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The Estate Tax Issue

Tuesday, April 29, 1997; Page A12

The congressional Republicans want to repeal the estate tax. They argue that persons who have worked hard all their lives to build up businesses or otherwise assemble estates should be allowed to leave them to their children relatively intact. They can point to cases where, to pay the estate tax, family-owned farms or other businesses have had to be sold instead.

But it's possible to solve such genuine problems with the tax by making only some relatively modest changes. The people who are seeking repeal or such deep cuts as to constitute near-repeal by another name have a different point of view. They think it's wrong – either unjust or counterproductive in the sense of penalizing initiative – to tax the accumulation of wealth generally. Many would like to repeal the capital gains tax as well. The unanswered question they face is, what would they tax instead? The question has both a fiscal side and a social one. How would they raise (or save, through spending cuts) an equivalent amount of money? And what, if anything, would they do to preserve the progressive nature of the system, according to which the greater burden falls on those with the greatest ability to pay?

Most people already escape the estate tax. Mainly because the first $600,000 in assets are exempt (and all assets left to a spouse), only 1.6 percent of estates each year turn out to be taxable. The tax nonetheless generates about $17 billion in annual revenue, because the rates – once they kick in – are high, and because the estates that it does affect tend to be quite large.

The cuts that currently are being proposed as a down payment or first step toward repeal don't look as if they would cost that much. That's because they are phased in or backloaded so that they wouldn't take full effect until after the five-year period for which most estimates are made. Even so, the cost by the fifth year would be $12 billion and rising. If you also intend to balance the budget without any offsetting tax increases, that means $12 billion in additional spending cuts. What will it be? Veterans' benefits? The highway fund? The parks system?

Only about 7 percent of even taxable estates include family farms or family-owned businesses. Special provisions in the law already apply to such assets. These could be liberalized at relatively little cost to solve the forced-sale problem. That ought to be done. Maybe the $600,000 exemption ought to be increased as well. But in fact an argument can be made that the tax on wealth at death in this country is already, if not low, then lower than it seems. That's because, under the law, death erases capital gains. If an heir sells an inherited asset, he or she figures the gain not from the price for which the asset was originally bought, but from its value at the time of the inheritance.

The estate tax can be improved, but it should not be junked. It is a reasonable and progressive way to raise an amount of money that the government in its current straits can't afford to give up.

© Copyright 1997 The Washington Post Company

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