A few weeks ago, a group of white millionaires, most of whom inherited their wealth, placed a small advertisement in The New York Times imploring Congress not to repeal the estate tax. It would be "bad for our democracy, our economy and our society," the millionaires said. The Times gave major coverage to this event, running a page-one story (above the fold) about the ad four days before it even appeared. It followed up with an editorial extolling the virtue of these selfless millionaires, as well as a feature in its Sunday magazine.
Now, fast forward to April 4. A group of black millionaires, most of whom made it themselves, place a full-page ad in The New York Times supporting abolition of the estate tax. However, this time the paper chose not to mention it in advance in its news pages. By contrast, The Washington Post, where the ad also ran, at least published a small news story on a back page two days before it appeared.
No doubt, were a conservative paper to have done the opposite -- hyping an ad by white people opposed to the estate tax, while ignoring an ad from black people supporting it -- the Times would probably have accused it of racism. It is at least as newsworthy that a group of wealthy blacks, led by billionaire Robert L. Johnson, would oppose the estate tax as that a group of wealthy whites support it. The failure to give equal coverage can only be attributed to the increasingly liberal bias of The New York Times.
The black business leaders' ad is also notable for being far more substantive than that of the white heirs and heiresses. Whereas the latter made their case with a lot of platitudes and unsupported statements, the former relied on logic and evidence to justify their position.
The most important point made by the black business leaders is one that is usually ignored, even by supporters of repeal -- that the estate tax is per se a double tax. "The estate tax is unfair double taxation since taxpayers are taxed twice -- once when the money is earned and again when you die," the ad says. Actually, this understates the point. In reality, for most people, the estate tax is a triple tax and for many a fourth level of taxation.
Consider this example. Someone works to earn wages, from which taxes are paid. From what is left, this person saves a bit and buys a share of stock. The company of which he has now become part-owner earns a profit. That profit is taxed by the federal government at rates up to 35 percent. However, when the remaining profits are paid to the company's owners -- the shareholders -- they must pay taxes again on exactly the same profits that were already taxed once.
Suppose that this company does a good job at what it does and increases its profits, causing its stock to rise. If our friend sells his stock and realizes a capital gain, there will be another tax on that sale. But the gain only represents the capitalized value of future profits, which we have seen are taxed twice. Thus the capital gains tax is really a third layer of taxation on profits that are already subject to two layers of taxation.
Now, despite paying taxes two or three times on his savings, by age 65 our friend is successful in building his portfolio up to $1 million. He did so because all the financial advisers he consulted said that he needed this much to live comfortably in retirement. He converted his stocks to Treasury bills and spent the interest to live, on which he continues to pay taxes.
Eventually our friend dies. With T-bills paying just 5 percent these days, he only had $50,000 a year of income -- about the median income for the United States -- and never thought of himself as rich or engaged in estate planning. His heirs will wish he had. Although $675,000 of the estate is exempt from taxation, the remainder is taxed at about a 39 percent rate. This means that the federal government will levy a tax of $125,000 on assets that have already been taxed 3 times.
Some may say to this, "So what?" Everybody pays multiple taxes on their incomes. The problem with the estate taxes is that the rates are very high, starting at 37 percent on the first taxable dollar, rising to 60 percent on estates over $10 million. (The rate falls to 55 percent on those over $17 million.) Coming on top of all the other taxes, the effect is to significantly reduce the stock of capital, which is the ultimate source of jobs and wages for all workers.
Estate taxes are especially costly to family-run businesses. In order to keep their businesses in their families, those who founded and nourished them to a modest size must expend vast resources to do so. Not only must they engage costly lawyers and accountants to devise complex estate plans, but they must often pay large sums out of current revenues for insurance policies that are needed primarily to pay the estate tax. Failure to buy such policies often means that family businesses must be sold at a fraction of their value to raise cash to pay estate taxes.
The white millionaires care nothing about the problems of struggling family businesses. Why should they? Most of them inherited their wealth in the first place, and those that didn't are known to have made extensive plans, all perfectly legal, for preserving their wealth from the tax collector. This is the reason why the effective estate tax rate actually falls on estates over $20 million.
The reality is that half of all estate taxes are paid by estates under $5 million and two-thirds is paid by those under $10 million. And the highest effective rate is paid by those between $10 million and $20 million, which pay an average of 19.7 percent. But because of estate planning, those over $20 million paid only 16.8 percent in 1999.
Johnson and his colleagues are to be congratulated for joining the estate-tax discussion. I look forward to a debate between them and those who signed the ad supporting the estate tax. BET, Johnson's television network, should televise it.
Chart data: Effective Estate Tax Rate, 1999
Gross Estate* ---- Percent
0.6 to 1 ---- 2.1
1 to 2.5 ---- 8.8
2.5 to 5 ---- 15.7
5 to 10 ---- 18.8
10 to 20 ---- 19.7
20 and over ---- 16.8
*Millions of dollars
Source: Internal Revenue Service