Right data

WILL Republicans embrace class warfare? That unlikely scenario is playing out on the tax front, where social conservatives increasingly resent the importance the party's business elite place on cutting estate taxes. Many pro-family types would forgo lower tax rates to get the $500 per-child tax credit.

But estate taxes are not just for the rich. Consider this: The current $600,000 exemption has been in place since 1987. Since then inflation (up by 42 per cent) and a booming stock market (up 200 per cent as measured by the S&P) have pushed many middle-class families into estate-tax territory. More than half (54 per cent) of the estate-tax returns filed in 1995 were from estates valued at less than $1 million. The government took 2.3 per cent of this group's inheritance.

On paper the tax is progressive: Marginal tax rates range from 37 per cent on the first dollar over $600,000 to 55 per cent on taxable amounts over $3 mil- lion. But as seen in the table, very large estates ($20 million plus) pay a smaller share to the government than medium-sized estates. The disparity reflects a myriad of loopholes available to people of means.

At the simplest level, a couple can give family members or other individuals $20,000 per year without incurring any gift tax. More complex -- and costly -- methods include "irrevocable trusts" and "second-to-die" insurance policies. So effective are the various escapes that George Cooper, a professor of law at Columbia University, says the tax is essentially voluntary. "The fact that any substantial amount of tax is now being collected," he writes, "can only be attributed to taxpayer indifference to avoidance opportunities or a lack of aggressiveness on the part of estate planners in exploiting the loopholes that exist."

Not surprisingly, the tax does not raise much money -- $11.8 billion, or just 1 per cent of federal revenues in 1995. Even this may be an overstatement. Stanford University economist Douglas Bernheim, in testimony before the Kemp Commission, said the income lost from re-jiggering financial assets to avoid estate taxes may exceed the amount ultimately collected. Other economists stress the disincentives facing high-income people whose main reason for work- ing is to leave a large estate to their children. (Tax rates facing them are effectively 73 per cent -- 39.6 per cent on the income, plus a 55 per cent estate tax on the remainder.) Negative effects include children who work and save less because of tax-exempt gifts bestowed by parents. Direct compliance costs alone are estimated at 65 cents for every dollar raised.

Small family-owned businesses and farms bear a disproportionate share of the tax burden. They often choose to forgo, or simply cannot afford, the expense of estate planning. Karen Kerrigan of the Small Business Survival Committee estimates that 90 per cent of family businesses that close after the death of the founder do so because heirs cannot pay the estate tax without liquidating the business. That's bad for everybody; 78 per cent of all new jobs created in the U.S. are spawned in family businesses, according to the Center for the Study of Taxation.

So what's the point of the tax? Liberals point to the large sources of wealth exempt from income taxes -- municipal-bond interest, life insurance, unreal- ized capital gains. Estate taxes are a backstop, they say. Yet it's clear that lower estate-tax rates would raise more money from wealthy tax avoiders. The current irrational policy is motivated by sheer envy.

COPYRIGHT 1997 National Review, Inc.
COPYRIGHT 2008 Gale, Cengage Learning