- The Washington Times - Tuesday, July 11, 2000

The so-called "death tax" used to be the almost exclusive headache of the super rich, their tax attorneys and their estate planners. But, with Wall Street's spectacular performance, more and more middle class families who own homes and have IRAs, 401(k)s or other retirement accounts could find themselves hit with an unexpected estate tax bill.

This fact has not been overlooked by the Republican Congress which has made repeal of the estate tax part of its single-item tax policy strategy. The House has passed H.R. 8 to phase out the estate and gift tax over 10 years by a vote of 279 to 136. This margin would be just enough to override a presidential veto. The bill now awaits action by the Senate.

According to research in our study for the Institute for Policy Innovation (IPI), estates worth over $675,000 are taxed starting at a rate of 37 percent and rapidly rising to 55 percent on estates over $3 million. In contrast, 50 years ago, estates under $2.3 million (in terms of today's wealth) were exempt from tax. This serious erosion in the value of the exemption is one reason why small and medium-sized estates, those under $2.5 million, paid over half (54 percent) the estate tax in 1995. Adjusted for the growth in wealth, similar-sized estates paid only an eighth of the tax in 1945.

The death tax hits small business particularly hard. Take a family-run store yielding an annual 10 percent return after inflation, 5 percent after taxes. If the owner dies and is subject to the 55 percent death tax rate, how do the heirs pay the bill? They can't send 55 percent of the store's inventory to Washington because the Treasury doesn't accept payment-in-kind, only cash. Their income from operating the store 5 percent return after taxes would pay off the estate tax in 11 years, but Treasury wants the money now.

Borrowing at 9 percent (4.5 percent after tax), they could pay off the loan in 50 years, but that would mean running the store for free all that time. The situation worsens for the small farmer owning land near an urban area.

While the farm yields a 10 percent return when valued for that purpose, tax law requires that the asset be valued at its "best use." That lowers the pretax return, say to 5 percent (2.5 percent after tax), and not even the 50-year bank loan can save the farm. The higher exemption and possibility of lower-interest loans granted in the 1997 tax bill does provide some relief by reducing the number of years that heirs would have to operate the business for free.

Examples like these are all too common and explain why the death tax forces heirs to sell, often to a larger entity. In the case of the family-run business, the sale may well result in a loss of jobs for the local community.

Farmers' heirs may sell to a developer and what was once open pasture or forest is broken up into suburban housing tracts. Besides hurting families, farmers and small business, the death tax harms the general economy. First there is the dead weight loss of high compliance costs as much as estate taxes raise by some estimates. Beyond that high marginal estate tax rates discourage saving about half of which is directed toward bequests leading to less investment, slower economic growth and lower tax revenues. In our IPI study, we estimated that eliminating the federal estate tax would increase GDP by almost $1 trillion over the next decade; increase the stock of U.S. capital by almost $1.7 trillion and create almost 275,000 more jobs. This added growth would ultimately produce over $5 in extra GDP for every dollar of static revenue loss, and within 10 years the tax cut would pay for itself.

All in all, American taxpayers, the economy and government would be better off without estate taxes. And, the drumbeat to get rid of the death tax will only intensify as a strong economy and ever-widening distribution of wealth continues to extend the reach of estate taxes well into middle-class America. We estimate that the percentage of estates large enough to file a return, which was 2.8 percent of those who died in 1992, should double by 2002.

Congress has a golden opportunity to kill the death tax now while static costs are relatively low. The Joint Tax Committee puts the cost of H.R. 8 at under $30 billion over the next five years. Even after total repeal in 2010, the Congressional Budget Office says the annual cost would be only $48 billion, or 1.6 percent of the more than $2.9 trillion in revenues the federal government expects to collect that year. With such a low price tag, getting rid of the death tax would be one of the best legacies that the 106th Congress could leave future generations.

Aldona and Gary Robbins are senior research fellows at the Institute for Policy Innovation, a Dallas-based, non-partisan public policy institute.

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