Death tax will hurt people, not help; time to put it to rest

Editorial

Family farms and small businesses are depending on Congress to make permanent the 2001 phase-out — leading to complete repeal in 2010 — of the “death tax,” otherwise called the estate tax.

The U.S. Senate will take up the measure in the next couple of weeks. Majority Leader Bill Frist, R-Tenn., is planning to introduce a bill for full repeal. A full-repeal bill passed the Republican-controlled House last year.

If the tax repeal is not made permanent, the tax rate will go from zero percent in 2010 to a whopping 55 percent in 2011 on the part of an estate valued at more than $1 million. (The current tax rate for 2006, under the gradual repeal, is 45 percent on the value of an estate above $2 million.)

A study by the nonpartisan Congressional Budget Office found that the 55 percent estate tax, if brought back, would be the equivalent of a 31 percent income tax imposed 20 years before the owner’s death. Add that to the other taxes a business pays — profit taxes, property taxes, sales taxes, half of workers’ Social Security and Medicare taxes, etc. — and the burden is large. If the business owner also receives a salary that pays the top 35 percent income tax level, the tax can be especially severe.

Proponents of the tax say that estate tax repeal would “cost” the federal treasury about $30 billion a year in lost tax revenue.

“The real question that I want to address here is whether this is something that our country can afford right now. And the answer is absolutely not,” Adam Hughes, budget policy director with OMB Watch, a liberal research and advocacy group, said in an April 21 statement e-mailed to journalists. He said the “cost” would be $1 trillion over 10 years, including interest on debt payments because of the additional deficit spending.

Of course, the immediate way around the debt payments is to end the deficit spending. If that were done, the “cost” would be only about $30 billion a year, or 1 percent of the current $2.8 trillion budget projected for fiscal 2007, which begins in October. That’s $300 billion over the 10 years. But all this is static thinking.

Taxes, by their nature, act dynamically. Raise them, and they reduce economic activity. Cut them, and they boost economic activity. Continuing the death tax means less money for small businesses and farms to invest in expansion and jobs creation. It means added expenses for accountants, tax advisers and estate planners as the family tries to keep a large part of the business from the grip of the tax revenuers.

A 1992 study by Henry Aaron and Alicia Munnell provides validation: “In short, the estate and gift taxes in the United States have failed to achieve their intended purposes. They raise little revenue. They impose large excess burdens. They are unfair.” They calculated that compliance costs are about the same as revenue raised. Both, as it happens, are liberal economists. Munnell later served as an economic adviser to President Bill Clinton.

Another argument is made by Bill Gates Sr., chairman of the Bill and Melinda Gates Foundation and father of the Microsoft co-founder.

In an April 18 online interview with Results, a liberal advocacy group, he argued the tax is needed to reduce the federal budget deficit and that because America is “an orderly place and that is a fundamental reason for people accumulating wealth,” which means everyone has “an indebtedness to the federal government for having made it possible,” and those who can afford to should give “back some part of it to the society that made it possible.”

We disagree with this line of thinking. Entrepreneurs earn their wealth by their own risk, investment and aspiration encouraged under a free-market system; not at the beneficence of the federal government. Often, small businesses “give back” to their community by supporting local charities, not to mention how society at large benefits by the very job creation and productivity that are any business’ core activities. Double taxation commonly has been paid on this money already, first through income taxes, then capital gains taxes. And if the tax compliance costs equal tax revenues, as noted above, how is that “giving back”?

Moreover, the super wealthy, such as the Gates family, can use foundations and other tax shelters to keep their money out of the taxman’s hands, something usually not available to those with small businesses.

It’s time to put the death tax six feet under.