The Repeal of the Estate Tax:
Dead but for how long?
by John Miller
Dollars and Sense magazine, November/December
The repeal of the estate tax is a dead letter, at least for
now. Despite the support of Republicans and a growing number of
Democrats for eliminating the "Death Tax," as they like
to call it, Congress failed to override President Clinton's September
veto. But the only federal tax on accumulated wealth will be at
the top of Congress's agenda next year, whether Bush, who favors
its repeal, or Gore, who favors larger exemptions for farmers
and business owners, is elected president.
The growing support for the estate tax's elimination is astonishing
and alarming. A June 2000 Gallup Poll reported that 60% of Americans
favored repeal, despite the fact that just 2% of estates are taxed.
(The current law exempts all estates under $675,000.) Even the
well-off, who have become paper millionaires with the stock market
boom, have little to worry about. A 1991 study found that nearly
all taxable estates under $5 million included liquid assets greater
than the estate tax owed. Meanwhile, the exemption is set to increase
to $1 million by the year 2006. In 1997, one-half of estate tax
revenues came from the 0.1% of estates valued at over $5 million.
The tax, in short, is not a burden on anyone remotely resembling
an ordinary taxpayer.
Why would a tax cut that benefits so few enjoy widespread
support? Part of the answer is clever marketing, Congressional
Republicans have painted the estate tax as a threat to family
farms and small businesses. In August, Sen. Strom Thurmond (R-SC)
signed the repeal bill and then handed it over to a Montana cattle
rancher, who delivered it to the White House on his red tractor.
George W. Bush got in on the action as well. Over the summer,
he told the members of La Raza, a major Latino advocacy group,
of a Mexican-American taco-shop owner who wanted "to get
rid of the death tax so I can pass my business from one generation
to the next."
The taco shop, it turns out, would have gone untaxed. Valued
at $300,000, it is worth less than one fourth of the $1,300,000
exemption the current law allows business owners and family farmers.
And it's not just taco shops that go tax-free. Almost all small
business estates are exempt from taxation. The value of a sole
proprietorship, the chief form of small business, is rarely greater
than its annual sales. In the mid- 1990s, only about 1.5% of non-farm
sole proprietorships reported annual sales of more than $500,000,
well below the exemption for the estate tax. Family farmers are
almost as unlikely to feel the estate-tax pinch. Just one in 20
leaves a taxable estate. In fact, in 1997, the assets of family-owned
businesses and farms accounted for less than 4% of the assets
of all taxable estates under $5 million. As the President, born
and raised in Arkansas, pointed out in his veto message, the chief
beneficiaries of the repeal of the estate tax have most likely
never sat atop a tractor of any color.
The other argument that opponents of the estate tax have mustered
for its repeal is that the rich have already paid income taxes,
so they should be able to leave their wealth to their heirs without
paying further taxes. They are being subjected to "double
taxation"! Well, there may be a constitutional prohibition
on double jeopardy, but "double taxation" is a fact
of life for every one of us, not just the rich. For instance,
workers pay payroll taxes and income taxes on their wages, and
then sales taxes when they spend what remains of their paychecks.
The important issue is not how or when we pay taxes, but how much
we pay. Today, the richest 1% of U.S. families pay about one third
of their incomes as federal taxes of all kinds, far less than
the two fifths they paid in 1977, despite the fact that their
real incomes have more than doubled since then.
Beyond that, much inherited wealth has never even been taxed
once, much less twice. Suppose that Steve Forbes purchases a share
of stock for $200, holds it as it appreciates to $1000, and then
passes that stock on his daughter when he dies. His daughter then
sells the stock one year later for $1 100. Under current law,
she would pay income taxes only on the $100 capital gain since
she inherited the stock. The $800 gain from its original purchase
price to its value at her father's death would escape the income
Untaxed gains are no small portion of estates. Economists
James Poterba and Scott Weisbenner estimate that these gains make
up about 37% of the value of estates worth more than $1 million
and about 5G% of estates worth more than $10 million. The estate
tax is the only way, under current law, to tax capital gains that
escape the income tax.
If fairness is your issue, then consider the consequences
of using the projected surplus in the federal budget to finance
the repeal of the estate tax. The 1997 "caps" on discretionary
domestic spending account for a cool $60 billion of the annual
surplus, just a little more than the $50 billion a year a fully
phased-in estate tax repeal would cost in government revenues.
Included among the programs that will shrink because they are
no longer adjusted for inflation is Head Start, which offers federally
funded preschool instruction and meals to children from low-income
families. The Clinton administration last fall proposed dropping
111,800 children from the Head Start rolls by fiscal year 2009.
The Republican budget proposal would have cut 430,000 children.
To give the sons and daughters of the wealthiest 2% of Americans
even more of a head start than they already enjoy, by repealing
the estate tax, while cutting hundreds of thousands of poor children
from Head Start - now that really would be unfair.
John Miller, a member of the Dollars & Sense collective,
teaches economics at Wheaton College.