July 13, 2006

July 13, 2006 | Commentary on Political Thought

Buffett thinks this is one tax that's a good idea

The federal government won't be getting a windfall of Buffett bucks after all. This year the world's second-richest man, Warren Buffett, turns 76. He's built a fortune worth an estimated $44 billion. He's also a strong proponent of the federal death tax, which (were he to die in 2011) would claim some 55 percent of his estate. So it must have occurred to some IRS bureaucrats that they might eventually cash a probate check for upwards of $20 billion.

But that's not going to happen.

On June 26 Buffett announced plans to give more than $30 billion to the Bill & Melinda Gates Foundation. That's completely reasonable. Buffett is a friend of Bill Gates, and the foundation's good work is well worth supporting. But it's clear that Buffett had more than one reason for giving his fortune away.

Buffett says he wants to shelter his fortune from the tax man. He went so far as to insist that his beneficiaries "must continue to satisfy legal requirements qualifying my gifts as charitable and not subject to gift or other taxes."

Ironically, even as he avoids paying the death tax, Buffett still insists that the tax is critical. "I would hate to see the estate tax gutted," Buffett told reporters as he announced his gift. "It's a very equitable tax." Just not one he wants to pay.

Buffett's actions, while hypocritical, make sense. Death shouldn't be a taxable event.

Lawmakers partially agreed in 2001. That year they started phasing out the death tax. It's scheduled to decline every year until 2010, when it will disappear for one year -- before returning at full strength (55 percent) in 2011.

Liberal New York Times columnist Paul Krugman calls this the "Throw Momma from the Train Act," since it would give people a perverse incentive to die in 2010. The best way to avoid that, of course, is to completely eliminate the death tax -- permanently.

This wouldn't be an extreme step. Some 24 countries including Canada, Australia, India, Mexico, China, Russia and even Sweden (poster child for the welfare state) have no death tax. The fact that the United States still does hurts our global competitiveness. A recent study by the American Council on Capital Formation showed that only two major nations (Japan and South Korea) have higher death-tax rates than the United States.

The death tax is simply bad public policy. It imposes a gigantic burden on small businesses. Family firms built by the sweat of a lifetime's work can be wiped out by the tax when their owners die. Business owners pay an estimated $12 billion each year just for insurance to prepare for the eventual payment of onerous death taxes. That's $12 billion that's not being spent on expanding those businesses through research and development or through hiring new employees.

This perverse situation does help explain Buffett's support of the death tax. His company, Berkshire Hathaway, sells "death tax insurance" to small businesses. And when a small businessman lacks such insurance? Buffett can swoop in to buy small businesses, such as the chain of 63 jewelry stores formerly owned by the Bridge family of Seattle.

Good tax policy is predictable tax policy. Businesses need to know how their profits will be taxed next year if they're going to make the right decisions. By forcing small businesses and family farms to hedge against the future instead of grow into it, the death tax holds back our economy and reduces job growth. Economists at The Heritage Foundation estimate it costs us between 170,000 and 250,000 jobs a year.

It's almost inconceivable that a country founded on the principles of freedom and opportunity is still taxing economic virtue and productivity. As Sen. George Allen (R-Va.) says, there should be "No taxation without respiration."

Warren Buffett has managed to dodge the death tax. It's past time for Washington to kill it off permanently.

Edwin Feulner is president of The Heritage Foundation (heritage.org), a Washington-based public policy research institute and co-author of the new book Getting America Right.

About the Author

Edwin J. Feulner, Ph.D. Founder, Chairman of the Asian Studies Center, and Chung Ju-yung Fellow
Founder's Office

First Appeared in the Chicago Sun-Times