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Last week, President Clinton carried through with his threat to veto
bipartisan legislation that would have repealed the federal death tax
over the next decade. The death tax makes a trivial contribution to
total federal tax revenues of $2 trillion — about 1.5 percent or $30
billion — but it can spell disaster for many Americans.

Dr. Bruce Bartlett, a senior fellow at the Dallas-based National
Center for Policy Analysis, reports in “Wealth, Mobility, Inheritance
and the Estate Tax” that 51 percent of family businesses have difficulty
surviving when a principal owner dies. Forty-one percent of business
owners said they’d have to borrow against equity to pay death taxes, and
30 percent said they’d either have to sell all or part of the business
to pay taxes.

The macroeconomic effects of death taxes makes all of us worse off:
It is a direct tax on capital and hence reduces our rate of capital
formation. That effect is magnified if death taxes reduce people’s
incentive to save. Saving and investment (capital formation) are the
engines of economic growth. Then there are what economists call
deadweight losses imposed on the economy as a result of the death tax.
First, there’s the cost to hiring large numbers of IRS agents and
accountants to collect death taxes. Second is the cost to taxpayers to
employ legions of tax accountants, lawyers and estate planners to avoid
the tax. Some 16,000 members of the American Bar Association report that
trust, probate and estate law as their primary area of concentration.
Repeal of death taxes would free up these resources for more productive
activity.

If federal tax revenue from death taxes is trivial, the tax harmful
to many Americans, and it’s a drag on the economy, then why is there a
death tax at all? The answer’s easy: The death tax is a part of a
crusade against people who manage to accumulate wealth — it’s class
warfare. But even though Clinton vetoed the repeal legislation, the
death tax’s days are numbered. According to recent polling data, 50
percent of Americans strongly favor death tax repeal, and 20 percent
more somewhat favor repeal. In favor of keeping the death tax, only 27
percent strongly, or somewhat strongly, oppose repeal.

As more and more Americans become wealthy, or expect to become
wealthy, using the death tax as an instrument of class warfare is losing
some of its broad appeal. Let’s look at what is happening to wealth
accumulation. Part of America’s world uniqueness is that just because
you know where a person ended up in life you can’t be sure about where
he started out.

Bartlett reports that a study of families between 1984 and 1994 found
that 60 percent of families in the bottom 10 percent (decile) of the
wealth distribution reached a higher decile 10 years later. An amazing
23 percent rose four or more deciles, with 1.5 percent rising from the
lowest to the highest decile. A survey of American millionaires found
that 80 percent acquired their wealth in a single generation. Another
study showed that among the top 5 percent of wealthy households,
inheritances account for only 8 percent of the assets. Unlike most other
countries, in America it is possible to start out with a modest or
poverty income and wind up wealthy, and that is becoming increasingly
possible. As a result, political attempts to foment class warfare are
going to be less and less successful.

Whether Congress will be able to override Clinton’s veto is iffy, but
given a robust and growing economy, growing chances and opportunities
for people of modest means to become wealthy, I don’t expect that the
death tax has a long life.

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