Who Wants to Stay a Millionaire?

Millionaires may rejoice. Congress is on course to pass a tax cut crafted especially for the rich: the repeal of the federal estate and gift tax, what politicians call the "death tax." The fact is that the tax in question is not levied on dead people, nor must it be paid at death. It is a partial tax on the transfer of very large amounts of wealth.

The tax can be triggered by death because a dead person's wealth automatically becomes someone else's property. It falls on very few dead people because only 2% of them leave estates that incur any tax liability.

Nor is the tax necessarily incurred at death. It can kick in well before one dies or well after, and it may be paid by the living as long as 14 years after the death of the wealth-holder.

It is only a partial tax because the current law provides for generous exemptions: a tax credit that will effectively exempt $2 million for a couple by 2006, full deductibility of donations to charitable institutions and the possibility of passing along an estate to children tax-free, at the rate of $10,000 per child per year. Over 20 years, assuming a modest rate of interest of, say, 6%, each heir could receive nearly $370,000 tax-free. Not a bad start in life.

So the label of "death tax" is really false. And that's not the end of the fables being propagated about the tax. One is the myth of double taxation--that a person pays tax on income and then the heir is taxed again on the same income. Actually, much income accumulated by the wealthy is never taxed. The way you get really rich in the U.S. is with capital gains from stocks and bonds and from business ownership. Neither type of gain is taxed under the income tax unless the stock, bond or business is sold. If the owner dies before selling, any such accumulation of wealth would pass to heirs tax-free, but for the estate tax.

Of course, ordinary folks know all about double taxation. Their wages are taxed under the payroll tax and under the income tax. But that's not the sort of double taxation our intrepid Congress has set its sights on.

Another fable propagated by those in favor of repealing the estate tax is the heir who is forced to sell the family business or farm to pay the tax. According to a Brookings Institution survey by tax economists William Gale and Joel Slemrod, however, only 2 out of 1,000 people actually leave estates that include ownership of small businesses or farms. And even for those who do incur these taxes, current law allows heirs to pay them in installments over 14 years. And the tax incurred for such enterprises applies only to their value in excess of $2 million.