Estate-tax repeal would be unwise move

Bush agenda: Huge windfall for the wealthy won't aid economy but could hurt states and charities.

April 21, 2001

ONE OF THE weak links in President Bush's tax-cut plan revolves around a tax that few Americans need worry about. It's the estate tax -- or "death tax" as Republican critics call it.

The estates of 98 percent of Americans face no such tax. Most of those that do exceed $5 million.

Yet George W. Bush has made repeal a priority. It's part of a long-standing Republican mantra of needed reforms. And it's the least appealing of Mr. Bush's tax-reduction ideas.

Full repeal is expensive: When fully implemented in 10 years, the loss of estate-tax revenue over the next decade would be $1.3 trillion.

That's because full repeal would not only produce a windfall for the heirs of millionaires, it would prompt additional tax-avoidance schemes, according to Congress' Joint Tax Committee.

The strongest argument for doing away with this tax is that it hurts farmers and family-run businesses. Yet an investigation by the New York Times found that this is a myth. The American Farm Bureau Federation could not cite one instance where a farm was lost because of estate taxes. (Farmers and family businesses already have large exemption -- $1.3 million for an individual and $2.6 million for a couple.)

Nor is the tax as onerous as critics claim. While the top tax rate is 55 percent, it doesn't kick in until an estate is valued above $3 million. The average tax paid on estates is just 17 percent after exemptions, deductions and credits are figured in. An individual's estate has to be worth $675,000 to be taxed, $1.35 million for couples.

Half of all the money raised each year from this tax comes from about 2,400 estates, which pay an average tax of $3.5 million. These are the wealthiest of the wealthy. Eliminating the tax primarily would benefit this group, allowing hefty assets to be passed along from generation to generation untaxed.

There would be other ramifications, too. Charitable giving could suffer. Some studies put the estimated loss at $6 billion a year. Pressure on the rich to divert part of their estates to charities to escape this tax would be removed.

States also would lose revenue -- $9 billion a year -- if the federal tax were fully repealed.

An alternative plan some Republicans are concocting would replace the estate tax with a capital-gains tax when assets are sold. It would be an accountant's nightmare, so complicated that some experts in tax law say it can't work. And it would only recoup about 13 percent of the revenue lost by repealing the estate tax.

This is one law better left on the books. But estate-tax exemptions should be raised, and the top tax rate lowered. One Democratic proposal calls for an individual exemption of $2 million and $4 million for couples, and $4 million for an individual farmer or small businessman and $8 million for couples. It would lower the top rate from 55 percent to 44 percent.

The annual cost of this proposal would be $7 billion a year when fully in effect -- a fraction of the price tag on the administration and Republican plans. Yet it would solve much of the problem. Nearly all farmers and family-run companies would gain exemption. But the very rich would not escape paying something to the government.

Repealing the estate tax doesn't help the middle class or the poor. It doesn't do a thing to get the economy re-started. It favors the rich over everyone else. It's bad tax policy and bad politics.

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