Chicago Tribune
Editorial
Sunday, April 9, 2000
Death and taxes: Break the link
An effective tax should be efficient and fair: On both counts, the federal
estate tax fails the grade.
Gradually reducing estate tax rates or indexing them to the rate of
inflation and somehow exempting family-owned businesses would perhaps
be steps in the right direction. But it may be time to just get rid
of this tax and treat estates the same as any other capital gain. The
current tax is inefficient; it discourages behavior we would like to
encourage - saving, investing and creating jobs - it doesn't achieve income
redistribution and it contributes relatively little to federal coffers.
The estate tax is paid on the value of everything you own at the time
of your death - house, car, stocks, bonds, other investments, proceeds
from life insurance, cash, belongings. Currently, it is owed when an
estate's value reaches $675,000. That limit is due to rise gradually
to $1 million by 2006. The tax rate rises from 37 percent to a top of
55 percent, which kicks in when the estate exceeds $3million.
Fewer than 2 percent of Americans who died last year left estates large
enough to have to pay any tax at all. But that number is expected to
grow as more Americans, who don't view themselves as rich at all, discover
that a house appreciating in value and a stock-rich company 401K plan
can easily put them over the limit.
The tax, which raises just 1.4 percent of federal revenues, has spawned
an enormous industry of tax accountants, lawyers and estate planners
who counsel people on how legally to avoid paying it. These are resources
that otherwise could be more productively employed if it were to go
away.
Although it is often viewed as a way of getting the rich to pay their
fair share, the tax does not lead to a more even distribution of wealth
because, with careful estate planning, it need not be paid at all.
It could be argued that the middle class, unaware of the impact of their
own increasing prosperity, are far more likely to end up owing the tax
than are the truly rich, who employ legions of lawyers and accountants
to take care of those matters.
Some of those legal tax avoidance arrangements also must be implemented
over many years, another factor that means the people paying it aren't
as likely to be the old filthy rich, but the new, more modestly rich.
In fact, in the view of economists Henry Aaron and Alicia Munnell, estate
taxes are more accurately "penalties imposed on those who neglect to
plan ahead or who retain unskilled estate planners." The burden falls
most heavily on those family businesses and farms that, with the death
of the founder, must be sold or broken up to pay the tax.
The economy overall may be better off just getting rid of the tax rather
than gradually increasing the limits because that would also eliminate
the need to try to figure out how to avoid paying it.
The estate tax has been around on and off for more than 200 years. In
the late 18th Century and episodically in the 19th, it was used to pay
for wars. It was last repealed in 1902, after the Spanish-American War,
was last reinstated in 1916 and has been with us ever since.
An early reason for the estate tax was to prevent the "concentration
of wealth." It certainly hasn't achieved that purpose. It's hard to
see where it has had a positive impact on income redistribution at all.
Income equality is greater now than ever.
And that's the big gorilla of a problem facing efforts to do away with
it. This tax may not achieve any productive revenue-raising aims, but
repealing it is politically difficult because there's no way around
the fact that it benefits the rich. Still, it's time to lay it to rest.
