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Jewish World Review July 25, 2000 /22 Tamuz, 5760

Amity Shlaes

Amity Shlaes
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Consumer Reports

The Estate Tax will drop dead

President Clinton is readying his pen to veto a tax bill abolishing America's gift and inheritance tax, also known as the estate tax. -- THE REAL NEWS though is that the plan to eliminate the estate tax made it as far as the President's desk at all.

The graduated levy, triggered by estates worth more than $675,000 and with a top rate of 55 per cent, was never popular with America's wealthy. But they were a muffled minority. The rest of the country seemed to agree wholeheartedly with the sentiment of Theodore Roosevelt, one of the original estate tax enthusiasts, that the tax structure must do what it can to drain "those fortunes swollen beyond all healthy limit."

Even the Reagan Administration, which pulled income tax rates down below 30%, found it could not marshal support for a campaign against the "death tax."

What changed? The new politics of plenty have played a role; for the first time in the memory of many American adults, there is cash to spare in government coffers for tax cuts. Eliminating the estate tax would cost $25 billion, not a prohibitive amount in the inflated context of modern budgetwriting. Besides, as in Britain, the tax is economically inefficient.

Rather than using their spare millions to do something sensible like generate jobs, wealthier citizens seek to "die broke," or devote untold cash to constructing elaborate and wasteful estate trusts and foundations, all in an effort to elude the levy.

But even more important is the change in Americans themselves. Today's citizens have amassed some $20 thousand billion in savings to pass along to their children, and they don't want the government to take away some of that. Currently some two percent of Americans are liable for the tax, but the growing pensions of the wealthy means that rate will expand in future.

Even more significant though is the role played by those who are not wealthy, but have the prospect of becoming wealthy in their lifetimes. Such people will no longer automatically support an anti-plutocrat measure.

Indeed, many of Mr Clinton's colleagues in the Democratic Party are finding that their constituents are hostile to the "death tax." Prominent among Democrats who have switched sides on the tax is Charles Rangel, the lawmaker in line to become chairman of the powerful House Ways and Means Committee, should the Democrats recapture the Congress this fall. As Mr Rangel, who represents Harlem, explained to the press, "death tax just sounds wrong."

The trend to prosperity in Mr Rangel's home neighbourhood may give a clue as to the timing of his switch. These days brownstone prices on Harlem's storied Strivers' Row are edging toward $500,000, treacherously close to levels that trigger the estate tax. One house recently went for $800,000, above the current $675,000 exemption level.

But the new antipathy toward the tax also shows up elsewhere on the traditional left. Many of them dislike the culture of conspicuous consumption that the tax has encouraged among senior citizens. "There's nothing wrong with people saving wealth," says Ed McCaffery, a professor of tax law at the University of Southern California and advocate of a switch to a graduated rate consumption tax system. "Yet the estate tax as it is now encourages people to spend away"-since the government will take the money when they die anyway. "Tax policy in America is backwards. You can be really rich and spend all your money, and if you try to work and save you get nailed."

Tax-related profligacy is also the subject of an illuminating new study of America's growing nonprofit sector, the principal beneficiary of cash eluding the estate tax. In "Writing Off Ideas: Taxation, Foundations, and Philanthropy in America," (Transaction Press, The Independent Institute) author Randall G. Holcombe points out that the private foundations wealthy Americans create to save on taxes often serve more to "aggrandise the family name" and provide sinecures as foundation trustees for family friends than for any manifest social good.

All this leaves President Clinton and the remaining estate tax fans somewhat isolated and old-fashioned. But who knows? Housing prices in Washington's Capitol Hill area are also on the march. By the next Administration, they may be high enough to convince even the most stalwart class warriors that the estate tax is passe.

JWR contributor Amity Shlaes is a columnist for Financial Times . Her latest book is The Greedy Hand: How Taxes Drive Americans Crazy and What to Do About It. Send your comments by clicking here.


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© 2000, Financial Times