Long Live the Estate Tax!

There is a stunning disconnect between the terrible budget shortfalls facing states and localities and the priorities of federal tax-cutters. States face budget deficits of more than $60 billion for the coming year--and the ax is falling on mental health, education and children's healthcare. Libraries are being shuttered, tuitions increased and parks closed. Governors of all political persuasions talk about the need for massive federal relief to the states in the form of block grants and Medicaid subsidies.

Yet the President and Congressional tax-cutters are marching ahead with a $670 billion tax cut that could include elimination of dividend taxes and an acceleration of 2001 tax rate cuts. According to the Urban Institute-Brookings Institution Tax Policy Center, 42 percent of the benefits of the dividend tax cut will go to the richest 1 percent of taxpayers, whose incomes are above $330,000. These proposals have more to do with rewarding campaign contributors and lobbying patrons than with economic stimulus.

Also at the top of the domestic agenda is the push to make repeal of the federal estate tax permanent. Such a step will not have any short-term or long-term economic stimulus effect. But cutting $850 billion in revenue in the decade after the tax is phased out--money that would have been collected from the heirs of multimillionaires--will prolong the current fiscal crisis. Many states will feel the pain of revenue loss first because their inheritance and estate taxes are linked to the federal levy.

Today, the estate tax affects less than 2 percent of the richest households, those with wealth exceeding $1 million. A reformed estate tax, with wealth exemptions boosted to $3.5 million, would still generate tens of billions of dollars of revenue a year. Under such a reform, an estimated 6,000 estates a year, averaging $17 million each, would pay the tax. In Maine, Montana, Alaska and Mississippi--states where both senators have voted to completely eliminate the tax--the estimated number of estates paying the tax every year would be fewer than twenty-five.

Proposals to reform the tax have been blocked since 2000 by the "all or nothing" repeal lobby, which understands the peril of not having smaller estates as camouflage. Once exemptions rise above $3 million, it becomes impossible to find a credible and photogenic farmer or restaurant owner who will complain about what opponents call the "death tax." It's hard enough to find them now. The pro-repeal American Farm Bureau was asked to produce an example of a farmer who had lost a farm because of the estate tax. It could not identify a single one.

Lost in this debate are the benefits to our country of maintaining an estate tax. Originally passed in 1916, the estate tax was a fundamentally American response to the excesses of the Gilded Age. Populist reformers labored for the three decades before 1916 to pass federal income and estate taxes in order to shift the tax burden, mostly in the form of nineteenth-century tariff duties and excise taxes, off of Midwestern and Southern farm states and onto the wealthy Northeastern states. But underlying the movement for an estate tax was a recognition that too much concentrated wealth and power was putting our democracy at risk. We had fought a revolution to reject hereditary political and economic power--and the dizzying inequalities of the Gilded Age violated a fundamental American ideal of equality of opportunity.

We are now in a second Gilded Age. Instead of taking steps that would strengthen our democracy, we're heading backward to the wealth inequalities of a century ago. We need to preserve the estate tax in states and at the federal level for exactly the reason it is under assault. In a democracy, we should be offended when the power of concentrated wealth brazenly attempts to shape the terms of policy debate and dictate the rules of our society.

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