Don't Abolish the Estate Tax, Raise It

The budget deal shows it pays to go to kaffeeklatsches at the White House. As a generous "thank you" gift to those who fund our political campaigns, the President and Republican Congressional leaders are generously providing a $52 billion cut in the capital gains rates and the estate tax. Given that 1996 campaign spending figure was a mere $6 billion, that's a whopping return on an investment. That a reduction in the capital gains rates will benefit the wealthy has been well-documented in the press. (Citizens for Tax Justice estimates that the $33 billion loss to the Treasury this time will benefit the wealthiest 5% of Americans.) It is the estate tax that has not received adequate attention mainly because so few actually pay it. Of the approximately 2.2 million Americans who die each year, only 25,000 pay any estate tax. Put another way, only 1.4% of those who die in any given year leaves estates that are subject to this tax. In early April, Speaker Gingrich said even that was too many and suggested we abolish the estate tax entirely. I suppose we should be grateful that the President didn't go along with Mr. Gingrich's suggestion. Still, the budget deal contemplates raising the floor on estates subject to the tax by 40 percent from $600,000 to $1 million. 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 7 percent of the estate tax filers each year. It's also important to note that the tax doesn't hit a married couple until the estate reaches $1.2 million, and no tax is paid until the surviving spouse dies. And my own definition of a small farm wouldn't include one valued at $1.2 million. What is more, the estate tax is loophole-ridden, so much so that Warren Buffett - ranked second on the Forbes 400 of the wealthiest Americans at $5 billion - has created an estate plan that will result in his heirs paying zero tax. The favorite loophole of the rich is to hire private appraisers who place low values on the real estate and other hard assets passed on to survivors. Their foe is the Internal Revenue Service, which lacks the financial resources to hire its own appraisers who might otherwise determine that the property has been grossly undervalued. Also, it is relatively easy if you are super-rich to pay no estate tax at all by simply setting up a foundation which contains your assets and then provide that your children will operate the foundation 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 well above 55% for the super-wealthy (say estates valued at over $15 million) for reasons best expressed by the industrialist Andrew Carnegie in his Gospel of Wealth: "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 my guess is few Americans would shed a tear if the large number of those on the Forbes 400 who have inherited their wealth were forced to pay a higher estate tax. It's called "pay as you go." Roy Ulrich is a public interest lawyer and consumer advocate who sits on the Board of Directors of the California Tax Reform Association.


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