Consternation over estate-tax elimination

Tax economist Joel Slemrod calls it "very odd." The Senate next week may take up a bill repealing the estate tax.

It's odd because this is happening at a time when the rich - those who pay almost all of the estate taxes - have been winning a bigger and bigger share of the national income pie.

Repeal of the estate tax would mean a few thousand potential heirs of great wealth stand to save billions in taxes.

"Working families would get nothing from it at all," notes a spokeswoman for Senate minority leader Thomas Daschle of South Dakota. More than 98 percent of estates are not subject to estate taxes. They are too small or the money has been left to a spouse or to charity.

In 1997, the 329 estates valued at $20 million and more - and some much more - paid an average of $10.7 million in estate taxes, according to a study by the Center on Budget and Policy Priorities. If this Republican-sponsored measure had been fully in effect then, the heirs of these estates would have saved $3.4 billion.

Still, many rich families take legal steps to avoid estate taxes. So the effective tax rate was 14 percent of the gross value of the estates - not bad, considering the top estate-tax rate is 55 percent.

The "Death Tax Elimination Act" passed the House last month. It now must pass in the Senate and, if it has enough votes, escape a possible filibuster and a presidential veto.

The bill will tempt some Democrats to charge the Republicans with being the "party of the rich."

Democratic presidential candidate Al Gore proposes an estate-tax reform that would target its relief to the 3 percent of taxable estates left by farmers and family-owned small businesses. His plan would mean $1 billion a year in lost revenues, instead of $50 billion when repeal is complete in 2010.

The House bill, said Gore, "is just not fair.... Instead of just making it easier to pass on a family farm, they want to give away the store to those who already own the shopping center."

If estate-tax repeal becomes a campaign issue, the Republicans will undoubtedly counter that the Democrats are trying to foment class warfare.

But there is some party blurring on this issue. Sixty-five Democrats voted for repeal in the House. In the Senate, Republicans would have to pick up the votes of five Democrats and hold on to all of their members to break a filibuster and even more to counter a veto.

Moreover, the sharp increase in prosperity of many Americans - dotcom millionaires and others - has raised fears of their estates being hit by the "death tax."

These people have the deep pockets political fundraisers seek.

New Internal Revenue Service statistics show that the number of taxpayers with incomes of $100,000 or more soared to 8.3 million in 1998, up 15 percent from 7.2 million in 1997.

The most prosperous 1 percent of Americans got 17 percent of total income in 1998. They paid 33 percent of total individual income-tax receipts.

The share of total income held by the wealthy grew rapidly in the 1980s, flattened out in the early 1990s, and since then "has come back with a vengeance," says Mr. Slemrod, of the University of Michigan Business School, Ann Arbor.

A research paper by Slemrod and Jon Bakija of Williams College, Williamstown, Mass., finds those making more than $1 million a year earning 3.37 percent of total income in 1994; 4.92 percent in 1997. That's almost a 50 percent jump in the millionaires' share. If capital gains were added in, the share would be even greater.

Proponents of the estate taxes see it as having social benefits in that it restrains a bit the large concentration of wealth in a relatively few families. And it encourages charitable giving.

The top 5 percent of households bear 91 percent of estate taxes, compared with 49 percent of income taxes. Abolishing the estate tax would be equivalent to a permanent 6 percent reduction in income taxes for the richest Americans.

To save the estate tax, the Democratic leadership offers alternative legislation that might take some sting out of the issue. It would lower the maximum tax rate to 44 percent, and raise the exemption level from the present $675,000 by another $150,000.

(c) Copyright 2000. The Christian Science Publishing Society