Death and Taxes

Tuesday, June 6, 2006

THE SENATE will debate whether to repeal the estate tax today, and the first decisive vote is expected Thursday. The House has voted in favor of repeal and the administration, which has pushed a temporary suspension into law, would be delighted to support permanent abolition; the Senate's voice will therefore be decisive. But the arguments for repeal are by turns wrong, muddled and internally contradictory.

Abolitionists say the estate tax forces the liquidation of family farms and businesses. In 2000, according to the Congressional Budget Office, 1,659 farms were liable for the tax, but fully 1,521 of these had sufficient liquid assets to pay without selling any land. In 2000, likewise, 485 taxable estates included a small business, but 321 of these could pay the tax without selling any of the firm. Moreover, heirs can spread estate tax payments over 14 years, so even those without liquid assets have plenty of time to take over the farm or firm, manage it productively, and thus generate the cash to pay the tax. So the estate tax wasn't forcing the fire sale of large numbers of family farms and businesses even in 2000, before the Bush tax cuts kicked in. Now that the amount that a couple can pass on tax-free has jumped from $1.3 million to $4 million, the mass-liquidation claim is even less accurate.

But it is also muddled. Suppose that the estate tax does force the sale of some farms and businesses; is that necessarily a bad thing? Well, it would mean that the heirs don't have the inclination or ability to manage the farm or the small business and turn a profit -- otherwise they would earn enough to pay the tax over the 14-year period. From the standpoint of job creation, it's a mistake to leave a farm or small business in the hands of heirs who don't know how to turn a profit on it; better that those assets be sold to purchasers who will maximize their value. Far from promoting a vibrant small-business and farm sector, the abolition of the estate tax would increase the number of businesses and farms that are managed by non-vibrant sons and daughters.

Meanwhile, abolitionists also claim that the tax doesn't raise much anyway, so why not kill it? Well, it's expected to raise $776 billion in the decade starting in 2012; if abolitionists view this as chump change, how can they pretend it's ravaging a sector of the economy? The abolitionists also assert that a revision in the treatment of capital gains would offset the revenue lost by repeal of the estate tax, but Congress's Joint Committee on Taxation has analyzed this claim and found it empty. Finally, the abolitionists argue that the estate tax discourages saving: If you can't leave your money to your heirs tax-free, then why not go out and spend it? But people facing the estate tax -- basically, retired couples sitting on more than $4 million -- are probably spending as much as they want to spend anyway. Besides, any small decrease in their savings is likely to be offset by the increase in government saving resulting from the tax, and by possibly higher saving by heirs, who won't spend so freely if their inheritance faces taxation.

In short, the exotic arguments in favor of abolishing the estate tax don't match the obvious ones for keeping it. The nation faces serious budget deficits, so why abolish a revenue stream? Inequality is rising, so why kill the most progressive federal tax? The competitive and meritocratic basis for the nation's economic success is under threat, so why take action that would encourage hereditary elites to entrench themselves?

© 2006 The Washington Post Company