A Boon for Multimillionaires

The federal estate tax needs to be reformed, not repealed, but unless there’s a political shift in Washington in the next few weeks neither is likely to happen. President Clinton promises to veto the phaseout of the estate tax approved by the House if the Senate passes similar legislation but says he would support a plan to modify current law. That alternative offers a reasonable basis for a compromise.

Fewer than 2% of Americans are affected by the estate tax. More than half of the $28 billion the tax is expected to raise this year will be paid from estates valued at $5 million or more. Opponents of the estate tax--they call it a death tax--often cite the sometimes confiscatory burden that falls on those who inherit family businesses or farms. There have indeed been cases where heirs have had to sell their inheritance to cover taxes. But that inequity is by no means as common as opponents of the estate tax claim. In 1998, the latest year for which figures are available, only 3% of taxable estates included sizable small-business or farm assets.

If the estate tax disappears, the big winners will be the small number of taxpayers whose estates exceed $5 million. The House-passed bill would cut the estate tax rate starting next year, with full repeal coming in 2010, at an estimated 10-year cost to the Treasury of $105 billion. That figure could rise considerably as baby boomers begin to inherit wealth from their parents. Estimates of this looming wealth transfer range up to $10 trillion over the next 20 years.

Among the biggest losers if the estate tax is abolished will be charities, universities, museums and religious and other tax-exempt institutions. These benefit especially from people who want to reduce the taxable value of their estates. One study has found that while estates of less than $625,000 typically leave 5% to charity, estates over $20 million leave 41%.

The Democratic alternative to the Republican bill approved by the House proposes a more fiscally responsible and socially supportable approach. It would cut estate tax rates by 20%, dropping the top rate to 44%. The current $675,000-per-person tax exemption would rise to $1.1 million next year and $1.2 million in 2006. (Estates of any size can be bequeathed tax-free to surviving spouses.) Exemptions on farms and small businesses would rise to $2 million for individuals and $4 million for couples. The cost of these changes is estimated at $22 billion over 10 years.

The House rejected this alternative, largely along party lines. The Senate would do well to reconsider it. With some compromises--say with a further lowering of estate tax rates--enough bipartisan support could be assured to retain the estate tax law while making it fairer in application.