A Revenue River? Jude Wanniski July 20, 2000

To: The Editors, The New York Times
From: Peter Signorelli
Re: Estate Tax Repeal

You are seriously mistaken in your characterization, “Channeling the Revenue River,” 07-17-00, of the federal estate tax repeal as a tax cut “weighted toward the wealthy.” The “wealthy” have long been able to avoid this tax by estate planning, leaving those estates under $5 million to pay the majority of this tax. Even by your own criterion of tax policy as a means of wealth (capital) redistribution you are in error. Surely your desire is to bring up the poor, rather than to bring down the “wealthy.” But your opposition to the repeal of this tax turns upside down your goal of redistribution. The current tax imposes a serious obstacle to those who have before them the opportunity to move upward on the economic ladder.

Imposed on estates valued as little as $675,000, this tax rises to an effective rate of 60%, second only to Japan (70%) as highest rate in the world. Incidentally, effective marginal tax rates thus can run as high as 73% at the federal level: a 39.5% top income tax rate plus a 60% estate tax rate. Yet the estate tax accounts for a minuscule revenue yield. With total federal revenues estimated at $2 trillion, the estate tax accounts for a mere 1.2% of the “revenue river.”

Even N.Y. senate candidate Hillary Clinton, addressing an audience of farmers this past April, acknowledged that the estate tax ought to be cut. As she poignantly put it, “You ought to be able to leave your land and the bulk of your fortune to your children and not to the government.” In national polls, respondents overwhelmingly (from 62 to 77%) favor abolition of the estate tax. Almost none of them have assets anywhere near $675,000, yet almost all still believe that the mobility of wealth in America means anyone can “get rich.”

You are not necessarily incorrect in your belief that “Americans have consistently embraced the principle that calls for the wealthy to pay proportionately larger shares of their income in taxes.” But you ought to add the truth recorded as far back as the 1800s by Alexis de Tocqueville that “the rich in America are constantly becoming poor....the rich rise out of the crowd and constantly return thither.” This dynamic is as much a part of the American character as the conviction that the rich also must pay their fair share. It accounts for the phenomenon in which 60% of American families in the bottom 10% of wealth distribution have moved up to a higher tenth, “some,” as National Center for Policy Analysis senior fellow Bruce Bartlett notes, “all the way up to the top 10%.” Moreover, “almost half of those in the top 10% of wealth have dropped out of that tier after 10 years.”

The estate tax works against socio-economic mobility. It falls upon the recipients, not the giver. Many of these heirs are far from wealthy. This is especially true among those layers of the population who have less capital accumulation than others -- African Americans in particular. The adverse consequence of the estate tax on this community is painfully illustrated by the demise one of the black community’s oldest and most venerable newspapers, The Chicago Defender. The heirs to this estate simply did not have the money required to pay the estate taxes and were forced to liquidate the paper. A similar situation exists for those inheriting family farms, where the estate taxes can be paid by the inheritors only by liquidating the farm itself. Fifty-one percent of family businesses now indicate they would have great difficulty surviving because of the estate tax. Another 30% say they would have to sell off large or all portions of the business, and 41% would have to borrow against equity to meet the tax. Some 14% indicate it simply would be impossible to survive the estate tax.

As the tax reduces capital formation, it works against the redistributive effect you champion. It does nothing to redistribute wealth, but instead keeps capital locked up by the already capital-rich. It adds to the concentration of already existing capital to the detriment of newcomers, especially those at the bottom of the economic ladder.