Death And Lower Taxes
The estate levy seems sure to be cut as more nonplutocrats discover it will hit their kids too
By George J. Church
(TIME, May 5) -- Robert Hartman had not looked at his will in 17 years. But when his first grandchild was born, he decided to update it, and he made a nasty discovery. A former assistant director for the Congressional Budget Office, Hartman, now 59 and retired, says, "I kind of knew" that only the first $600,000 of an individual's estate is exempt from federal estate tax. But, he says, "like most people, I didn't really focus on it. Then I sat down to do the math [on how much of his estate might go to the IRS rather than to his two sons] and said, 'Uh-oh, that's a big tax bite.'"
If Hartman was surprised, imagine the reaction of less tax-savvy people who suddenly realize that their heirs face a worry usually thought to be reserved for Rockefellers. Thanks to decades-long booms in stock and real estate values, more people are making the dismal discovery every year, and their shock is compounded when they learn how stiff the tax is. It starts at 37% on amounts in excess of $600,000 and escalates to 41% on amounts over $1 million and 55% on anything over $3 million.
Enough people are mad enough, in fact, to fuel what is becoming an irresistible tax-cutting drive. Some reduction in the estate tax is nearly certain to be part of any 1997 budget-balancing deal, and it is possible that relief will be granted even if no budget compromise is reached. "I haven't seen this kind of support [for a tax cut] in the 26 years I've been in Congress," says Bill Archer, chairman of the tax-writing House Ways and Means Committee.
On the Democratic side, President Clinton has proposed some modest reductions, and is obviously preparing to go along with deeper ones. One indication: Deputy Treasury Secretary Lawrence Summers last week accused those who propose repealing the tax of "selfishness," but then issued a public apology. That was a humiliation the proud Summers would probably endure only under presidential orders.
So much fuss might seem surprising, given the numbers involved. True, it is expected that more than twice as many estates will be taxed in 2007 as were in 1995. But that would still be only 73,000, or around 3% of the total. Liberals are fond of contrasting those numbers with the 10 million children who lack health insurance.
Numbers, however, do not tell the whole story. Those hurt worst by the tax have traditionally been farmers and owners of small businesses, two politically powerful blocs. The value of their estates tends to be concentrated heavily in land, buildings and machinery, with little cash left to heirs, who have to sell the business, or chunks of it, to pay the tax.
Increasingly, though, the tax is hitting professionals and middle managers--lawyers, accountants, engineers, sales managers. Some own homes they bought for $20,000 or so in the 1960s that are worth easily 10 times as much today. Many have socked away money in mutual funds or burgeoning 401(k) plans, reinvested dividends and capital-gains distributions, and piled up huge profits--so far mostly on paper.
A final argument is that the tax causes losses in output and jobs that far outweigh the $19 billion it will pump into the Treasury this year. Part of the damage results from the sale and breakup of thriving farms and businesses. The environment suffers too, in the opinion of the Environmental Defense Fund. It says lowering the estate tax "may be the most important reform of all" to keep farmland out of the hands of housing developers.
Even bigger losses are thought to result because money is diverted from productive investment and paid to lawyers and accountants who hunt for ways to escape or minimize the tax. The heirs to enormous fortunes, of course, can do this better than nonplutocrats. And so the tax has never broken up concentrations of wealth the way the legislators who enacted it in 1916 hoped it would.
What to do? At one extreme, a Republican bill would repeal the tax entirely. At the other, the White House would merely let heirs to family-owned farms and businesses stretch out payments over 14 years, as now, but defer more tax and pay lower interest on it. The most likely basis for compromise is a G.O.P. bill that has picked up some Democratic support. It would raise the general exemption from $600,000 to $1 million; farms and businesses would be taxed only on half of any amount over $1.5 million.
There is already much talk of a final compromise making the general exemption $750,000, but that depends heavily on how much money may be allotted to tax relief in an overall budget deal. Some easing seems all but certain, however. Death and taxes are proverbially inevitable, but they need not so often be synonymous.
--Reported by John F. Dickerson/Washington
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