Repealing Rich Man's Tax

The best Congress money can buy is at it again. In a spasm of smug, self-righteous zeal, the majority House and Senate Republicans voted, in June and July, respectively, to reward the people they truly represent by ending the century-old federal estate tax paid by the wealthiest Americans. The President has promised a veto, but in typical Clinton fashion, has also offered to sign the repeal legislation if the GOP will accept prescription drug coverage for the elderly under Medicare. So, at this point, the ultimate fate of the estate levy remains problematical.

The national estate or inheritance tax, which Republicans persist in calling the "death tax" on the cynical advice of their pollsters, has been in existence continually since 1916 and periodically since 1862. As America's only effective wealth tax, it has stood as a beacon of fiscal fairness for decades, having survived countless changes of administration and power shifts in Congress. But now, say the sons of Gingrich, it has to go; GOP Senate Majority Leader Trent Loft has labeled it "un-American" and declared it "a monster that must be eliminated."

The monster was not always viewed as such by American politicians, including many Republicans. None other than President Abraham Lincoln signed the nation's first inheritance tax, a graduated levy on recipients of personal bequests, during the Civil War. President William McKinley, another Republican, signed the first true federal estate tax in 1898. (Estate taxes, the American way of taxing inheritances, are levied on the total value of an estate at the time of death, prior to the transfer of property; pure inheritance taxes, favored by most other Western countries, are levied on individual recipients of an estate after transfer takes place.)

The movement for a permanent US estate tax, which gained momentum during the Progressive era of the early 1900s -- the 1862 and 1898 laws were temporary -- also involved prominent Republicans, most notably President Theodore Roosevelt. From his earliest days in politics, T.R. campaigned against those he called the "malefactors of great wealth," the robber barons and their wastrel heirs, whose massive fortunes, compiled by dubious means, were used for such unproductive, essentially valueless purposes as stock-market speculation and conspicuous consumption. Given that flawed stewardship, he thought, it was eminently right for the nation to "fix the terms upon which the great fortunes are inherited."

Beginning with his second term as president and continuing through the remainder of his political career, Roosevelt championed inheritance taxes as the best means of channeling vast, unearned wealth toward socially useful ends. Here's T.R., hero of Republican presidential aspirant John McCain (who, incidentally, voted for this year's estate-tax repeal), in 1911: "I believe in a heavily graded inheritance tax, avowedly aimed at the very big fortunes, and I believe that ... this can only come effectively through the National Government." Teddy didn't advocate imposing such a tax on small bequests, but, he said, "I would apply it progressively and with such heaviness to big inheritances as to completely block the transmission of enormous fortunes to the young Rockefellers, Vanderbilts, Astors and Morgans." Today, that list would undoubtedly include the young Gateses, Forbeses, Perots, and Buffets.

Regrettably, the Republican party underwent a Jekyll-and-Hyde transformation with Teddy's passing, losing its last vestiges of progressivism. It was left to Woodrow Wilson and the Democrats to implement a permanent estate tax in 1916. Thereafter, the inheritance levy was slowly ratcheted up, with the graduated rate on the largest bequests (initially set at 10 percent) eventually reaching 70 to 80 percent in the late 1930s and early 1940s under T.R.'s nephew Franklin.

FDR's reign marked the high-water mark for estate taxation in the United States. Over the past generation, starting with the Reagan years, exemptions (which have always been included in the law to protect small bequests) have risen sharply, and top rates have fallen drastically as well. Considered in a historical context, the estate tax that agitates Trent Lott and the other GOP members of the present rich man's Congress is not really onerous at all.

Take top rates, for instance. From 77 percent in 1941, they have fallen to 55 percent (on estates over $3 million), a drop of one-third. And that declines further to 39 percent after credits for state inheritance taxes are taken into account. Individual exemptions, meanwhile, have risen from $60,000 during World War 11 to $675,000 today, and under revisions passed in 1997, that will increase to $1 million (doubled for family businesses) in 2006. Let's make it plain: Under current law, no estate valued at less than a million dollars -- and no family farm or enterprise worth twice that much -- will shortly pay any federal transfer taxes at all.

The upshot is that only the property of a tiny minority of deceased Americans (between 1 and 2 percent) is annually liable for estate taxes, and even then, only a portion of this property ever becomes subject to actual taxation. Present legislation allows complete tax avoidance through the creation of trust funds and the expedient of non-taxable gifts (up to $10,000 per recipient per year) prior to death. On top of these loopholes, there is the granddaddy loophole of them all: the capital-gains tax evasion. Notwithstand-ing Republican whining about estate levies constituting "double taxation," a huge proportion of appreciated wealth in the form of investments is transferred tax-free from one generation to the next as unrealized capital gains, which are not taxed unless and until the stock is sold. If such assets are simply accumulated and passed on, the holder pays no capital-gains tax in life and no estate tax in death.

Despite these shelters, considerable money is still collected, and the proposed estate-tax phase-out is expected to cost the federal government $105 billion in revenues over ten years and an estimated $50 billion a year after complete abolition in 2010. That shortfall will have to be made up somehow, either by higher income or payroll taxes on average Americans, or by cuts in essential programs like Social Security and Medicare.

Why, then, would nine senators and 65 representatives of the Democratic party, the self-proclaimed "party of the people," join Republican majorities in voting for estate-tax repeal? The Senate vote offers a clue. Two of the nine Democratic apostates, Murray of Washington and Feinstein of California, represent states newly laden with billionaires and millionaires from the trendy "new economy." A third, Torricelli of New Jersey, the business-friendly chairman of the Democratic Senate Campaign Committee, has a well-documented record of trading in high-tech stocks and courting high-tech money men. A fourth, Robb of Virginia, is one of the Senate's wealthiest members, with $9 million in assets to be protected. The possible motives of the remaining members of the infamous Democratic nine (Breaux, Cleland, Landrieu, Lincoln, and Wyden) can only be speculated upon, but the confluence of money and public policy in the estate-tax vote should raise red flags in abundance. Republican ties to big money constitute a given. What is disturbing are the inroads the new-economy moguls have made in influencing the traditional party of working Americans. With corporations like Microsoft working overtime to dole out political contributions -- $1.2 million this year from the software giant to the Democrats alone -- the move to repeal the rich man's tax may only be the beginning.

Wayne O'Leary is a writer in Orono, Maine.

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