Democracy and Estate Taxation

Republicans scored a rhetorical coup some years ago by labeling the estate tax a "death tax." They built upon that coup with a subsequent claim that small businesses were the real victims of the tax. An effort permanently to abolish estate and gift taxes, supported by all but two Republican senators, recently stalled. Nonetheless, Republicans promise to keep the issue alive this fall. If they are successful, they will have achieved far more than a tax change. Outright repeal will constitute a threat to major instruments of progressive social policy and even to democracy itself.

Progressives have properly pointed out that repeal of the estate tax would provide an enormous windfall for the rich. By 2006 estates of two million or less will already be completely exempt from taxation. Fewer than 2% of all estates would ever face any Federal taxation. Current law also already makes special provisions for farms and small businesses. In addition, House Democrats have proposed other targeted changes that would make it even easier to inherit farms and small businesses without simultaneously extending largesse to holders of vast corporate portfolios.

Some small business lobbies argue that even special provisions for small businesses and farms aren't enough because these owners must still spend many thousands for accountants and lawyers. Even if these claims are correct, they would at most be an argument for tax deductions or credits for such services rather than for elimination of the entire estate tax on all wealthy individuals.

One of the great ironies of US social policy is the corporate effort to hitch estate tax repeal to the mantra of small business. Americans have long feared concentrations of corporate wealth and power not merely because they could limit competition but also because they constituted a threat to democracy itself. Now, in the name of small business, conservatives are proposing tax changes that would make immense concentrations of economic power all the more likely.

For wealthy individuals, there is a basic difference between providing one's heirs the opportunity to live a comfortable life and bequeathing them vast economic and political power. Even under Clinton-era estate law, a hypothetical citizen with $10 million in assets could still leave his two children more than $2 million apiece. Invested even in bonds, such assets could guarantee each child nearly $100,000 a year for life. Even billion-dollar estates still faced a top marginal rate of only 55%.

With estate tax repeal, a few heirs will gain not only the possibility of a comfortable life without work but the opportunity to control fortunes so extensive that they can disproportionately shape our media, economics, and politics. If conservative can call estate taxes the death tax, I suggest progressives re-label the measure a plutocracy tax.

If conservatives were genuinely interested in reducing the taxes heirs pay after the death of their loved ones rather than finding new ways to improve the circumstances of the super-wealthy, an annual tax on wealth would be a better alternative. Taking a quarter percent or so per year on wealth above $1 million could allow elimination of estate taxes and give families more freedom to distribute assets as they choose

Unfortunately, the fiscal consequences of estate tax repeal in today's economic climate are just as dire as the political implications. The Treasury will lose about $60 billion a year. Less widely noted are the ways this proposal alters the evolution of our whole tax system, a point fully elaborated by the Center on Budget and Policy Priorities. With estate and gift taxes eliminated, the wealthy can shift highly appreciated assets like stocks to their children, sell those shares, and thus reduce their capital gains taxes. Since fewer revenues will come from taxes on income, gifts, and estates, Federal revenues will shrink and the incidence of Federal taxation will become ever less progressive. Once the net burden of all taxes, including state and local, is calculated, our tax system as a whole will become highly regressive.

The damage done by estate tax repeal does not stop with Washington. My home state of Maine, like 34 other states, ties its own estate taxation to the Federal tax. Current estimates are that even my small state would sustain a $45-million-dollar hit from full repeal.

Can states pick up the slack? Unfortunately, it is more likely that the pressure to cut public services will grow. The wealthy have less need for them and the poor and working class citizens can't afford to pay for them. As the quality of poorly funded services diminishes, the push to reduce them further only grows.

The politics of school financing in many states provides a preview and analog for Federal cuts. Many state governments now provide a diminishing percentage of school funding. Schools increasingly rely on regressive local property taxes. Here in Maine our town meetings regularly must choose between the Scylla of reduced school funding and the Charybdis of high tax burdens on their working class citizens. Schools are gradually losing in this process. Nonetheless, state governments are reluctant to increase progressive taxes on incomes or business services for fear of losing businesses that can cross state borders even more easily than they flee the country.

Repeal of the estate tax comes down to two fundamental issues of public philosophy. Are vast disparities in income and wealth a threat to democracy? Does a healthy democracy and even a thriving market depend on a range of generous public services, including schools, transit, public health, and basic research? If the answer to these questions is yes, retention of an estate tax is an imperative.

John Buell lives in Southwest Harbor, Maine, and writes regularly on labor and environmental issues. He invites comments at

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