Estate tax - a necessary evil

One nearly certain way for a journalist to get reader response is to advocate retention of the estate tax.

Taxes in general are hardly popular. But the death tax seems to really rile those contemplating leaving assets or those expecting inheritances. Many, perhaps, see an inheritance as their best hope for sudden prosperity - sort of a lottery ticket with extremely high odds of winning. Or maybe the attitude is: "Daddy [or I] worked hard for that money. He should be able to do with it as he wishes, even after he passes on."

Whatever the reason, the tax is sufficiently despised that the Republicans in Congress are often trying to dilute it or phase it out.

Last month, for instance, the House passed a bill to boost the minimum wage which contained an estate tax reduction and an array of other tax cuts. The estate tax aspect accounted for 65 percent of the total $122 billion in tax cuts over 10 years. Most of that benefit would accrue to the heirs of wealthy people who do not own small businesses or farms.

The bill will likely be vetoed.

Few, mostly large, estates are subject to federal tax. In 1997, 42,901 taxable-estate tax returns were filed. That was only 1.85 percent of deaths that year. Moreover, because of all the loopholes tax accountants and lawyers have found, estate taxes are often described as "voluntary." It is often the unaware who leave money to Uncle Sam.

But something unforeseen has happened. Many more Americans are becoming wealthy. The estate tax and the related gift and generation-skipping transfer tax have become an important revenue source. These taxes provided Washington with $7.6 billion in 1988, $24 billion in 1998.

"An increasing number of America's upper-middle class will be forced to experience the complexity and irrationality of the estate- and gift-tax structure firsthand," writes economist Martin Sullivan in "Tax Notes," a bible of the tax industry. "As America's affluent baby boomers turn gray, it is likely that new life will be breathed into the old debate on 'death taxes.' "

Before long, dotcom millionaires will be besieging Congress for estate-tax relief.

Revenue from these transfer taxes is expected to equal $331 billion in the 1999-2008 decade. That is not fiscal peanuts.

The estimated 1999 revenues of $27.7 billion from these taxes equals the entire 1997 individual income-tax liability of taxpayers with an adjusted gross income under $15,000. It was 36 percent of the tax liability in that year of those in the $15,000 to $30,000 bracket, notes Boston College law professor James Repetti.

Aside from its revenues, there are other valid reasons for continuing to tax estates.

One is that it prompts the wealthy to set up foundations for "good" purposes and finance new museum wings. "If estate and gift taxation were to disappear, there would be a considerable drying up of charitable contributions," says Thomas Field, publisher of Tax Notes in Arlington, Va.

The "real importance" of estate taxes is that they limit the establishment of "aristocracies of wealth," Mr. Field says.

The moneyed already have too great an influence on the nation's politicians and on legislation, campaign reformers allege. Estate taxation, as high as 60 percent, restrains the buildup of family wealth over generations.

Field suggests that to maintain congressional support for the estate tax, it should apply only to estates above $15 million, and then escalate from a 10 or 15 percent rate at first to 60 percent at, say, $100 million.

Farmers and small business proprietors could then no longer complain that Washington was preventing them from turning over their life work to their children.

Already husbands and wives can leave unlimited amounts of assets to each other tax free. And in 1997, Congress upped the amount that can be passed on to other heirs tax free from $600,000 to $675,000 this year and $1 million in 2006. Those changes will cost $33 billion in revenues through 2007.

Complete abolition of estate taxes may be too costly for Congress to pass. And it would deepen economic inequities in the nation.

*David R. Francis is senior economics correspondent of the Monitor.

(c) Copyright 2000. The Christian Science Publishing Society