The Estate Tax: Mend It, Don't End It

The debate over repealing the estate tax is generating more heat than light. Conservatives talk about helping family farmers and small-business people. Liberals talk about curbing the rich. Nobody talks about the millions of aging baby boomers that polls show to be increasingly in favor of repeal, since they are inheriting sizable estates from their parents and want to pass on their own wealth to their children. We believe that mending the estate tax, not ending it, is in the best interests of the country.

Here's why. As Gordon Wood points out in in his book The Radicalism of the American Revolution, America's first leaders rejected the European model of hereditary privilege and hierarchical social ranking. They hoped to replace it with a more open republic based on liberty and equality. Although still evolving, the U.S. has succeeded in becoming a middle class meritocracy with opportunity and mobility for most of its people. Concentration of tremendous wealth at the top could threaten this open society. The estate tax works against this. The founding fathers were right to worry about an aristocracy of wealth.

The estate tax also generates very large tax revenues. President Bush's plan to eliminate it by 2009 would cost the Treasury about $1 trillion over two decades. As a recent petition against repeal signed by 300 wealthy individuals said, the shortfall would "inevitably be made up either by increasing taxes on those less able to pay" or by cutting programs.

Charities might also suffer. While people contribute money to build hospital wings, college buildings, and museum additions mostly to do good and gratify their egos, avoiding estate taxes plays a role. The anti-repeal petition is full of leaders of charitable organizations who fear the loss of their funding.

Finally, very few Americans currently pay estate taxes. Of all Americans who died in 1998, only 46,000 of their estates paid any tax; 44,000 had estates of $4 million or less, and 2,000 paid about half the total. Estate tax insurance policies were used by many small-business heirs to pay their share. And all estates were passed on without paying capital-gains taxes.

That said, a 60% top rate on estate taxes is clearly too high for an era when all tax rates are coming down. And a $675,000 exemption rising to $1 million in 2006 is clearly too low when many middle class families with a house and retirement portfolio can be paper "millionaires." Cutting the top rate to the highest marginal income tax rate and raising the exemption to $3 million, starting in 2002, would refocus the estate tax on the very rich, its original intention when it was passed in 1916, the last great age of wealth accumulation in America.

    Before it's here, it's on the Bloomberg Terminal.