**Responsible Estate Tax Reform**

**By Chuck Collins and Lee Farris\
**

**I. Description of Proposal**

United for a Fair Economy and its Responsible Wealth project support
keeping a reformed estate tax in our national tax structure, along with
a progressive income tax. The estate tax plays an important role in
maintaining the progressivity of the tax system and brings in
significant revenue. Responsible Wealth members are among the top 5% in
wealth or income in the United States. Responsible Wealth has enlisted
more than 2200 taxpayers who have paid or will pay the estate tax, and
who support a responsible, reformed estate tax (see
http://www.faireconomy.org/.)

**\
**The 2001 tax cut phases out the estate tax between now and 2009; the
amount of wealth exempted rises from \$1.5 million in 2005 to \$3.5
million for individuals, double that for couples. In 2010, the tax will
be completely repealed ... for one year. If Congress takes no action,
the 2001 tax law will sunset and the estate tax will return at its
pre-2001 levels, including a \$1 million individual wealth exemption and
55 percent rate structure. The reason for this sunset was to
significantly reduce the cost of repealing the estate tax.\
\
The push for repeal comes from a coalition of anti-tax groups, business
trade associations, newspaper owners, and lobbying firms like Patton
Boggs, representing some of America\'s wealthiest families, including
the Mars and Walton clans. But the fiscal, moral, and political case for
complete estate tax abolition is weak.\
\
In the context of prolonged large budget deficits, abolishing a tax that
will generate almost \$1 trillion in revenue from 2010-2021 is fiscally
irresponsible, according to Senator George Voinovich (R-OH) and other
moderates in both parties who abhor the prospect of red ink for decades
to come. (Revenue estimate from "Estate Tax Reform Could Raise
Much-Needed Revenue: Some Reform Options With Low Tax Rates Raise Very
Little Revenue," Joel Friedman and Ruth Carlitz, Center on Budget and
Policy Priorities, March 16, 2005.)

In fact, the estate tax could play a vital role in saving Social
Security. According to the Center on Budget and Policy Priorities, "The
Chief Actuary of the Social Security Administration has estimated that
maintaining the estate tax at the 2009 levels --- with a \$3.5 million
exemption and a 45 percent top rate --- would raise enough revenue to
cover more than one-quarter of the shortfall in the Social Security
Trust Fund over the next 75 years, as measured by the Social Security
Trustees.  The trustees estimate the shortfall to be 0.65 percent of
GDP, while the revenue raised by this reform would equal 0.2 percent of
GDP.  The Congressional Budget Office projects a smaller shortfall (0.36
percent of GDP).  Under CBO assumptions, the estate tax revenues
collected under this reform would close *about half* of the 75-year
shortfall.  A reform with a \$2 million exemption and a 45 percent rate
(the law in 2008) would close an even great portion of the Social
Security shortfall." ("House To Vote On Permanent Repeal Of Estate Tax:
Estate Tax Reform, Rather Than Repeal, Could Preserve Much Needed
Revenues And Help Restore Social Security Solvency," Joel Friedman and
Arloc Sherman, CBPP, April 12, 2005.)

Meanwhile, states are voting with their feet to preserve revenue from
taxing wealthy estates. This year, the \"state credit\" portion of the
federal estate tax expired, leaving states that previously
\"piggy-backed\" on the federal law bereft of hundreds of millions of
dollars. As a result, seventeen states have voted to retain their own
state-level estate taxes, a pragmatic response in the face of tight
state budgets. In April, legislative leaders in Washington state
instituted a new Washington estate tax at the initiative of recently
elected Governor Christine Gregoire.\
\
The current wartime context also raises moral questions about the
timeliness of abolishing the estate tax. A number of commentators and
politicians have pointed out how unseemly it is for Congress to
zealously protect every dime of Paris Hilton\'s inheritance while other
families are holding bake sales to buy body armor for their children
serving in Iraq. This grotesque inequality of sacrifice is not lost on
some veterans groups. \"During the Civil War, rich people could buy
their way out of the draft,\" said Charlie Richardson, co-founder of
Military Families Speak Out. \"Now the wealthy don\'t have to pay
anything to avoid military service - and they get big tax cuts on
top.\"\
\
Senator John McCain (R-AZ) recently observed that cutting taxes for the
very wealthy during a time of war is historically unprecedented. \"In
the last year we have approved legislation containing billions and
billions of dollars ... in pork barrel projects, huge tax breaks for the
wealthy, and a corporate tax bill estimated to cost \$180 billion. This
is a far cry from sacrifice.\" Historically, wealth has been
\"conscripted\" to pay for war costs and debts.

