Estate tax questions

Bruce Bartlett
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Posted: Jun 20, 2006 12:04 AM
On June 8, defenders of the estate tax won a victory when the Senate failed to break a filibuster against H.R. 8, which would permanently repeal the tax. Future debate will center on a compromise proposal that will keep the tax in place, but substantially raise the amount of wealth exempt from it and lower the tax rate.

During the course of debate on the estate tax, several questions were raised in my mind that were never answered by supporters of the estate tax. I still think that they need answers before final resolution of this issue.

First, opponents of repeal say that they now support permanently raising the estate tax exemption and reducing the tax rate. I would like one of them to tell me whether this would be their position if the proponents of repeal hadn’t made such a strong case for their position and managed to obtain majority support in both the House and Senate?

Let us remember that before the repeal effort got going, the top rate on estates was 55 percent and all estates larger than $600,000 were subject to a tax of at least 18 percent. The top rate applied to those larger than $3 million. It is simply absurd to believe, as estate tax supporters implicitly argue, that people with such modest levels of wealth are rich in any meaningful sense of the term.

Indeed, financial advisers today tell middle class couples that they will need at least $1 million in financial assets to live comfortably in retirement. And with the big run-up in housing prices in recent years, it is not at all uncommon for middle class families to live in $600,000 homes. These are not the sort of people who deserve special taxes originally designed for the rich in order to break up large fortunes and avoid excessive concentration of wealth.

Yet there is no question that the middle class would still be subject to the estate tax without the efforts of those seeking its repeal. Liberal supporters of the estate tax who now say they favor a big increase in the exemption would never hold this position unless political support for repeal was so strong that they have no other choice.

This brings me to my second question. Supporters of the estate tax constantly say that the repeal effort is driven solely by a few rich families that are selfishly pushing for repeal of a tax that only affects them. But if this is true, why is it that very large majorities of average Americans support repeal and did so long before the repeal effort got going?

The most recent poll I have was done by Harris in March and shows 68 percent of Americans favoring elimination of the estate tax. In every poll I have seen since 2000, roughly two-thirds of respondents say the same thing—far more than can possibly be accounted for just by those who think they will benefit.

The oldest poll I have was taken in 1935 in the middle of the Great Depression when Franklin D. Roosevelt was actively pushing soak-the-rich tax policies. Nevertheless, 52 percent of Americans said that there should be no limit on how much a person should be allowed to inherit—in effect supporting the idea of no estate tax.

Supporters of the estate tax have never had a good response for these poll results. In my view, there are only two possible answers. One is that people just believe that the estate tax is fundamentally unfair—people pay taxes on their savings and income while they are alive and there is simply no justification for an additional tax at death. Second is a widespread belief, whether realistic or not, that perhaps they or their children may someday become rich and potentially lose more than half their assets to Uncle Sam when they die.

Finally, I often hear that repeal of the estate tax is unnecessary because proper estate planning can reduce or even eliminate it no matter how rich one is. On June 12, one estate tax supporter had a letter in the New York Times saying that the tax was basically optional. “So repeal is unnecessary except for the uninformed, the unfocused or those people who are unwilling to pay their financial planning team a little more to make the tax go away or be reduced,” he wrote.

This has to be the worst defense of any tax I have ever heard. When a tax is arbitrary and falls on mainly on the ignorant while the sophisticated are exempted, this is usually an excellent argument for getting rid of that tax. In my opinion, estate tax supporters have a lot of nerve turning a fatal flaw in that tax into a prime virtue.