Straight Talk About the 'Death' Tax: Politics, Economics, and Morality

STRAIGHT TALK ABOUT THE ‘DEATH’ TAX: POLITICS, ECONOMICS, AND MORALITY By Dennis J. Ventry Jr. Dennis J. Ventry Jr. is a Research Fellow at the Brookings Institution in Washington, D.C., and a Ph.D. candidate in Economic History at the University of California, Santa Barbara. Ventry examines the political, economic, and moral cases against transfer taxes. First, he ar- gues that the rhetoric surrounding the effort to repeal the estate and gift tax — particularly the charge that it destroys family farms and closely held businesses — is, at best, misleading, and at worst, disingenuous. Second, he demon- strates that the estate and gift tax does not necessarily threaten aggregate saving, labor supply, or economic growth as its critics main- ta in. Nor does it gen erate an in sig nifican t amount of revenue, produce prohibitive com- pliance costs, primarily tax wealth that has al- ready been taxed, or have little effect on the rate of charitable contributions, again, all of which critics maintain. Finally, Ventry challenges the assertion that transfer taxes are immoral because they prevent parents from passing along hard-earned wealth to children, and because they tax saving, not consumption. The fact that we care about our children, he argues, does not make transfer taxes immoral, anymore than the fact that we care about what we consume makes consump- t i o n t a x e s i m m o r a l . M or e fu n da m e n t a l l y, Ventry challenges the moral case against taxing wealth at death by invoking history. Americans have long considered wealth a civic right, not a birthright. Thus, taxing inherited wealth ful- fills a moral obligation in a liberal democratic society. Ventry concludes that the estate and gift tax should be reformed, not repealed. In the interest of preempting further calls to abolish the estate and gift tax, preserving one of the most progres- sive features of the federal tax system, and im- proving horizontal equity, he recommends rais- ing the effective exclusion, broadening the tax base, and lowering marginal rates. TAX NOTES, November 27, 2000 Table of Contents Rhetoric Versus Reality . . . . . . . . . . . . . . . . . . . . . . . . . . 1160 The Economics of Inheritance Taxes . . . . . . . . . . . . . . 1163 The Moral Case for the Estate and Gift Tax . . . . . . . 1166 Conclusion: Reform, Not Repeal . . . . . . . . . . . . . . . . . 1168 In June, the U.S. House of Representatives passed H.R. 8, the Death Tax Elimination Act. In September, the Senate ratified the House bill. Days later, President Clinton vetoed the legislation. End of story? Not quite. H.R. 8 represents the most recent initiative in a protracted and increasingly viable effort to abolish the federal estate and gift tax. In fact, critics of the so-called “death” tax seemed poised for victory this summer. Most telling, the partisanship that had characterized earlier proposals to eliminate the estate tax gave way to a bipartisan alliance. Democrats joined Republicans to repeal what Bill Archer, R-Texas, Chairman of the House Ways and Means Committee, called “the wreck- ing ball of a life’s worth of achievement and success.” 1 Sixty-five House Democrats helped pass H.R. 8, 279 to 136, and nine Senate Democrats co-sponsored the House bill, shuttling it to the president’s desk by a vote of 59 to 39. Only the White House’s concerted effort to shore up Democratic support prevented an override of the president’s veto. What’s more, recent polling data indicates over- whelming public support for eliminating the estate and gift tax. A June 2000 Gallup Poll found that 60 percent of respondents favored “eliminating all inheritance taxes on estates over $1 million.” The latest numbers are even more damning. In surveys conducted in late August and early September, the Pew Research Center reported that 71 percent of respondents favored Archer quoted in Ryan J. Donmoyer, “Clinton Gets Estate Tax Repeal As GOP Eyes Veto Override,” Tax Notes, Aug. 28, 2000, p. 1071 at 1072.