Tuesday, July 19, 2005

Final repeal of the estate tax is high on the agenda of the White House and congressional Republicans. It has already passed the House, but vote counters are not sure they have 60 votes needed in the Senate to avoid a filibuster. This has emboldened estate tax supporters, who want to keep it alive any way possible.

There is a lot of pressure to resolve the issue one way or another this year. Under current law, the estate tax is repealed for one year, 2010, but comes back again in 2011.

This nonsensical law is the result of Senate budget rules that prohibited enactment of permanent repeal in 2001. But the result makes estate planning almost impossible, since no one has any idea what the tax regime will be after 2010. Even many who back repeal are willing to keep it with lower rates and a higher exemption if they can get some permanence in return.

Estate tax supporters are desperate to keep the estate tax in some form or other because they know it will be harder to reinstate after it has been out of existence for some time. As long as the tax exists, rates can more easily be raised back up to confiscatory levels the next time Democrats are in power.

A part of the liberal campaign to save the estate tax is to make it seem repeal is favored only by a few rich people who bought off Congress with campaign contributions. This is the theme of two recent books: “Death by a Thousand Cuts” by Michael Graetz and Ian Shapiro, and “Wealth and Our Commonwealth” by Bill Gates Sr. and Chuck Collins. (Mr. Gates is father of the Microsoft guy.)

The problem with this theory is that public opinion polls have long shown most people don’t like restricting inheritances. As long ago as 1935, 52 percent of Americans, including 47 percent of self-identified poor people, thought there should be no limit at all on how much money people are allowed to inherit.

Ever since people were first asked, strong majorities have favored repealing the estate tax. A Wirthlin poll in August 1999, well before the estate tax repeal effort really got going, found 70 percent of people favored phasing out the estate tax — 50 percent strongly and another 20 percent somewhat. In August 2000, a Pew Research Center poll found 71 percent of people supporting elimination of the inheritance tax — 28 percent saying they favored it and another 43 percent saying they strongly favored the idea.

The most recent poll was done by the New York Times in March of this year. It found 76 percent saying they opposed any tax on inherited assets. When people were given the option of having the tax apply only to estates of more than $3.5 million — far more than the average American could ever hope to have — 50 percent said they still favored complete abolition.

One explanation for these poll results is that people know wealth is not stagnant — today’s poor may be tomorrow’s rich and vise versa. This perception is backed by empirical research.

A 1992 study by the National Bureau of Economic Research found that between 1967 and 1977, 75 percent of people in the bottom 10 percent of the wealth distribution had risen to a higher bracket, with 1.2 percent rising all the way to the top decile. Forty percent in the top decile fell to a lower one.

A 1998 study published by the Brookings Institution found similar results. Between 1984 and 1994, 60 percent of those in the bottom decile of wealth rose to a higher one, including 1.4 percent who went all the way to the top. Forty-seven percent of those in the top decile fell to a lower one.

People perceive this wealth mobility as well. In the New York Times poll previously cited, 80 percent of people said it was possible to start out poor in this country and become rich. And this percentage has risen over time — contradicting those who claim American society has become more stratified. In 1983, only 57 percent of people thought it was possible to become rich and 38 percent thought it was not.

The estate tax has never raised significant revenue for the government. Ending it won’t affect the budget meaningfully. Its main purpose is to satisfy the envy of those who want no one to be rich if they aren’t. That’s a poor justification for tax policy and sufficient reason to get rid of the “death tax.”

Bruce Bartlett is senior fellow with the National Center for Policy Analysis and a nationally syndicated columnist.

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