Magazine article The American Prospect

Tax the Wealthy: Why America Needs the Estate Tax. (Common Wealth)

Magazine article The American Prospect

Tax the Wealthy: Why America Needs the Estate Tax. (Common Wealth)

Article excerpt

FOR MORE THAN A DECADE, A POWERFUL GROUP OF special-interest organizations has waged a multimillion-dollar campaign to turn public opinion against a tax that falls on the wealthiest 2 percent of the population. It worked. The "death tax," many Americans now believe, afflicts family farmers and small-business owners, robbing them of the opportunity to bequeath their lives' fortunes to their children.

The people pushing this line include the heirs to the Gallo wine and Mars candy fortunes, along with an organized association of more than 100 independent newspaper owners. Together with a veritable antitax industry of think tanks and lobbying firms in Washington, these groups have formed a potent "death tax elimination" lobby.

Of course, the vast majority of family farmers will never owe an estate tax. Rather, the windfall of estate tax repeal will shower upon the heirs and heiresses of the 3,000 wealthiest estates. This elite group will inherit billions in appreciated stock and real estate--significant capital gains, many of which have never been subject to taxation.

Why do we raise the issue now? Because in a matter of days the Senate will decide whether to make permanent the 200l repeal of the estate tax. It's an issue that has scarcely made the news, but its consequences will profoundly affect the health of the republic.

Many Americans believe that the estate tax debate has already played out. After all, the tax's phase-out and eventual repeal were included in the $1.35 trillion tax cut that President Bush signed into law last June. But the Bush tax bill includes such a puzzling assortment of phase-outs, delayed activation dates, and gimmicks that money guru Jane Bryant Quinn called it "a contemptible piece of consumer fraud." To mask the bill's enormous cost in outlying years, its authors included a "sunset" provision: At the end of 2010, tax rules revert to those in effect as of May 2001.

Predictably, the original patrons of the tax bill--some of whom have spent millions in campaign contributions, political advertising, and lobbying fees to abolish the estate tax--find the sunset provision unacceptable. They urgently wish to make repeal of the estate tax permanent. And if they don't succeed in doing so now, the odds will soon be against them, as budget deficits grow and the cost of repeal escalates.

If, however, the Senate bows to this lobby's pressures by permanently repealing the estate tax, the country stands to lose $800 billion between 2011 and 2021. It's a loss that will significantly undercut Social Security and Medicare over the next seven decades, hitting hard as the eldest baby boomers reach retirement age.

The United States also stands to lose one of its most progressive federal taxes. Only estates worth more than $1 million (or $2 million for couples) are subject to the tax--and the bulk of it is paid by the fewer than 3,000 estates with assets in excess of $5 million. Thanks to the Bush tax cut, between now and 2009 the exemptions will rise to $3.5 million for an individual ($7 million for couples).

Some people object to the notion of a tax at death, but taxing dead multimillionaires is eminently more fair than taxing the not-so-rich living. Between now and 2052, the intergenerational transfer of wealth is projected to reach between $41 trillion and $136 trillion. An estimated one-third to one-half of this wealth will be transferred by estates worth more than $5 million. The estate tax, should it remain in place, will therefore be an increasingly significant progressive source of revenue in the coming decades. Meanwhile, state budgets, already straining from plummeting tax revenues, will lose more than $6.5 billion a year when state-linked revenue from the estate tax is eliminated in 2005.

If the direct costs weren't high enough, the indirect ones could be beyond measure. …

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