A Tax We Can't Afford to Lose


By Howard Gleckman We are, as President Bush continues to remind us, at war. And wars, I used to think, were a time for sacrifice. Not just for the men and women who put themselves in harm's way or for the families of the victims of September 11, but for all of us.

So why is the House about to mark the war on terrorism by cutting taxes for the megarich? We're not talking about another tax reduction aimed at boosting a sluggish economy. That might be defensible. No, we're talking about slashing taxes for a few hundred of the wealthiest families in the country. More to the point, if the tax were repealed right away, we would be a giving a $16.5 billion tax cut to 3,200 families. About 450 of them would get a staggering $8 billion. And what did they do for this largesse? They saw a rich relative die.

Later this week, the GOP-controlled House will vote to make permanent the repeal of the estate tax. Ordinarily, it would be easy to write this off as just another political stunt -- one of an endless series of bills passed by the House only to die in the Senate, thus giving the GOP more ammunition in their campaign to blame Senate Democratic Leader Tom Daschle (D-S.D.) for blocking all manner of popular ideas. The trouble is, there's so much support for repealing the estate tax, the Senate might stumble into actually doing something as well. And that would be very sad.

CONVOLUTED CODE. You may remember that a year ago, as part of the Bush tax cut, Congress approved changes in the levy that defied all logic. The law first raised the size of an estate that will be exempt from tax from $600,000 to $1 million. By 2009, the exemption rises to $3.5 million. Then the tax is repealed entirely for 2010. Starting in 2011, it would be restored to its pre-2001 exemption of $1 million.

This convoluted strategy represents everything bad about modern tax legislation. And it needs to be fixed. Here's how: Make the generous $3.5 million exemption permanent after 2009. Even index it for inflation. But repeal the tax entirely? They must be kidding.

To see why, it helps to look at who pays the estate tax. Here's a snapshot, courtesy of Bill Gale, a tax economist at the Brookings Institution, and Len Burman, a former senior Treasury Dept. aide in the Clinton Administration. In 1999, the last year for which numbers are available, taxes were paid by about 50,000 estates, representing roughly 2% of everyone who died in the U.S. that year. The other 98% of us owed no estate tax, even before passage of the Bush tax cut.

WHO PAYS? About 40% of those taxable estates were worth $1 million or less, and thus are already exempt under the 2001 law. The $3.5 million exemption would protect another 50%. Bottom line: Even with inflation, perhaps 10% or 15% of taxable estates -- or well below 1% of all estates -- would benefit from full repeal of the levy. And by 2011, they won't be divvying up $30 billion, they'll be enjoying the bulk of $50 billion.

Who are these folks? The yeoman farmers of American myth? Nope. Only about 12% of taxable estates, representing less than 2% of the value of those estates, was reported from farmers. Small-business people? Wrong again. Perhaps 9% of estate tax returns were filed by mom-and-pop business owners. Besides, small-business owners and farmers already get the benefits of all sorts of special rules that let them artificially hold down the reported value of their assets and give them years to pay off any tax that is actually due.

No, most of this dough belongs to investors. Bless them for providing the capital that companies use to grow -- it is a wonderful and important thing they do. But, like the rest of us, their heirs should pay tax on those market profits. It is the least they can do -- especially in a time of war. Gleckman is a senior correspondent in BusinessWeek's Washington bureau. Follow his views every Tuesday in Washington Watch, only on BusinessWeek Online


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