On death and taxes

August 22, 1999|By SEAN R. TUFFNELL

DALLAS -- The American dream has always included entrepreneurs who risk everything to forge a better life for themselves and their families. America used to encourage this type of rugged individualism, but not anymore.

While the United States never went as far as some of the welfare states of Europe, collectivism did infect our public policy.

One example was the enactment in 1916 of the estate tax, also known as the death tax -- the tax on assets transferred from one generation to another after death. Some say calling this tax a remnant of socialism is a little harsh. But, consider that the third plank of the Communist Manifesto calls for the abolition of inheritance.

Proponents of the death tax often make two different but related arguments in its favor.

First, the death tax ensures collection of a significant amount of revenue that would otherwise be lost from rich people.

Second the death tax is needed to redistribute wealth from the super rich, thus preventing a permanent class system.

On both counts, history has shown that death tax proponents are wrong about its effects.

The death tax doesn't collect large revenues as its proponent's promise.

It is the government's least significant revenue source -- rinsing a mere 1.3 percent of all tax revenue in fiscal 1998.

This is partly because the death tax collects most of its revenue from assets worth under $5 million -- 52 percent in fiscal 1996.

Conversely, death taxes as a share of gross estates actually fall for those with assets above $20 mil-lion. So tile greatest burden falls upon small businessmen and the modestly wealthy.

Why does the tax miss its target? Because as Columbia University Professor George Cooper explains, "The inheritance tax is largely a voluntary tax. Anyone with a good tax lawyer and a willingness to engage in advance planning can avoid it."

The complexity of the tax law favors the largest estates, since estate planning techniques are costly. Also, families with long histories of wealth are more likely to be familiar with tax avoidance.

Therefore, those with recently acquired, modest wealth, such as farmers and small businessmen, shoulder a disproportionate share of the burden.

In many cases, their actual incomes may not have been very high and they died not realizing they were considered rich.

For example, Douglas Stinson, a tree farmer from Washington state, recently told the House Ways and Means Committee that the household income of the average tree farmer is less than $50,000, but the typical tree farm can be valued at more than $2 million. The result many times is that the heirs have to sell the farm or business just to pay the death tax.

According to the National Federation of Independent Business, only about 30 percent of family farms and businesses survive a first-to-second generation transfer, and only about 4 percent survive a second-to-third.

Enabling entrepreneurs to leave an inheritance might allow a family to continue their fight for a piece of the American dream between generations without continually starting over from scratch.

Sean R. Tuffnell is the manager of communications at the National Center for Policy Analysis, a Dallas-based think-tank.

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