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Copley News Service, 06/08/2000
Oprah Winfrey doesn't mince any words when it comes to telling us what she thinks about the federal estate tax: "I think it's irritating that once I die, 55 percent of my money goes to the U.S. government," she said. "You know why that's irritating? Because you would have already paid nearly 50 percent."
She's not alone in these sentiments. Millions of poor and middle-class Americans find the estate tax obnoxious, as well, not necessarily because they stand in line to inherit anything but because they aspire to become rich enough themselves to pass alone an inheritance to their children and grandchildren.
It is not surprising, therefore, that only about 2 percent of all estates actually are taxable under the inheritance tax by the time the person dies. It is not, as apologists for the tax would have us believe, because the tax is levied only on the richest of the rich. It is because virtually everyone who might be subject to the tax - and it's not just the rich - are, like Oprah, so irritated by the prospect of posthumous taxation that they go to extraordinary expense and inconvenience while they are alive to prevent their assets from being snared at graveside by the taxman. John Maynard Keynes got at least one thing right when he observed, "The avoidance of taxes is the only intellectual pursuit that carries any reward."
Because the death tax is subject to such massive avoidance, it is actually a regressive tax among those who actually pay it. For individuals whose taxable estate exceeds the unified credit, the richer they are when they die, the less likely it is their estate will be taxed and the lower the rate at which it will be taxed.
According to the latest Internal Revenue Service data available, 53 percent of the estates that filed tax returns in 1996 were under $1 million and 96 percent were under $5 million. Nearly 52 percent of the revenue collected from the estate tax in 1996 was collected from estates valued at less than $5 million; estates worth between $5 million and $20 million paid 26.4 percent of the taxes collected, while estates of more than $20 million paid only 22.1 percent.
The most eye-opening statistic of all concerning the estate tax reveals just how regressive the tax is: According to the Internal Revenue Service, estates in the range of $5 million to $10 million paid the highest average death tax rate - 17.4 percent - in 1996, while estates of more than $20 million paid an average rate of only 12.5 percent.
In addition, the estate tax is economically destructive and fiscally counterproductive. Compliance costs associated with the estate tax are so high the $24 billion collected in federal estate and gift taxes last year actually cost taxpayers $31 billion because they had to pay $7 billion over and above what they owed the federal government in taxes to maintain records, hire lawyers and tax accountants, and pay law-enforcement personnel to compute, pay and collect the tax. Moreover, Institute for Policy Innovation fellows Gary and Aldona Robbins estimate the estate tax is so economically destructive that in the long run, for every additional dollar of revenue raised by the death tax, national economic output is reduced by $5.18.
Thus, if the death tax were repealed, they estimate the additional income, payroll, capital gains and other federal tax revenue that would be generated from the added economic production would exceed the lost death-tax revenues after about the seventh year. So the long-run effect of repealing the estate tax would be to increase, not decrease, federal revenues. Even in the short run, the dynamic revenue effect is profound. On net, additional revenues from other federal taxes can be counted on to replace almost 60 percent of the lost estate-tax revenues during the first five years after repeal.
The case for repeal of the death tax is so overwhelmingly obvious that even Congress seems to get it, at last. After more than 80 years on the books, Congress is on the verge of repealing this, the most repugnant of all taxes. In June, the House of Representatives voted 279 to 136 to repeal the estate tax with every single Republican and 65 Democrats voting in favor of the repeal despite heavy White House lobbying to vote against it. In the Senate, Majority Leader Trent Lott has said there will be a vote on repealing the estate tax sometime shortly after the Congress returns from the July 4 recess. With one exception, all the Senate Republicans appear solidly in support of repeal. And with 11 Democratic senators co-sponsoring a bill to repeal the estate tax, the way looks open to Senate passage and presenting a bill to the president before the month of July is out. What a great step forward toward reforming the tax code.
The only potential hang-up now would be for the president to prevail onenough of the Democratic senators who support repeal to sustain a filibuster and obstruct Senate passage as a partisan ploy to extort some of the president's spending agenda from Republicans. That is not a likely scenario since Al Gore knows voters would extract retribution at the polls in November were congressional Democrats to allow themselves to be strong-armed into such a crass and cynical action by a lame-duck president.
Jack Kemp is co-director of Empower America and Distinguished Fellow of the Competitive Enterprise Institute.