Death tax dirge

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Small-business owners, farmers, investors and entrepreneurs face a good news-bad news quandary. The good news is the death tax will disappear in 2010. If they die that year, their families, not the IRS, will get their assets.

The bad news is this pernicious tax springs back to life in 2011, at the same rate it reached under President Clinton. In other words, unless Congress permanently eliminates the death tax, some taxpayers will have to jump off a cliff on Dec. 31, 2010, to save their family assets.

The House of Representatives has done its part. It recently passed bipartisan legislation to kill the death tax. Forty-two Democrats joined Republicans in an overwhelming 272-162 vote for repeal, the largest-ever margin to get bury the grave-robber tax. Unfortunately, because of arcane budget rules, the Senate battle will be much harder. To overcome filibusters and other procedural gimmicks, supporters need 60 votes.

There are 55 Republican senators, and almost all of them support repeal. But Democrats are almost equally united in opposition. As such, it is unclear if supporters can get the necessary votes. The outcome probably will depend on whether the American people, who overwhelmingly favor death-tax repeal, decide to apply some pressure.

Some politicians want to compromise and only reduce the death tax, but this "let's-make-a-deal" mentality would be a mistake. If you had cancer, would you want the doctor to leave some of it in your body, where it could regenerate and spread?

No. By the same token, the death tax should be eliminated. If politicians strike a deal and keep the death tax alive, it's only a matter of time before the tax is increased.

There are five reasons this tax should end:

(1) The death tax is immoral. Dying shouldn't be a taxable event. It's fundamentally unjust for the IRS to compound a family's grief by confiscating half of a family's wealth when the breadwinner dies.

(2) The death tax is a perverse form of double-taxation. People earn money and pay tax on it. If they save or invest the money, they're taxed again -- often two more times, thanks to the double-tax on dividends and capital gains. And if they don't spend all their money, it is taxed again when they die.

(3) The death tax hurts national saving and economic growth. By imposing such a large tax on family assets, the death tax dramatically reduces the incentive to save and invest. A successful entrepreneur or investor already is taxed heavily on savings and investment, and he will understandably be discouraged by the prospect of the IRS seizing half of what's left when he dies. Likewise, small-business owners and farmers have little reason to expand when they know the IRS will get the lion's share of any wealth they create.

(4) The death tax hinders U.S. competitiveness. Because the death tax discourages saving and investment, many nations have decided to eliminate it. Australia and New Zealand repealed theirs. So have several former communist nations, such as Slovakia and Bulgaria. Even Sweden -- yes, socialist Sweden -- realized the death tax undermined international competitiveness and killed it.

In a competitive global economy, jobs and investment can cross borders to find the most tax-friendly jurisdiction. America should put out the welcome mat, not scare away money with this punitive form of double-taxation.

(5) The death tax enriches tax lawyers and accountants. Some Americans love the death tax. Tax lawyers and accountants earn big fees by advising people how to get around it. This doesn't mean they're bad people; families should engage in tax-planning to protect their assets. But it would be better if they invested their money to increase America's wealth rather than decide which tax shelter is best at dodging the death tax.

The death tax is an outdated and horribly expensive example of class-warfare economics. The super-rich can avoid it since they can afford the best lawyers, lobbyists, accountants and financial planners. The main victims of the tax are small-business owners, farmers, investors and entrepreneurs. But because this anticompetitive relic hinders America's economy, the rest of us also are victims.

Congress should kill this tax, not wound it.

Daniel J. Mitchell is the McKenna Fellow in political economy at the Heritage Foundation.