The Estate Tax Debate

In 1999 and again last year, Congress rich. Although most Americans are not voted to abolish the estate tax, but each rich, 60 percent favor abolishing the tax, time, President Bill Clinton vetoed the according to a poll last June, and the issue measure, saying it would benefit only the continues to be debated.

Under current law, only estates of $675,000 or more are taxed, with the tax rate starting at 37 percent and rising to 55 percent on estates of $3 million or more. Less than two percent of Americans who die owe any estate tax at all, but many Americans apparently dream of accumulating enough riches to be threatened by the tax: 41 percent in a 1999 Newsweek poll claimed that they are very or somewhat likely to become wealthy.

"The fundamental justification for estate taxation is [the belief] that great private wealth is socially undesirable," writes Bruce Bartlett, a senior fellow at the National Center for Policy Analysis, in the Public Interest (Fall 2000). But he argues that, on the contrary, great wealth and the inequality it represents and fosters are vital to the functioning of the U.S. economy.

"A secondary rationale" for estate taxation, Bartlett asserts, "is that inherited wealth is undeserved and perhaps even harmful for the recipient." But study after study, he says, shows that most great wealth in America does not come chiefly from inheritances. A recent survey of the wealthiest one percent of Americans found that inheritances were not a significant source of wealth for 90 percent of them. But "the desire to leave an estate drives people to work and save," Bartlett argues. "To the extent that the estate tax reduces a parent’s ability to leave an estate to his children, it will have a negative effect on willingness to accumulate wealth through work, saving, and investing."

"The threat of a tax strike by the rich is terrifying," sardonically comments James K. Galbraith, a professor of public affairs and government at the University of Texas at Austin, writing in the same issue of Public Interest, squares poorly with points Bartlett makes."

notes that the very wealthy engage in careful and costly estate planning to avoid the tax, while "a disproportionate burden . . . often falls on those with recently acquired, modest wealth: farmers, small businessmen, and the like. In many cases, their incomes may not have been very high, and they died not even realizing they were ‘rich.’ " But, Galbraith asks, if the very wealthy can readily evade the tax, and many of the less wealthy are not even fully aware of the extent of their fortune, then how can the estate tax be such a disincentive to work, save, and invest?

Edwin S. Rubenstein, director of research at the Hudson Institute, writing in its journal American Outlook (Nov.–Dec. 2000), zeroes in on the disproportionate effect of the tax, arguing that the impact on farmers and small business owners can be "devastating." A 1995 survey found that slightly more than half of family businesses would find it hard, thanks to the estate tax, to survive the principal owner’s death. But economists William G. Gale of the Brookings Institution and Joel Slemrod of the University of Michigan, in Brookings Policy Brief No. 62 (June 2000), warn against letting the tail wag the dog: "Farms and other small businesses represent a small fraction of estate taxes. In 1997, farm assets were reported on less than six percent of all taxable estates, his the "but it two other Bartlett himself and closely held stock on less than 10 percent. . . . [The] vast majority of estate taxes are paid by people who own neither farms nor small businesses."

If the estate tax has little effect on the concentration of wealth in America, as some opponents of the tax contend, then that, observe Gale and Slemrod, "could be construed as an argument for increasing, rather than decreasing, the tax." Abolition of "the most progressive tax instrument in the federal tax arsenal," they say, would hurt nonprofit organizations (to which the wealthy are induced by the tax to give), reduce federal revenues (by the amount the tax produces, which was $28 billion in 1999, or about 1.5 percent of all federal revenue), and "create a gaping loophole for capital gains in the income tax." (The estate tax gets at capital gains that were never realized and so escaped the income tax.) "Many arguments commonly made against the tax are demonstrably specious," Gale and Slemrod conclude. "To the extent that any of them are valid, they suggest reform rather than abolition."

Leon Friedman, a professor at Hofstra University’s School of Law, writing in the American Prospect (Nov. 6, 2000), has a different idea: Abolish the estate tax, but impose a one percent tax on the net worth of the richest one percent of Americans "on a regular basis during their lifetime." This, he says, would generate more than $100 billion a year in federal revenues, "reduce the national debt, shore up Social Security and Medicare, allow for significant tax decreases for the middle class, and eliminate the need for an estate tax."