- The Washington Times - Sunday, September 27, 2009

ANALYSIS/OPINION:

One of the most widely misrepresented taxes on the books is the federal estate tax. According to populist myth, the estate tax reduces the likelihood that the United States will become a country where just a handful of people enjoy extraordinary wealth while the rest of us subsist on table scraps.

In fact, the estate tax - or “death tax,” as it is commonly known - does little to inhibit supersized accumulations of wealth, as Arkansas’ Walton family, Microsoft Corp.’s Bill Gates and Steve Ballmer, Hollywood’s George Lucas and Steven Spielberg, and New York Mayor Michael Bloomberg can attest. Even after the pounding the stock market took last year, Forbes magazine on March 30 listed 701 U.S. billionaires, with fortunes ranging from a “mere” $1 billion to a high of $40 billion.

Imagine how many more people have a net worth of a mere $20 million, or $220 million, or $500 million.

The point here is not to denigrate wealth, but to make sure everyone understands that if you have enough money, you can hire accountants and attorneys who will keep the money in the family, perhaps by making the family’s primary business a charitable foundation.

The main effect of the estate tax is not to spread wealth - a questionable role for government in the first place - but to hinder the creation of additional wealth. It does so by forcing many Americans, especially small-business owners, to take evasive action to limit their assets so Washington doesn’t confiscate their lifetime earnings when they die.

This evasive action often amounts to a decision to stop growing the business, so their estates don’t grow beyond the allowable threshold over which the punitive tax kicks in.

But “not growing the business” means these companies also aren’t adding workers and aren’t increasing purchases from other businesses, which also then are not adding workers. In economics, when everything goes well, it’s often called a virtuous cycle; the estate tax creates the opposite effect.

We recently asked a top economist, Douglas Holtz-Eakin, former director of the nonpartisan Congressional Budget Office, to examine how the death tax affects capital accumulation and job creation. His findings should be required reading on Capitol Hill and featured prominently in social-policy journals and on editorial pages.

The long and short of it is this: If you want to kill jobs, increase the estate tax. If you want to create jobs, kill the tax. According to Mr. Holtz-Eakin’s research, eliminating the estate tax would raise the “probability of hiring” by 8.6 percent, increase payrolls by 2.6 percent and expand investment by 3 percent.

To understand the magnitude of these estimates, recall that small businesses employ roughly 40 million to 50 million Americans. If small business payrolls were to rise by as much as 2.6 percent, this would translate into roughly 1.5 million additional jobs - nearly half the number President Obama hopes to “save” or create with the “stimulus” legislation passed earlier this year.

“Our study suggests that simply killing the estate tax could bring Obama nearly half way to his goal of 4 million jobs while saving American taxpayers billions of dollars,” Mr. Holtz-Eakin reported to us.

The estate tax currently faces an uncertain future. Under current law, the tax is scheduled to disappear next year. But under the same law, it will then reappear in 2011, with a confiscatory tax rate of 55 percent (that is: for every $1,000 in taxable assets in an estate above the exempt amount, Washington could grab $550).

Neither of these options is politically viable, which means Congress likely will re-examine the controversial tax this year. When they do so, lawmakers need to understand that this isn’t about creating a more egalitarian country, with fewer “super-rich” families and individuals. It’s about creating jobs for those Americans who must work for a living.

As Mr. Holtz-Eakin says, “When deciding the fate of the estate tax, policymakers will be wise to consider that killing it is a positive step towards instilling life back into the ailing U.S. economy.” That’s a goal all Americans should share.

Dick Patten is president of the American Family Business Institute, a national trade association of family-owned businesses and farms.

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