Estate Tax

Dear Jim,

       Apart from three brief war periods (1797-1802, 1862-1870, 1898-1902) when an estate tax was levied to pay war debts, and shortly thereafter repealed, the estate tax as we know it today was permanently enacted in 1916.
       There were two intended purposes when the estate tax was permanently passed.
       1. Redistribution: Take from the rich and give to the poor.
       2. Break up concentrations of great wealth.
       The estate tax fails both tests. In a federal budget approaching $1.8 trillion, the estate tax raises $16 billion to $17 billion, about 1% of the total. If you took all of the estate-tax revenues and gave them to the poor it would be a trickling financial tributary in a gushing Mississippi at flood stage. Medicaid goes up each year more than total estate-tax collections. So much for redistribution to the poor. There isn’t enough to redistribute to do much good.
       As to breaking up concentrations of great wealth, this tax has also failed. In 1916 it was aimed at the Rockefellers, the du Ponts, et al. They are still around. Crafty estate-tax planners have devised methods for the wealthy which enable them to mitigate or even avoid the estate tax. It’s amazing what you can do to avoid estate taxes with $10,000-per-year tax-free gifts ($20,000 if a spouse also gives) and by creating charitable family foundations. The problem is, most Americans don’t have enough loose cash to make $10,000-per-year gifts to their children. More typical is the person who founded a business at age 35 in 1960 with five employees. When he or she reaches age 65 and has 300 employees in a business worth $30 million, they discover it’s too late to do any estate-tax planning sufficient to significantly reduce their estate taxes. So their estate coughs up 55% to the federal government.
       That is unfair. You want a litmus test? Go to the coffee shack in a lumber mill. A blue-collar employee, if working full-time, makes $25,000 to $40,000 a year. The owner is well known and well liked by the employees. The business is worth about $30 million. Ask that blue-collar employee, who himself will never be in any bracket that would require paying estate taxes, what he thinks about the fact that when his boss dies his children will have to pony up about $15 million in estate taxes. The word “unfair” quickly comes out of the employee’s mouth. The estate tax runs against the grain of the average American’s sense of fairness when they learn that when you work hard and save, you have to give half of it to Uncle Sam when you die.
       So the job of those of us who believe the estate tax should be repealed is to convince Congress that this tax is unfair. If we succeed, Congress will repeal it.