August 23, 2004

August 23, 2004 | Commentary on Taxes

Killing Off the Death Tax

It sounds surprising at first blush, but the people working the hardest to save the federal estate tax, or "death tax," are some of the country's richest. Indeed, the membership of the pro-death tax Committee for Responsible Wealth reads like a Who's Who for a Vanderbilt birthday party.

There are reasons for that. For example, famed investor and outspoken death-tax proponent Warren Buffet makes money by selling "death tax insurance" to small businesses. He also makes money by buying small businesses (at fire-sale prices) when they have to be sold to pay taxes because their founder died without such insurance.

Much to Buffet's chagrin, as things stand now, the death tax is, well, expiring. It will be completely phased out by 2010.

However, unless Congress takes action, it will rise from the grave in 2011. That means if someone dies in 2010, his estate will pay nothing in inheritance taxes, but if he survives until January of the following year, the estate will have to turn over more than half its assets to Uncle Sam.

Because this would provide a perverse incentive for wealthy individuals to die during 2010, economist Paul Krugman has jokingly called this the "Throw Momma from the Train Act of 2001."

So why maintain a death tax at all? One reason the small group of extremely wealthy people wants to keep the death tax alive - and kick it back up to its confiscatory 2003 levels - is because they claim that eliminating the federal inheritance tax would decrease the amount of charitable giving, thus endangering American charities.

Of course, the best way to help charities is to boost the economy. We know that when the economy is strong, charitable donations increase. And permanently repealing the death tax would give our economy a big boost.

Heritage Foundation economists estimate that the federal estate tax alone costs the U.S. between 170,000 and 250,000 potential jobs each year. This additional employment never appears in the economy because the investments that would have resulted in higher employment are not made.

Those additional jobs would do more to help Americans than any charity ever could. By repealing the death tax, we'd open the door for hundreds of thousands of low-income workers and recent college graduates who simply need the chance to enter the workforce. We'd move them from the welfare rolls to the work rolls, changing them from charity cases to taxpayers. The additional revenue the government would collect from these new workers would far outstrip the amount it would lose from the permanent, total repeal of the inheritance tax.

Furthermore, the death tax prevents the economy from achieving its investment potential and slows down wage growth. Workers are more productive when they have new tools, machines and factories. And that increased productivity boosts wages and salaries.

History proves that charitable giving barely responds to changes in the estate tax rate or the amount that can be exempted. That's probably because people won't give their money away simply to dodge taxes - they need to know it's being used wisely.

In fact, trimming the death tax has actually increased the amount of money given to charities. The Congressional Joint Economic Committee found that last year, with inheritance taxes coming down, charitable bequests reached a record $21.6 billion - a 25 percent increase from 1999. The death tax merely crowds out charitable giving. When estates are paying more to the government, there's less for heirs to donate to worthy causes. But when we bring those taxes down, our charities benefit.

And we already know that worthy charities won't be left behind. More than two-thirds of Americans donate money to charities. They simply want to know where the money is going and how it will be used before they sign the check. That's one reason why charitable organizations are a critical part of the American fabric.

But many of the "charities" cited by death-tax supporters aren't involved in helping the poorest of the poor - they're making life better for the richest of the rich. Nobody would want to live in a country with no art galleries, ballet companies or horticultural gardens. However, these "charities" ought to be supported by wealthy private interests. They don't need to be propped up by donations from people looking to avoid paying a death tax.

No charity in the world creates hundreds of thousands of jobs per year. Repealing the death tax, however, would. And those who would likely benefit the most are the working poor. We can have both a healthy economy and healthy charities. But the death tax is a danger to both. Let's put it out of its misery, for good.

William W. Beach is director of the Center for Data Analysis at The Heritage Foundation.

About the Author

William W. Beach Director, Center for Data Analysis and Lazof Family Fellow
Center for Data Analysis

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