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Death Tax: End It, Don't Mend Itby
Peter J. Sepp Jun 8, 2002 Oprah Winfrey, meet Donald C. Clampitt. She is a successful media mogul who
once called the federal estate tax (more properly the death tax) “irritating
…because you have already paid 50 percent” in taxes on earnings
while alive. He is a second-generation owner of a paper company who says the
death tax “makes no sense” because its punitive rates (up to 50
percent) can break up family businesses.
Both are right, and would have given three cheers to last year’s tax-cut
legislation that supposedly terminated the death tax. Instead, Ms. Winfrey,
Mr. Clampitt, and many other Americans can do little more than yawn. Unless
they all plan on dying in 2010 (when phase-out takes effect), the death tax
could haunt them in 2011 (when it phases in again). This month the House voted
to make repeal permanent, and the Senate should follow, without “compromises.” Why?
The estate and gift tax will raise a seemingly huge $27 billion for the federal
government in 2002, but the Treasury would hardly miss it: the amount represents
just 1.3 percent of the overall total taken from taxpayers. But even if policymakers
are worried about the “static” revenue effects of death tax reform,
ending the tax rather than mending it is their best bet. According to a study
cited by Congress’ Joint Economic Committee, getting rid of the death
tax outright would, within seven years, create 240,000 jobs and increase the
Gross Domestic Product by more than $33 billion. This much-needed rise in
economic activity would generate income and other tax revenues that could
offset any “losses” to the government.
But more is at stake than Uncle Sam’s bottom line, because millions
of American workers and employers who don’t pay the
death tax are still affected by it in other ways. A study co-authored by Alicia
Munnell of President Clinton’s Council of Economic Advisers found that
the cost to business of complying with or legally avoiding the estate tax
in 1998 was $23 billion – roughly equal to what it raised for the government!
Mere tinkering with the system won’t cure these headaches, and the
pain is real. Surveys conducted by Loyola University and Kennesaw State College
found that 60 percent of family businesses found that they would put more
employees on their payrolls if the death tax vanished entirely.
Why is repeal more important to these Americans than relief? Donald Clampitt’s
experience is illustrative – he was advised to set up an insurance policy
on his father, who founded the company, in order to cover the estate tax liability
when the father passed away. But as Clampitt points out, “paying the
insurance premiums on a $5-$10 million policy on a 79-year-old man” was “enough to impact the cash flow of our firm” as it struggled
to operate.
Businesses are forced to pursue these costly strategies now because owners
can’t possibly know what their estates will be worth when they die 10
or 20 years in the future. If, for example, Congress forgoes repeal and merely
boosts the death tax exemption to $2 million – or $5 million, or $10
million – businesses will still need to spend precious resources on
tax planning to be sure they stay on the “right side” of that
exemption. Only ending the tax completely will likewise end this uncertainty.
Paradoxically, this may also explain why a small group of the super-rich,
including Warren Buffett and George Soros, support a new life for the death tax. IRS data confirms that the effective tax rate
actually drops on estates of more than $20 million, in part because
the mega-wealthy can devote more resources to avoiding the system. To these
cloistered billionaires, the death tax conveniently keeps up-and-comers out
of their boardrooms and their country clubs.
Yes, repeal
of the death tax is about “fairness” – for those who seek
the American Dream, and for millions more who benefit from their risk-taking.;
Congress must cancel this insidious tax, for the Donald Clampitts as well
as the Oprah Winfreys of America.
Pete Sepp is Vice President for Communications with the 335,000-member
National Taxpayers Union (NTU), a non-partisan citizen group founded
in 1969 to work for lower taxes, less wasteful spending, and accountable
government at all levels. |
