With the federal budget deficit estimated at $169.7 billion for the coming year -- exclusive of the new costs in the Mideast and the huge savings and loan bailout -- the pressure is on to find the "tax revenue increases" that President Bush now concedes are necessary to help in deficit reduction. One tax that has received little attention in the discussion of possible sources of new revenues is the federal estate tax, which applies to property held at death. Yet, as a tax that can target the relatively wealthy and that deprives heirs only of money that they have not earned, it is a potential source of significantly increased revenue that can command widespread public support.

There are two reasons why estate taxes should assume special importance in the present policy debate over new revenue. First, as a result of demographics and economic growth, burgeoning amounts are expected to be passed to heirs over the coming years, up from an estimated total (in constant dollars) of $778 billion during the five years 1987-91, to $1.098 trillion in 1992-96. Second, taxes currently levied on these huge transfers are very modest in comparison with those of a number of the other industrialized democracies. A death transfer tax burden more in line with that levied in Japan, for example, might be expected to yield roughly $50 billion a year in incremental revenue in the early '90s, enough to make a larger dent in the U.S. budget deficit than any of the taxes now under serious discussion.

The federal estate tax was reduced sharply, and with little media attention, by the Tax Reform Act of 1976, which among other changes, replaced the former separate deductions for gifts made during life and the taxable estate with a single, unified tax credit that has risen to $192,800. The top rates also dropped, from 77 percent to a present ceiling of 55 percent. In addition, amounts passed to one's spouse were completely, rather than only partially, exempted from taxation. The unified tax credit, at its present level, cancels out the federal tax due on an individual estate of $600,000 and allows both parents combined to pass a $1.2 million estate on to their children tax-free. The net effect of the present rules is that, on a single individual's $1 million estate, federal taxes average only $119,800 (state taxes average $33,200); even on a similar amount of taxable income earned by the recipient the tax burden would be roughly twice as great.

Under the rules in effect before the 1976 law, 7 percent of all estates -- one family out of 14 -- were subject to the federal estate tax; now that figure has dropped to one-third of 1 percent -- one family out of 300. In Japan, the comparable figure today is 7.9 percent of estates, nearly the same as the earlier U.S. percentage. In Japan and England, the amounts exempt from death transfer taxes are roughly $385,000 and $156,000, respectively, much less than the $600,000 allowed in the United States. Maximum rates in Japan and West Germany (the latter for transfers other than those to children) are 70 percent, versus 55 percent in the United States (set to drop to 50 percent in 1993).

Most telling are the differences in revenue generated by different sets of national rules. In 1989, federal estate tax revenues accounted for approximately 0.63 percent, or $6.2 billion, out of total federal tax receipts of $975 billion. Gift taxes -- which are treated with estate taxes as a single taxation scheme -- accounted for a further 0.18 percent, a grand total of 0.81 percent. Before the 1976 law, the combined percentage was 1.7 percent of federal tax receipts, or twice as high. In Japan, death taxes alone account for 3.7 percent of national tax revenues, and before Britain made changes in the late '80s, the share there was 5.8 percent.

If the U.S. rules had been changed to once more reach the largest 7 percent of estates, and with an eye further to achieving the present Japanese percentage of revenue, 1989 estate-tax revenues would have been $36.1 billion instead of $6.2 billion. Comparable figures for the '90s would be about 40 percent higher, because of the large increase expected in amounts passing upon death, yielding a differential of over $40 billion a year versus the present estate tax rules; and parallel gift taxes would yield a further $10 billion annually. Altogether, the prospect exists for additional tax revenue of some $50 billion a year. Moreover, because this is a tax increase on windfall income, it is not subject to "higher taxes hurt productivity" allegations.

Even if federal estate and gift taxes today were restored only to their relative significance before the 1976 law -- about 1.7 percent of federal tax receipts -- an additional $12 billion of revenue would be generated each year in the 1990s. From both a policy and a revenue perspective, higher estate taxes should clearly be one of the highest items on the Washington agenda.

Roy L. Prosterman is a professor at the University of Washington School of Law in Seattle. Tim Hanstad is a research consultant there.