Tax on heirs in Congress's crosshairs

House Republicans may have a hard time explaining to most voters the tax-cutting bill they passed last week.

That's because the bulk of the tax savings will go to the well-to-do. It can easily be attacked by Democrats as too big - and skewed to favor the rich.

Americans want "tax cuts in the national interest, not special interests," President Clinton said last week. He warned he would veto the bill cutting $792 billion in taxes over 10 years.

One part of that bill, abolishing the estate tax, or "death tax," as its Republican opponents prefer, would especially help the wealthiest Americans.

Most of the benefits of phasing out that tax - gone entirely by 2009 in the bill pushed by House Ways and Means Committee Chairman Bill Archer (R) of Texas - would go to the highest-income 1 percent of taxpayers. Their incomes exceed $300,000 per year, reckons the Institute for Taxation and Economic Policy in Washington.

Looked at another way, about 2.3 million people passed on in the United States in 1996. About 37,000 heirs actually paid estate taxes, calculates Charles Davenport, a tax expert at Rutgers University in New Brunswick, N.J.

"Why give tax cuts to those whose wealth and income have been growing rapidly, compared to other Americans?" asks Professor Davenport.

In the case of bequests, $650,000 of assets are free of taxes this year.

Under present law, that tax-free amount will grow in steps to $1 million by 2006.

Billions in lost revenue?

Often it's said estate-tax revenues aren't worth fussing about. Not so.

This year, the revenue is estimated at $28 billion. Without the Archer trims, revenues would reach $40 billion by 2008.

If the estate tax is left intact, revenues would grow rapidly beyond 2008, the experts say.

That would reflect a rising average age of Americans and the fact the rich have been getting decidedly richer with the booming stock market and burgeoning real-estate prices.

Lost estate-tax revenues would have to be made up by tax hikes, reduced spending, or less tax cuts elsewhere, says Davenport.

A look at the arguments

Arguments for and against the estate tax include these:

It closes a major tax loophole. Heirs pay no capital gains tax on any appreciation in the value of unsold estate assets prior to death. For the heirs' tax purposes, the value of the assets is stepped up to the value at the time of death.

In Canada, heirs pay taxes on accumulated capital gains, but no estate tax. In Australia, heirs pay capital gains tax when they dispose of the assets, but no estate tax.

The estate tax helps maintain the progressivity of the American tax system, where the well-to-do pay a greater proportion of their income in taxes than those with lesser incomes, argues Iris Lav, an economist with the Center on Budget and Policy Priorities in Washington.

The estate tax rapidly climbs after the basic exemptions to 55 percent.

The tax discourages saving and complicates individual's financial plans. Because people are reluctant to leave wealth to Uncle Sam, they sometimes spend it or devise complex financial devises to avoid taxes, notes James Hines, tax research director at the University of Michigan Business School, Ann Arbor.

But Rutgers's Davenport says the tax may actually stimulate savings. People target how much they want to leave to heirs. So they save more to make sure the after-tax amount meets that goal.

It boosts philanthropy, and keeps economic power spread around. Experts do agree the tax stimulates charitable giving. And many hold that estate taxes retard the creation of an "aristocracy of wealth" wielding inordinate political/economic power.

But Mr. Hines, for one, sees the tax as unneeded for that purpose. "Most families of great wealth have dissipated it after a couple of generations," he says. And campaign-finance reform would limit political power.

The tax makes it difficult for heirs of farms and small businesses to carry on. But many experts see that argument as phony. Congress has already provided generous provisions to make the loss by heirs of the family business or farm unlikely for tax reasons.

(c) Copyright 1999. The Christian Science Publishing Society