Death tax's exaggerated bite

Estate tax : Most wealthy estates pay far less than the heated congressional rhetoric suggests.

August 02, 1999

THE IDEA of eliminating the estate tax, as called for in the House-passed tax reduction bill, has great emotional appeal. But it makes very little policy sense.

GOP House members claim that many family companies and farms are liquidated each year to pay for the tax. They also argue that the rates -- 37 percent to 55 percent -- are confiscatory.

In a recently published study, however, two economists showed how the facts don't support these arguments. When Charles Davenport and Jay A. Soled sifted through data from 1996 federal estate tax returns, they found that the tax actually affected very few people and the tax rate was not nearly as high as the political rhetoric would suggest.

In 1996, about 2 million people died in the United States, but only about 38,000 estates -- or about 1.5 percent -- were taxable. Under current law, the first $650,000 of an estate is exempt. That number will increase to $1 million in 2006, meaning even fewer estates will pay any taxes. Of those that paid taxes in 1996, the average tax liability was 18 percent -- nowhere near the levels suggested in the congressional debate.

The two researchers also discovered no evidence to support the claim that the estate tax forces heirs to sell family businesses and farms. Most sales of farms and businesses, they said, were the result of heirs who wanted to cash in on their inherited estates. Rarely were the family businesses and farms sold off just to pay estate taxes. Even more revealing: Only about 20 percent of the tax returns with farm assets were subject to the estate tax.

In reality, most wealthy people have taken a variety of steps to protect their estates from taxation. Rather than eliminating the estate tax, Congress should think about lowering the marginal rates and crafting a more graduated tax.

The facts -- rather than raw emotion -- would certainly support that policy.

Pub Date: 7/31/99

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