Estate Taxes

By Jonathan Chait

It wasn't long ago that repealing the estate tax was considered a Republican pipe dream. Even the Contract with America, Newt Gingrich's revolutionary manifesto, didn't dare scrap the progressive-era levy on inheritances, which annually raises some $50 billion. How things have changed. Last month the House voted to kill the estate tax, with scores of Democrats joining the G.O.P. Last week the Senate followed suit, with nine Democrats supporting the Republican majority. President Clinton vows he will veto the measure when it hits his desk this week, calling it too expensive and a subsidy for the rich.

What explains this sudden interest in inheritance taxes? For one thing, there is the booming economy, which has raised the number of millionaires and those who think they can become millionaires. There's also the federal budget surplus, which has fueled tax-cutting desires in both parties. But the biggest factor is a brilliant marketing campaign by Republican foes of the estate tax. To combat the plutocratic image of estate holders, they circulated heart-rending tales of small businesses and farms bankrupted by the estate tax. Most shrewdly, Republican pollsters realized that few voters get angry over taxes on estates because few of them have any estate to speak of. But everybody dies. And so Republicans rechristened the tax a "death tax."

This strategy has been effective, but it has also meant that the debate has taken place on what is often dubious grounds. Death alone does not trigger a tax; passing on a large estate does. And those mom-and-pop sob stories are overblown. The fact is, less than 2% of the federal revenue derived from estate taxes comes from farms and small businesses.

This doesn't mean there aren't good reasons to get rid of the estate tax. For one, it penalizes generosity: if Bill Gates spends $1 million buying caviar, he doesn't pay an extra tax (beyond sales tax on all those fish eggs), so why should he pay one for giving $1 million to his kids? Proponents of the estate tax respond that it nabs income that, thanks to loopholes, would never have been taxed at all. They also argue that it breaks up large concentrations of wealth, encouraging the children of the rich to earn their own way. Opponents reply that giving your children a prosperous and secure life is one of the reasons people get rich in the first place.

Worried Democrats in Congress, backed by the White House, proposed an alternative that would raise the amount that can be inherited tax-free from $2 million to $4 million and would exempt farms altogether. That, Democratic leaders hope, would keep the debate focused on the estates of the superrich. It's classic Clinton: embrace the popular parts of the plan of your opponents, and make them defend the unpopular parts. It was rejected last week.

Meanwhile, Republicans insist on repeal. That won't happen this year; Democrats say they've got the votes to sustain a veto. But Republicans figure they will get it next year, under President George W. Bush.

--J.C.