National Review: Both Parties Wrong On Estate Tax The tax on inheritance is set to return next year when the 2001 tax cuts expire. Both political parties have proposals for how high the rate should be, but Phil Kerpin of the National Review says neither party is approaching the issue correctly. Only full repeal will bring Americans economic freedom.
NPR logo National Review: Both Parties Wrong On Estate Tax

National Review: Both Parties Wrong On Estate Tax

College Republicans held a protest in 2006 calling on the Senate to eliminate the estate tax. The tax was cut as part of the 2001 Bush tax cuts, but will return next year. Alex Wong/Getty Images hide caption

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Phil Kerpen is vice president for policy at Americans for Prosperity.

On taxes, Republicans have held to the strongest position politically and economically: no hikes on anyone while the economy remains fragile. They have correctly argued that major tax hikes on capital investment and small-business income would depress the business activity and job creation that our economy needs. It’s a significant mistake, therefore, that the Senate Republicans’ tax proposal fails to extend all of the current tax rates.

Specifically, their proposal, which establishes their opening position for negotiations, allows one of the most hated taxes of all, the federal death (or “estate”) tax — which, under the phase-out plan put in place by the 2001 tax cuts, finally reached zero this year after 92 years — to return next year at a 35 percent rate for assets above $5 million. That’s better than the 55 percent rate preferred by Democrats on assets above $1 million, which will automatically return next year under current law, but it’s a far cry from a full repeal.

The phase-out of the death tax, it should be noted, was paired with a compromise on the capital-gains tax; on inherited assets, capital-gains taxes are now assessed on the full gain, instead of just the value upon inheritance. So death-tax repeal does not prevent the double taxation of inherited assets, just their triple taxation.

In 2001, when Democrats used the filibuster to prevent permanent death-tax repeal, advocates of repeal scheduled the expiration for an election year — 2010 — in the hopes that pressure could be brought to bear to prevent Congress from allowing the tax to return. Now, just months from a politically disastrous 55 percent tax, Republicans are leading with a weak compromise instead of using the looming tax hike as leverage for full repeal.

In our incredibly fragile recovery, that’s economic malpractice. A new study conducted by former Congressional Budget Office director Douglas Holtz-Eakin for the American Family Business Foundation quantifies the economic damage wrought by the death tax. Holtz-Eakin found that the Democrats’ 55 percent tax would destroy as many as 1.5 million small-business jobs, while the 35 percent rate preferred by GOP leadership would destroy a still-hefty 857,000 jobs. Holtz-Eakin summarized an emerging consensus in the economic literature that the tax places an enormous burden on small and family-owned businesses, farms, and entrepreneurs, with major attendant effects on capital formation and job creation.

So the GOP’s decision to lead with a compromise position is weak on economics. It’s also questionable from a political standpoint, because death-tax repeal is a big political winner.

Polls consistently show the death tax to be highly unpopular. A 2006 study by two Yale professors, Mayling Birney and Ian Shapiro, comprehensively reviewed the issue. They said: “Many polls since the late 1990s have shown widespread public support for estate tax repeal, in the range of 60, 70 or 80 percent. Moreover, supporters appear to be spread more or less equally across income groups, contrary to what self-interest would predict.”

The study’s findings, which confounded the study’s authors, belie the claim that strong public support for repeal depends on misunderstanding or misleading information. They found surprisingly high public support regardless of who asked the questions or how they were phrased.

Most recently, a July survey by Resurgent Republic found that 63 percent of voters oppose the Democratic plan to bring back the tax. That included 66 percent of independents and a surprising 46 percent of Democrats. The American Family Business Institute has collected pledges committing to full death-tax repeal from 480 candidates for federal office this year, showing the political power of the issue.

Americans fundamentally believe that death should not be a taxable event. The Founders of our country believed this so strongly that they included a clause in the U.S. Constitution that forbids seizing an estate at death as a punishment for treason. Yet we now have a majority party that thinks it’s appropriate to take up to 55 percent of everything a person leaves to his children as a punishment for success, for achieving the American Dream. (And, apparently, a minority-party leadership that thinks confiscation at death is okay as long as the government takes only a third instead of a half of everything you’ve saved for your children.)

The death tax punishes virtue and rewards vice. It tells older Americans: “You can’t take it with you, and you can’t leave it to your kids.” So it discourages the traditional American virtues of hard work and thrift, savings, and investment, while it encourages lavish, reckless consumption.

The bottom line is that the death tax is wrong. Advocates of economic freedom shouldn’t be afraid to say so and fight for full repeal.