Turning kids into capitalists

The campaign to abolish the estate tax shows the strange priorities in Washington these days.

Some 20 percent of American children live in poverty. Roughly 40 percent of all families have no financial assets to speak of, which means little for their children's education. Yet Washington is obsessing over the relative handful of kids who must endure the estate tax. The place has become a virtual Wailing Wall of concern for trust-fund babies.

None of us likes taxes. But when your biggest problem in life is that you will inherit only $50 million instead of perhaps $75 million - well, that's a problem most of us would like to have.

The sad part is, the whining over the estate tax has upstaged a rare opportunity to ensure that every child starts life with at least some financial assets. Every baby could be a trust-fund baby, not just those fortunate enough to have wealthy parents. We could do this with no new taxes, no increase in government - nothing besides an adjustment in the existing financial plumbing, and some reforms in the estate tax instead of abolishing it.

Historically, the estate tax always has served a large national purpose of this kind. Abraham Lincoln used it to pay for the war to save the union. Congress enacted it again to finance the First World War. Congressional leaders declared at the time that the very wealthy have a particular obligation to support the nation's defense. Today that obligation is no less.

But there's a more important mission today, one that goes to the core of this nation's ideals. The Founding Fathers did not believe in equality of result - that everyone should have the same. But they believed fervently in opportunity; and the estate tax today serves that ideal only in a negative sense. It restrains somewhat the entrenchment of a permanent aristocracy of the kind the Founders sought to prevent. But it does not in itself promote opportunity.

It could, and the way would be quite simple. Instead of going to the government, the revenues from the estate tax could go to individual investment accounts for every single child. There could be an initial deposit at birth, a second upon completion of junior high school, and a third upon the completion of high school. Each young person could then embark on life with a grub stake with which to continue their education, buy a home, start a business, or just to build a nest egg for retirement.

The system would function much like a 401(k), except that instead of contributing earnings, young people would contribute by completing school. All would be eligible, in order to avoid complex eligibility rules and the suggestion of welfare. However the well-to-do would have the option of declining so others could have more. The list of those who took this step would be public: moral suasion instead of government regulation would prevent abuse.

A very rough calculation suggests that children born this year would leave high school with well over $10,000 in the bank, counting interest and investment gains. The amounts would increase substantially in future years as estate tax revenues grew. Parents, employers, and others could add to the accounts tax free. Every single child could have a little of what the children of the well-to-do take for granted - absolute assurance that if they do their part, resources will be there for the next step.

In addition, millions of American families would have the experience of managing savings - often for the first time. Young people would get to watch their investments grow; it would be a counter to the commercial huckstering that permeates their lives. There might also be a fundamental change in the culture of ghetto schools. At present, the young person who works hard invites ridicule as a chump who is trying to be "white." With a tangible reward in prospect, the chump would be the one who didn't finish school.

For all this the price would be quite small. For all the wailing over the estate tax, the actual rate - after loopholes - is typically about 17 percent. The heirs of large fortunes would continue to inherit princely sums. There could even be a substantial increase in the exemption, which currently is about $1.3 million for a married couple. We could eliminate the tax entirely as it affects family farms and businesses. It is rare that a family farm must be sold to pay estate taxes, but we should eliminate even the possibility.

The fact is, the estate tax is one of the few taxes that have positive effects. It encourages work and enterprise among children of the wealthy, for example. "Great sums bequeathed oftener work more for the injury than the good of the recipients," wrote industrialist Andrew Carnegie a century ago.

On top of that the estate tax encourages contributions to charity. Many of the biggest foundations in this country began as estate tax dodges, and rarely has tax avoidance served such constructive social ends.

So in the end we are left with a simple question. Is it more important to ensure a tax-free death to those 2 percent of Americans whose heirs are subject to the estate tax, or a resource-full start in life for those who represent this nation's hope for tomorrow?

Jonathan Rowe is a fellow at the Tomales Bay Institute, and former Monitor staff writer.

(c) Copyright 2001. The Christian Science Monitor