INHERITANCE TAX

You cannot avoid death and taxes, but the federal government makes sure you can't face the former without the latter. The federal estate tax of 18 to 55 percent on estates worth more than $675,000 undermines hard work and capital growth.

This confiscatory tax is charged upon the deceased person's entire estate, regardless of how it is disbursed. The tax provides minimal revenues (1.3 percent of total federal revenues) to the government. The administration of the tax is also very expensive, with 65 cents of each dollar in revenue being used for enforcement. In reality, the death tax only raises an extra $8.4 billion a year, less than three quarters of one percent of the revenues raised by the federal government. The death tax does nothing to bolster the federal budget, but it does have devastating effects on thrift, entrepreneurial spirit and intergenerational enterprise.

Currently, the first $675,000 of inherited property inherited is exempt from federal estate taxes; anything in excess of this amount is taxed at a rate between 18 and 55 percent. The Taxpayer Relief Act of 1997 increased the exemption from $625,000 in 1997 to $675,000 in 2000 and 2001. The exemption will rise to $700,000 in 2002; $850,000 in 2004; $950,000 in 2005; and, finally, $1 million in 2006. The 106th Congress realized that any estate tax was fundamentally unjust and subsequently sought to eliminate the tax altogether. Accordingly, both the House and the Senate passed legislation repealing the estate tax before recessing this August. President Clinton kept his promise and vetoed the legislation when it reached his desk. Congress failed to get the two-thirds vote necessary to override the presidential veto.

Proponents of the estate tax claim that repealing it would only benefit the wealthiest Americans. Again, this claim is just inaccurate. Fifty percent of all estate tax revenues come from estates that are valued at less than $5 million. Five million dollars is a lot of money, but what these people do not realize is that this amount is not always liquid. The value is tied up in machinery for family farms, in printing presses for local newspapers, or in shops for local mechanics. Yet the government expects these businesses to pay up to 55 percent of the total value in taxes. Because of this high tax bill, more than 70 percent of inherited family-owned businesses are forced to liquidate their assets. That means selling everything just to get the cash to pay the government. Doors are shut and jobs are lost.

In 1916, when the tax was instituted, it was only intended to affect the wealthiest Americans, but as the following examples show, the tax's consequences affect all Americans.

Robert Sakata is a 42-year-old vegetable farmer from Colorado. His father started their family's business in 1944, which he still owns today. Although Mr. Sakata and his father are not millionaires, the younger Mr. Sakata will be forced to pay a $200 million estate tax bill when his father passes away. He will pay this bill because of the value of the 40 acres that his father bought in 1944 for $6,000 has skyrocketed to $380 million. It is the value of the land, not Mr. Sakata's gross income, which will determine the rate at which he will be taxed. He will be forced to sell all or most of his land to foot his federal tax bill. The 350 workers he and his father employ will lose their jobs in the process.

Robert Sakata's situation is similar to that of a North Carolina farmer named Clarence who provides more than 70 jobs for members of his community on his three farms. He expects to pass his business on to his son, who is currently one of his employees. Most of the business's assets are tied up in machinery and tools. Although Clarence and his son each only gross about $31,000 per year, when Clarence dies his son will owe the government approximately $1.5 million in estate taxes. Clarence's son will have to sell the land and discharge his 70 employees.

Robert Sakata and Clarence have both purposely slowed the growth rates of their businesses to avoid some of the anticipated estate tax bill. These extreme measures harm the economy by slowing growth of the gross domestic product (GDP) and depriving the economy of new capital.

Despite such stories, proponents of the estate tax say the death tax is beneficial to the economy and would be "risky" to eliminate because it could cause a budget deficit. Studies show, however, that the repeal of the estate tax would have positive effects on the economy. A study done by The Center for the Study of Taxation shows that, if the estate tax had been repealed in 1971, by 1991:

• There would have been more than 262,000 more jobs (13,000 more annually);
• The GDP would have been $46.3 billion more; and
• There would have been $398.6 billion more generated in capital.

Other studies corroborate these findings. A new study by The Institute for Policy Innovation shows that if the estate tax were repealed now, growth would occur even more rapidly than it would have in the 20-year span concerned in the study above. The study shows that if Clinton had not vetoed the 1999 Republican repeal of the death tax, that repeal would have:

• Created 45,243 more jobs in 2000 and 236,000 more jobs by 2010 (an average of 23,600 annually);
• Produced $700 billion more in GDP between 1999 and 2008; and
• Increased annual the GDP by $117.3 billion by 2010.

The only risk involved associated with the estate tax is keeping it. That risk is borne by taxpayers. There have been several reform proposals for the estate tax. Some, like the one just vetoed by President Clinton, would repeal the tax gradually over time, while others would only lower rates. Tinkering with exemptions, adjustments, revisions and rate reductions will not produce equitable treatment for all taxpayers. The only solution is the outright repeal of the estate tax. This is the only way to preserve the American dream of creating, saving and passing wealth and family business on to future generations.