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* DECEMBER 11, 2009
The Tax That Won't Die
Democrats are afraid to let the estate tax rate hit zero.
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In less than three weeks, the hated death tax is scheduled to
expire---with the rate falling from 45% to zero for 2010. Then the tax
will be resurrected in 2011 at a rate of 55%. This bizarre policy dates
back to 2001 when Democrats wouldn't let President Bush permanently kill
the death tax, so Republicans bet that if the tax were eliminated for
one year, it would never come back.
OpinionJournal Related Stories:
Death Blow <http://online.wsj.com/article/SB123923589432903367.html>
Night of the Living Death Tax
<http://online.wsj.com/article/SB123846422014872229.html>
Estates of Pain <http://online.wsj.com/article/SB123180759988175649.html>
Well, the moment of truth has arrived, and House Democrats recently
voted 234-199 to cancel the 2010 repeal and hold the rate permanently at
45% with a $3.5 million exemption. Senate Majority Leader Harry Reid now
wants to do the same. But to suspend the Senate's health-care debate and
turn to the estate tax, he needs 60 votes. All Republicans and some
Democrats are saying no. Blanche Lincoln of Arkansas and Jon Kyl of
Arizona will accept no more than a 35% permanent rate with a $5 million
exemption.
We've long argued
<http://online.wsj.com/article/SB123846422014872229.html>that the
economically optimal and fairest death tax rate is zero. The tax is
applied to income that was already taxed when it was earned, so it is a
double tax on savings and capital. The correct way to tax a gain in the
value of assets bequeathed to an heir is with a capital gains tax of 15%
when the assets are sold, rather than at the time of the funeral of the
original owner.
Study after study, including one co-authored years ago by White House
economist Larry Summers, finds that a powerful motivation for
entrepreneurs to grow their businesses is to pass that legacy to their
children. The left disparages this as building "family dynasties," but
most Americans think that it is immoral for the government to confiscate
the fruits of a life's effort merely because of the fact of death.
Democrats also say their rate would apply only to the richest 2% of
estates. But a new study by economists Antony Davies and Pavel Yakovel
of Duquesne University finds that the estate tax "impacts small firms
disproportionately versus large firms" by encouraging well-capitalized
companies to gobble up smaller ones at the owner's death. The study
shows the result is to "promote the concentration of wealth by
preventing small businesses from being passed on to heirs."
Republicans and willing Democrats shouldn't give up on eliminating the
death tax. The Kyl-Lincoln amendment to create a permanent 35% rate is
far better than the confiscatory House bill. But the best strategic
outcome now is to let the death tax expire in January as scheduled under
current law, and return to this debate next year when the tax rate is
zero. Then let liberal Democrats explain to voters on the eve of
elections that they must restore one of the most despised of all taxes.
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