Its time to end the death tax

Posted: Mar 02, 2001 12:00 AM
Abolition of the estate and gift tax, dubbed the "death tax" by its opponents, has been one of the highest priorities of Republicans in Congress for several years. Although garnering majorities in both the House and Senate, death tax repeal was consistently blocked by Bill Clinton. Thus, when Republicans won the White House last year while keeping control of both houses of Congress, I am sure that many believed that the estate tax would soon be history. Now it appears likely that it will survive, the result of an unholy alliance between a few short-sighted Republicans, the foundation community and some cynical tax practitioners. Ironically, one of George W. Bush's own appointees is playing a key role in keeping the death tax alive. John J. DiIulio Jr., recently appointed head of the White House Office of Faith-Based and Community Initiatives, threw the death tax a critical lifeline in an interview with the New York Times on February 8. Asked whether he favors abolition of the estate tax, he said, "I don't want to be the skunk at the picnic. But no, I don't think the estate tax should be eliminated--modified, maybe, but not eliminated." Seizing upon this break in Republican unity, supporters of the estate tax quickly rallied. A bunch of millionaires--always thought to be Republicans because, after all, the Republican Party is assumed to be the party of the rich--took out an ad in yesterday's (February 18) New York Times saying that the estate tax should be retained. Echoing the politically naive Mr. DiIulio's concerns, the millionaires stressed the importance of the estate tax in stimulating charitable contributions. "The estate tax," they said, "exerts a powerful and positive effect on charitable giving. Repeal would have a devastating impact on public charities." These breeches in the wall of Republican solidarity on death tax repeal apparently have emboldened those who benefit financially from it to come out of the shadows. According to columnist Robert Novak, the lawyers, accountants and insurance agents who make their livings helping people avoid the estate tax have begun lobbying heavily on Capitol Hill against getting rid of the tax. Too clever to make the honest case that abolition of the estate tax will reduce their incomes, these public spirited citizens are also warning that an end to the estate tax will slash charitable giving. This concern for the interests of charities is mostly insincere, designed to tug at the heartstrings of those Republicans, like Mr. Bush, who genuinely believe that the private sector can replace much of the government's role in aiding the destitute and disadvantaged. The true goal of many estate tax supporters is not to help the less fortunate, but to combat cutbacks in government welfare spending while allowing the wealthy to maintain their privileged position in society. The simple-minded notion underlying all this is that much giving by the wealthy appears to be motivated by the estate tax. With a tax that can go as high as 60 percent, it only costs some wealthy individuals 40 cents to give a dollar to their favored charities in their wills. The assumption is that if the estate tax goes away, it will then cost $1 to give $1 at death, which will reduce charitable bequests. The reality is that the estate tax does more to affect the timing of giving among the wealthy than the amount. Research by Treasury Department economist David Joulfaian, recently published in prestigious economic journals, presents compelling data on this point. It shows that those with lower amounts of taxable wealth tend to give much more to charity during their lives, while the very rich give much more at death. In a sample of taxpayers, none with estates under $1 million made any charitable bequests whatsoever. All, however, made substantial gifts during their lives. At the opposite end of the wealth spectrum, those with estates larger than $100 million only gave 22 percent of their charitable gifts during their lives, with 78 percent being given at death. It is reasonable to assume that in the absence of an estate tax, those with large incomes and great wealth would simply give more during their lives than they do now. After all, even if Mr. Bush's tax plan were to be enacted, a rich person would still save 33 cents in federal income taxes for each dollar given to charity. That will remain a powerful incentive to give. Moreover, a recent study by the accounting firm of PriceWaterhouseCoopers estimates that Mr. Bush's proposal to allow those who do not itemize to also deduct charitable contributions will increase giving enough to offset any net reduction in charitable giving by the wealthy owing to abolition of the estate tax. Finally, it is worth noting that these millionaires who want to keep the estate tax mostly don't pay any estate taxes now. They put all their assets into private foundations that they set up to memorialize themselves, so that everyone will know what great people they were and also keep control of their businesses in their families. According to Mr. Joulfaian, the vast bulk of the assets of the very wealthy go to setting up such foundations, whereas the moderately wealthy are more inclined to give to churches, universities and other existing organizations. In a recent book, "Writing Off Ideas," economist Randall Holcombe notes that these foundations often become controlled by leftists, who use them to promote ideas diametrically opposed to those whose wealth established them. Mr. Bush was right to propose abolition of the estate tax during his campaign. Mr. DiIulio is wrong to fight him on this and, in any case, his concerns are misplaced. The estate tax does far less to encourage useful charitable giving, of the sort his office wants to encourage, than he imagines. Most of the charitable bequests of the mega-rich simply go to stroke their own egos and often do more harm than good. If abolition of the estate tax reduces such giving, society may actually be better off.