The Estate Tax and Minimum Wage Vote

Charles Babington reports on the failure of the compromise legislation to raise the minimum wage while permanently cutting the estate tax. Opponents of the repeal argue that it will cost the federal treasury, although most rich people use trusts and other shelters to avoid paying the tax. Only the "unprepared rich" ever pay this tax. Repealing or cutting the tax would leave quite a few of the estate planners who thrive on its provisions out of work, so you wonder whose side the Democrats are really on. Much of the debate is about perception. The Republicans have been, quite rightly, identified with the rich and shameless, while the tax itself is associated with Marxism, since the early Communists had both it and an income tax on its list of interim reforms.

Maya MacGuinneas and Ian Davidoff wrote an article in July offering the possibility of taxing inheritances rather than estates. This is a good approach and is also advocated by the Capital Ownership Group, an online think tank. To make an inheritance tax more pallatable, I would add additional modifications which will shut up the critics on the right.

The first is to tax only cash or in-kind disbursements to heirs. In other words, if a productive asset is liquidated or given over to the personal use of an heir, taxation applies. If, however, the asset is retained for business purposes the tax is deferred until it is liquidated. This would exempt any family farm which is still worked or any stock which is not sold. As long as the family remains in the family business, no tax is owed.

The second modification is related to the first and it goes to the real purpose of the estate tax - to distribute wealth. If an asset is liquidated in a sale to the employees of the farm or firm, whether a qualified Employee Stock Ownership Plan or similar scheme or an employee cooperative, taxes will be waived permanently - just as they would be if the original owner had made such a transfer to an ESOP. Now, there is the codicil that the transfer must be to broad based ownership, not to an executive group. The IRS has been cracking down on such schemes among the living, as the ESOP law is meant to encourage broad based ownership, not the creation of fortunes to the few.

This points to the final point in the estate tax debate - about whether an asset is taxed multiple times. Such an argument is a red herring for one very simple reason. Had the dearly departed fat cat liquidated the assets in the estate, some form of tax would be owed. If the money were distributed, then gift taxes must be paid. If he or she kept the money, capital gains taxes would be owed. Death should not be a way to avoid these taxes, hence the need for a tax on heirs.

For more information on my tax reform proposals, go to my Iowa Center For Fiscal Equity web site for the testimony we submitted to the President's Tax Reform Commission.