The estate tax encourages charitable giving by exempting donations to
charities. According to a recent study by the Congressional Budget
Office, in 2000, repeal would have reduced giving by \$13 to \$25
billion. This amount exceeds the total amount of all corporate
charitable donations in the United States, which equaled \$11 billion in
2000. It approaches the \$25 billion that foundations contributed for
charitable causes in 2000.  (Congressional Budget Office, \"The Estate
Tax and Charitable Giving,\" July 2004. See also David Kamin, \"New CBO
Study Finds That Estate Tax Repeal Would Substantially Reduce Charitable
Giving,\" CBPP, July 31, 2004.)

Contrary to popular thought, the estate tax does not threaten small
farms and businesses. According to the Tax Policy Center, in 2004, of
almost 19,000 taxable estates, only about 440 were primarily made up of
farm and business assets. Some legislators have proposed keeping the
estate tax with an unlimited exemption for qualified family-owned farms
and businesses (QFOBI). However, as Tax Policy Center noted, an
unlimited QFOBI exemption would be very costly, and would give the
wealthy huge incentives to buy farms and businesses, thus bidding up
prices and hurting family farms and businesses. In addition, an
unlimited QFOBI exemption would exempt some of the largest businesses in
the world, such as Mars and Cargill. (Leonard Burman, William Gale, and
Jeffrey Rohaly, \"Options to Reform the Estate Tax,\" Tax Policy Center,
March 2005.)

When there is no estate tax in 2010, inheritances will be subject to
capital gains tax using carryover basis, rather than the step-up in
basis now used with the estate tax. This change will impact ten times
the number of estates. According to the recent article by John Buckley
(Chief Democratic Tax Counsel, House Ways and Means Committee), "Estate
Tax Repeal: More Losers Than Winners", 106 Tax Notes 833 (2005), "Repeal
will benefit an extraordinarily small number of estates. Of the 7,500
estates that would have estate tax liability with the 2009 exemption
level, many would face tax increases because the potential capital gains
taxes from carryover basis could exceed their estate tax liability. In
contrast, the new carryover basis rules will impose substantial
compliance burdens on more than 71,000 estates per year. A significant
number of those estates also will suffer tax increases from carryover
basis, even though they would receive no benefit from repeal." Buckley
also noted that long held assets such as farms are particularly impacted
by the change in basis.

The case for responsible estate tax reform is compelling.

United for a Fair Economy and its project Responsible Wealth advocate
reforming the estate tax by:

\- Raising the exemption to \$2 million for individuals and \$4 million
for couples

\- Indexing the exemption for inflation

\- Keeping the step-up in basis

\- Simplifying and liberalizing provisions to ease the transfer of the
few closely held businesses subject to the tax, and retaining the
existing ability of businesses and farms to pay any tax over 14 years

\- Creating an automatic exemption for married couples that is double
that for single people

\- Ending the loopholes, such as valuation discounts, especially those
for multiple owners, and special trust arrangements

\- Reinstating the state credit, so states do not create a mismatching
patchwork of state laws, but can simply piggyback on a reformed federal
law

\- Returning to a progressive rate structure, lowering the rate on
estates smaller than \$5 million to 40 percent, with incremental steps
to a top rate of 65 percent on estates over \$20 million.\
\
This progressive rate structure invokes the historical intent of the
tax, as articulated by Teddy Roosevelt and Andrew Carnegie, to thwart
the build-up of \"wealth dynasties\" that threaten to undermine
democracy. During the Depression and World War II, President Franklin D.
Roosevelt won approval of a top rate of 70 percent on dynastic fortunes
over \$50 million, ensuring that even the wealthiest shared in the
wartime sacrifice.

**II. Impact of Proposal Relative to Current System**\
Relative to the current tax system, the responsible estate tax reform we
propose would:

\- Maintain the revenue generated by the estate tax from 2010-2011

\- Continue to encourage charitable giving

\- Simplify estate tax provisions regarding married couples, businesses,
and farms

\- Reduce compliance and administration costs by simplifying the tax
code and reducing loopholes

\- Make the estate tax more progressive and thus fairer

\- Enhance economic growth and competitiveness by encouraging the wider
dispersion of wealth, rather than its accretion in fewer and fewer
hands.

We encourage the President\'s Advisory Panel on Federal Tax Reform to
include a reformed estate tax in its recommendations to the President.
We would welcome the opportunity to testify before the Advisory Panel on
this proposal.

*Chuck Collins is Senior Fellow at United for a Fair Economy and its
project Responsible Wealth, which advocates for estate tax reform (See:*
*<http://www.faireconomy.org/estatetax/index.html)>. He is coauthor with
Bill Gates Sr. of [Wealth and Our Commonwealth: Why America Should Tax
Accumulated Fortunes]{.underline} (Beacon).*

*Lee Farris is Senior Organizer on Estate Tax Policy at United for a
Fair Economy.*