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Why Repeal a Tax That the Taxed Believe In?

February 20, 2001|MICHAEL J. GRAETZ | Michael J. Graetz, a professor of law at Yale Law School, was deputy assistant secretary for tax policy in the administration of George H.W. Bush

When 200 of this nation's richest people speak, as they did last week, in one voice opposing repeal of a tax directed at them, we should take heed. Here is their key point: Repeal of the estate tax, which applies only to the wealthiest 2% of people who die in any year, sooner or later will require that people less able to pay make up for the tax revenue that will disappear.

Those who want to repeal the estate tax--now referred to as the "death" tax--always point out that it is a minor source of federal revenues, less than 1 1/2% of the total. But there are still sizable dollars at stake. In 1999, fewer than 50,000 taxable estates contributed $28 billion to the federal government. Estate tax receipts are projected to grow to about $40 billion by 2008. This is enough revenue to pay for President Bush's proposal to reduce the top individual income tax rate from 39.6% to 33%, or to reduce the corporate income tax rate from 35% to 30%, or to exempt completely from the corporate income tax all corporations with assets of $100 million or less. It is more than the entire income tax liability on tax returns with income less than $22,000, and more than one-fourth of total income taxes paid by those with incomes under $50,000. It is not chump change. And, along with the income tax, the estate tax has long been an important factor in making federal taxes progressive.

If Congress wants to repeal this tax, rather than simply to reform it, it should find a replacement, at least for the bulk of the revenues it will be giving up. How about a tax on "lucky windfalls?" This would tax those who receive more than say $1 million or so in gifts or bequests at the top income tax rate, now about 40%. We might also consider including winners of multimillion dollar lotteries under the same tax, instead of the income tax.

People who receive working farms or small businesses as a gift or bequest from a family member could be exempt from this tax, at least until they sell the farm or business or take the business public. The tax, of course, would not apply to gifts or bequests received by a church, university, museum, hospital or other charity. This would help alleviate the valid concerns that repeal of the estate tax will sharply curtail charitable gifts and bequests.

This tax idea is not fanciful or impractical. The American Law Institute published a study in the 1960s detailing just how such a tax could work. They called it an "accessions" tax, but like the relabeling of the estate tax, "lucky windfall" tax now seems a more apt appellation.

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