Opinion pieces and speeches by EPI staff and associates.
THIS PIECE ORIGINALLY APPEARED IN THE LOS ANGELES TIMES ON JULY 3, 2000.
Who Wants to Stay a Millionaire?
by Max Sawicky
Millionaires may rejoice. Congress is on course to pass a tax cut crafted especially for the rich: the repeal of the federal estate and gift tax, what politicians call the “death tax.” The fact is that the tax in question is not levied on dead people, nor must it be paid at death. It is a partial tax on the transfer of very large amounts of wealth.
The tax can be triggered by death because a dead person’s wealth automatically becomes someone else’s property. It falls on very few dead people because only 2% of them leave estates that incur any tax liability.
Nor is the tax necessarily incurred at death. It can kick in well before one dies or well after, and it may be paid by the living as long as 14 years after the death of the wealth holder.
It is only a partial tax because the current law provides for generous exemptions: a tax credit that will effectively exempt $2 million for a couple by 2006, full deductibility of donations to charitable institutions and the possibility of passing along an estate to children tax-free, at the rate of $10,000 per child per year. Over 20 years, assuming a modest rate of interest of, say, 6%, each heir could receive nearly $370,000 tax-free. Not a bad start in life.
So the label of “death tax” is really false. And that’s not the end of the fables being propagated about the tax. One is the myth of double taxation–that a person pays tax on income and then the heir is taxed again on the same income. Actually, much income accumulated by the wealthy is never taxed. The way you get really rich in the U.S. is with capital gains from stocks and bonds and from business ownership. Neither type of gain is taxed under the income tax unless the stock, bond or business is sold. If the owner
dies before selling, any such accumulation of wealth would pass to heirs tax-free, but for the estate tax.
Of course, ordinary folks know all about double taxation. Their wages are taxed under the payroll tax and under the income tax. But that’s not the sort of double taxation our intrepid Congress has set its sights on.
Another fable propagated by those in favor of repealing the estate tax is the heir who is forced to sell the family business or farm to pay the tax. According to a Brookings Institution survey by tax economists William Gale and Joel Slemrod, however, only 2 out of 1,000 people actually leave estates that include ownership of small businesses or farms. And even for those who do incur these taxes, current law allows heirs to pay them in installments over 14 years. And the tax incurred for such enterprises applies only to their value in excess of $2 million.
How much tax is actually paid? We’ve been told by those not in the know that the government takes more than half of a person’s hard-won wealth. But Gale and Slemrod report that, for estates in the range of $3 million or less, the average tax rate is approximately 13%. For larger estates, it is 19%.
Why should we tax large estates? The best reason is to tax income that escapes the individual income tax. This is elementary fairness. Tax all types of income, not just the types received by the average person. Another reason is to enhance the progressivity of the federal tax system–to tax people according to
their ability to pay taxes. Millionaires can more easily afford to pay taxes than can truck drivers, schoolteachers and domestic workers. A third is that the tax encourages and subsidizes gifts to charitable institutions.
One of our original rich guys in the U.S., steel magnate Andrew Carnegie, said that to die rich is to die in disgrace. If we care about work incentives for welfare moms, why not for the children of the rich?
Who wants to tax a millionaire? Not the House of Representatives; it voted for repeal. The bill is now before the Senate. Repeal of the estate and gift tax will not benefit the overwhelming majority of taxpayers one iota. But it will benefit many members of the Senate, who are millionaires themselves, as well as their elite campaign donors.
[ POSTED TO VIEWPOINTS ON AUGUST 2, 2000 ]
Max Sawicky is an economist with EPI. He specializes in U.S. budget policy and tax issues.
