its mission very well. Almost 45 percent of those on the list achieved that status at birth. But that's hardly a reason to abolish it.

The main reason the estate tax has failed is that so few people actually pay it. Of the approximately 2.2 million Americans who die each year on average, only 43,000 (just a fraction over two percent) actually owe any estate tax. That's why it accounts for less than one percent of federal revenues, or $19 billion.

Proponents of repeal like to talk about the small farmer who is forced to sell the family farm to pay the estate tax. But family farms and small businesses make up just 5 percent of estate tax filers each year.

The law provides that each individual can pass on up to $675,000 tax-free. That translates to $1.35 million for a married couple, since the tax doesn't hit until the surviving spouse dies. My own definition of a small farm wouldn't include one valued at $1.35 million.

What's more, the estate tax is ridden with loopholes. The favorite loophole of the rich is to hire private appraisers who place low values on real estate and other hard assets passed on to survivors. The Internal Revenue Service lacks the financial resources to hire an adequate number of its own qualified appraisers who might otherwise determine that the property has been grossly undervalued.

Also, it's relatively easy if you are super-rich to pay no estate tax at all by simply setting up a foundation to hold the estate's assets to be operated by their children at multi-million dollar salaries. This avoids actually passing on the assets to the kids and thereby conveniently avoids the tax entirely.

Rather than repeal, a strong argument can be made that the tax rate ought to be increased for the super-wealthy (say for those with estates valued at over $15 million). The reasons for this were best expressed early this century by the industrialist Andrew Carnegie. In The Gospel of Wealth, he wrote: "The parent who leaves his child enormous wealth generally deadens the talents and energies of the child, and tempts him or her to lead a less useful and worthy life than he or she otherwise would."

Put another way, our society might expect greater productivity from the children of the super-rich if estate tax rates on high-end estates were increased and the gaping loopholes described above were eliminated. My guess is few Americans would shed a tear if those people on the Forbes 400 who have inherited their wealth were asked to pay a higher estate tax. And one might hope that the man in the White House who owes his good fortune largely to his name would be more sensitive to such arguments.

Roy Ulrich is president of the California Tax Reform Association and a member of the Responsible Wealth Coalition.

For more information on the estate tax, go to Responsible Wealth

Also, to petition the repeal of the estate tax, go to MoveOn.org