'Death tax' repeal a hoax

Every once in a while, it appears that Congress does something goodfor the American people. Such a moment came on Friday when the Housepassed the "Death Tax Elimination Act of 2000." Sounds wonderful,especially these days when future estates are accumulating rapidly dueto economic expansion. Have the Republicans overcome their spinelessnature to finally stand up for principle?

I'm afraid not. The final bill was far worse than advertised.

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Like the "Freedom to Farm" bill of a few years ago, this one looksgreat on the surface. And, certainly, it is economically and morallyurgent that the estate tax be repealed. It brings in nothing of anypractical relevance for the government -- which raises the question ofwhy it exists at all. The answer has to do with ideology. It feeds theravenous and envious appetites of egalitarians who can't stand the ideathat anyone can be born with a financial advantage. They want everygeneration to begin with "equal opportunity," a phrase that originatedin the socialist literature.

In fact, the freedom to bequeath and inherit is essential in a freesociety. It permits the rise of a segment of society capable ofchallenging the state in its social, cultural and economic status. Itencourages the formation of a natural elite that is financiallyindependent and socially secure. It's no accident that big-governmenttypes love the inheritance tax; the fastest path to achievingunquestioned obedience to government is to wipe-out intermediatinginstitutions like family dynasties of substantial financial means.

The current law that loots the dead when their estates grow beyond$600,000 is an affront to justice and economic good sense. What a sham-- a crime -- that people have to pay high-priced lawyers to figure-outways to get around the law, performing legal acrobatics merely topass-on their estates to their kids, lest the government get what shouldstay in the family. The exemption is scheduled to rise, but far tooslowly.

Alas, Congress has not liberated us. It's true that the originalbill authored by Rep. Jennifer Dunn, R-Wash., is a winner. It cleanlyeliminated the tax in stages, not fast enough, but enough to be worthyof support. The tax would fall by five percentage points per year untilit is gone in 2010. At least that would permit people who are planningtheir estates now to count on the ability to pass sizeable amounts ofwealth on to their children.

But then, two weeks ago, the pillaging House Ways and MeansCommittee, under the despotic rule of Bill Archer, got hold of the billand gutted it. He didn't change the name; it still claimed toeliminate the tax, albeit much more slowly than the original version. No five-percentage-point reductions for him. No, he wants to takeminiature steps of one, two and three percent. That's bad enough, butwe are used to the Republican leadership trimming the proposals offeredby lower-ranking members. That's the history of Republican Congresses.

But, this time, Archer wasn't satisfied to water down the bill. Hiscommittee has actually converted it from a tax-cutting bill to atax-shifting bill. It might even be a tax-raising bill: the newversion might actually make the present situation seem preferable. There is no a priori reason to think that the final bill that passedwould cut taxes at all.

This fact wasn't exactly announced in a press release. Indeed, it isburied in an amended section under the title "repeal of step-up of basisat death," a way of saying that the children of the dead are about to beburgled. The economist who discovered this is Bruce Bartlett, a seniorfellow at the National Center for Policy Analysis and an adjunct scholarof the Mises Institute. He may be the only independent economist inAmerica who actually reads these tax bills with a critical eye and indetail.

Here's what Bartlett found. The Archer substitute bill imposed a newdeath tax to replace the present one, exactly on the year of its finalelimination. The amended bill requires the beneficiary to pay a newcapital gains tax, calculated based on present value minus the originalpurchase price. The basis is changed from the point of bequest to theoriginal point of purchase. Hence, if your dad wills you a plot of landtoday and you sell it, you owe a tax based on the value accrued duringhis, not your, lifetime.

The Congress has merely renamed the tax, just like they renamedwelfare and farm subsidies a few years go. Now, the inheritance taxwill be merely folded into the capital gains tax. This is great fromthe government's point-of-view; it takes the pressure off them andchanges the subject. But it doesn't change the reality.

The accounting costs of complying with the final bill, with its newreplacement tax, would be egregious. (As Bartlett says, there may ormay not be records.) Can you imagine researching the entire pricehistory of inherited property? At the end, the tax may be very highindeed. In fact, the deceased may have held onto the propertyprecisely to keep from having to pay the high capital gains tax.

The idea of repeal the step-up on basis is to close what is decriedas a "loophole" in the law, which forgives capital gains tax when aperson dies, with the new owner starting with a clean slate. The theoryis that everyone should owe capital gains taxes -- whether living ordead.

But this is preposterous. The dead, being dead, don't benefitfinancially from the increase in value of their property in theirlifetimes because they never sold it. As for the heir, he should not betaxed for changes in value that occurred before he actually became theowner, otherwise he is being punished for the fact that his benefactorwas a good investor.

Others argue that forgiving the capital gains tax at death causespeople to hold on to property longer than economic fundamentals woulddictate. But if that is the case, there is another way out besidespiling one distortion on top of another: repeal the capital gains tax.That way, we can be sure that people's economic calculations are madewithout respect to the tax consequences.

Aside from moral problems and accounting difficulties, the new billintroduces strange new incentives. The elderly person suddenly faces achoice between selling property now and paying the tax or passing apotentially large tax liability onto the children. This diminishes thevalue of the property of the living and thus reduces the incentive toaccumulate wealth and give it to the next generation. The present deathtax does that too, but at least under the current system, there is anelement of certainty about what the tax will be. Under the Archer Tax,no one will know for sure.

But the larger question is: why did anyone push for this misnamedbill? Many members knew nothing of the amendment put in by Archer. They thought they were voting for a clean repeal. But others did know;they hoped to get the credit for having "abolished" an awful tax, whilethe real story, the "repeal of step-up of basis at death," is sprung onus years down the line.

If Congress couldn't repeal the estate tax, a better path would havebeen to simply continue raising the exemption or speed-up the increasesin the exemption already scheduled under present law. At minimum, thereshould have been no new tax! Once again, we are reminded that thereality of the Republican Congress doesn't live up to its reputation.