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Now that the House Has Voted to Eliminate the Federal Estate Tax Permanently...
By Gail Heriot

I've always been slightly unnerved by what seems to be the near uniformity of opinion among my fellow conservatives in opposition to the federal estate tax. The passion with which they make their case never seems in any way proportional to the strength of their argument.

Think tanks denizens are frequently the worst offenders--and it's easy, though just a bit troubling, to see why. Those institutions depend on contributions from wealthy and usually elderly individuals for whom the estate tax is a significant issue. And if an issue, particularly a financial issue, is important to an institution's donors, it will be important to the institution--at least if the institution wants to grow and prosper.

I was pleased therefore to see Irwin Stelzer of the Hudson Institute writing in the Weekly Standard with a more skeptical view. Among other things, he attempts to meet some of the more common arguments against the tax:

"* Surviving spouses will suffer. No. Inheritance taxes are not levied on spousal transfers--quite right, since we now recognize that the accumulated wealth of husband and wife is due to the efforts of both.

* Inheritance taxes are "death duties" or "vulture taxes." No. They are not levied on people foolish enough to die, but on those lucky enough to be named beneficiaries in a will. The Wall Street Journal's rallying cry, "No taxation without respiration," is catchier than it is accurate.

* Inheritance taxes constitute "double taxation." No. They are
one-time taxes on the income of the recipients of inherited assets, not a double tax on those who earned the money in the first place. Besides, as William Gale (Brookings) and Joel Slemrod (University of Michigan) point out in a paper prepared for a National Tax Association symposium, "It turns out that much of the wealth subject to the estate tax has not previously been taxed."

* Inheritance taxes force the sale of small businesses or farms. No. Any such entity surely has borrowing power in excess of the amounts required to meet the taxman's demands, and can therefore raise any needed cash. Besides, a study for the National Bureau of Economic Research by Thomas Dunn and Douglas Holtz-Eakin (the latter is now director of the Congressional Budget Office) suggests that an entrepreneur's "propensity to become self-employed" is affected far more by the human capital he or she inherits than by inherited financial assets. So inheritors of businesses, and of that "self-employed propensity," are not likely to sell out and join the ranks of wage earners merely because the value of the enterprise they inherit is taxed."

I suppose it's getting to be a little late to be making arguments on this issue. Stelzer predicts that the Senate will follow the House lead and vote to make the elimination of the federal estate tax permanent. And like me, he is not sure if that's a bad thing. "But," he concludes, "the burden will be on the inheritance-tax repealers to decide which taxes they will raise to make up for the lost revenue--$1 trillion over 10 years. Unless, of course, they favor a still-larger deficit."
posted by Gail at 5/07/2005 12:58:00 PM