- The Washington Times - Monday, July 25, 2005

The death tax has become the Hamlet of public policy. The battle was waged to get rid of the estate tax (or death tax), and was finally won in 2001 — or so some thought.

That year, a tax cut bill passed that included a phaseout of the death tax, with the levy to be banished completely in 2010. But just like the king in William Shakespeare’s “Hamlet,” the ghost of the death tax lingers. In fact, under current law, the death tax is due to be resurrected in 2011, with its pre-2001 destructiveness largely restored.

To kill, or not to kill the death tax, that is the policy question.

Not surprisingly, the editorial page of the New York Times would rather keep this tax around. Like others on the left wing of politics and economics, the Times editorial page seemingly never met a tax it didn’t love.

On June 21, the paper’s editorial page bemoaned the potential loss of revenue to the federal government if the death tax disappeared. It called repeal “another wildly unaffordable tax cut for the wealthiest of the wealthy.” The piece went on to criticize plans to keep the death tax around with an exemption of $3.5 million and a tax rate of 15 percent. This would “starve the Treasury,” and when you factor in the exemptions, the average tax rate might dwindle to 5 percent or 6 percent, the Times claimed. It concluded: “That is less than what most wage earners have withheld from their paychecks.”

Finally, there is the kicker. As to businesses imperiled by the death tax, the Times editorialized: “That’s nonsense. Business owners have a responsibility to plan for the estate tax bill that will come due when they die, the same way a free-lance consultant must set aside a chunk of his fees to avoid being caught flat-footed on April 15.”

The Times simply ignores the economywide reach of the death tax’s detrimental effects. The Times worries about lost revenues to the federal government. However, over the last couple of decades, federal estate and gift taxes have ranged between 0.9 percent and 11/2 percent of annual federal revenues — not exactly a huge chunk. Factor in the compliance costs and lost economic output related to the tax, and guess what? The death tax provides little or no net revenues.

Of course, it goes without saying the Times failed to mention true fiscal responsibility, that is, cutting or at least restraining the growth in government.

What about the comparison to taxes withheld from wage earners? Maybe these editorial writers are confused. Let’s help them out. Money withheld from paychecks is an income tax. U.S. personal income tax rates, unfortunately, range as high as 35 percent, plus any state or local income levies.

The death tax, though, is a tax on assets, not income, a big difference. One pays a lifetime of income taxes, plus a host of other levies, and then with a death tax, the government shows up again at the end of life to grab a share of one’s total assets. The Times thinks that’s fair, but most people, I think, do not. It

is merely a grim case of reaping multiple taxes.

Finally, the editorial’s dismissive declaration that businesses simply must plan to pay the death tax represents a gross example of the media elites’ absolute cluelessness about the real day-to-day struggle to run a business. The Times preferred a $2 million exemption and a 45 percent top tax rate.

Estate planning wastes resources that otherwise could be used productively in a business. It should be obvious to all but the most ardent class warriors that a 45 percent tax on assets discourages investment and devastates many businesses, farms and families.

Even more frustrating than the Times editorial, though, was a news story in the June 22 Wall Street Journal (“Senators near deal to eliminate estate tax for all but the richest”). After all, on tax relief, one expects more from Republicans who have a majority in the U.S. Senate, than from a bunch of liberal editorial writers. However, the story tells of negotiations in the Senate to keep the death tax around. The report highlights proposals offering exemptions ranging from $3 million to $10 million per person, and tax rates of 15 percent or more.

This is billed as affecting only the very rich. But again, that’s simply not so. The negative effect on investment incentives and the draining of resources from businesses clearly affect the economy broadly. And we must be reminded once more this is a tax on assets, not income. There are many businesses with assets — such as land, buildings, vehicles, inventory, machinery, etc. — that value into the millions of dollars. It does not necessarily mean the owners are among our nation’s richest. But even if they are wealthy, so what? The death tax is unfair and a clear negative for the economy.

Lastly, as history has shown time and again, a tax targeted at the wealthy always winds up hitting most everyone else one way or another. That’s been the story with the income tax and the death tax over the decades.

So it is critical not to let the death tax linger in any form. It is always harder to reinstate an eliminated tax than it is to raise an existing levy. This truly historic opportunity to kill the death tax must be seized.

As Hamlet said: “To die, to sleep no more, and by a sleep to say we end the heartache.” Let’s end the economic heartache and immediately — and permanently — kill the death tax.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

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