Estate Tax

Dear Bob,

       First off, it’s great to hear from you again. As the man who made the best tax deal of the past 70 years or so–the 1980s rate reductions and loophole closings that seemed to set us on a course toward a flat tax–you are sorely missed on Capitol Hill.
       But to the subject at hand: estate taxes. In the tradition of great polemicists, you set up a straw man and knock him down: You say that the estate tax was first passed to redistribute wealth from poor to rich and to break up concentrations of great wealth. In these goals, you say, it has failed. You’re right–and those never should have been the goals in the first place.
       The purpose of the estate tax should simply be to raise money to fund the government. Let’s stipulate (alas) that we need this money. I think the estate tax is a decent way to get it–better, for example, than raising tax rates across the board.
       No, it’s not perfect, and I have lots of ideas for reforming the current system–all of which require the payment of taxes at death. I’ll get to those in a subsequent posting. But now, let me tell you in broad terms why I oppose the idea of repealing estate taxes:
       1) As it stands, the estate tax at least makes an effort at fairness. After all, rich dead people, who can afford it (and who won’t need any more money where they’re going anyway), still get to pass the first $600,000 in assets to heirs tax-free. And heirs can “step up” the basis of appreciated capital assets–a massive loophole I’d be glad to discuss later.
       2) It’s better to collect taxes on wealth than on income. A high tax rate on income, as you understand better than anyone, directly discourages work and investment since an individual makes a calculation at the margin: “If I work another hour, I’ll get paid $50 but half of that will go to the tax man.”
       3) Free-market types like you and I generally believe government should promote equality of opportunity rather than equality of results. We’ll never have precisely equal opportunity (genes and upbringing count too much), but why not use the tax code to discourage a gigantic head start?
       In their remarkable book, The Millionaire Next Door, Thomas J. Stanley and William D. Danko found that “most of America’s millionaires are first-generation rich.” More than half never received an inheritance, and fewer than one-fifth inherited 10 percent or more of their wealth. While the majority were entrepreneurs, “91 percent never received, as a gift, as much as $1 of the ownership of a family business.” So starting from scratch can make you ultimately richer–and help the economy as a whole, too.
       4) Ending the estate tax–or even doubling the exemption–is a dumb idea to raise now if your ultimate goal is comprehensive tax reform, that is, a consumption tax (meaning either a flat-rate tax with a big personal exemption or a national sales tax). That’s what we really need. Even if the estate tax were truly an evil, it was paid in 1995 by only 31,500 estates–while more than 2.3 million Americans died that year.
       For those of us (including you, I thought) with an eye on a more important prize, repealing the estate tax is a distraction–and a deadly one politically since it opens the door to easy class-warfare arguments (none of which I’ll raise myself here).