Give Up on the Estate Tax

CONGRESSIONAL Democrats have voiced outrage at President Obama’s compromise proposal to lower the estate tax rate to 35 percent, from 55 percent, and raise the per person exemption to $5 million, from $1 million. They have called it a giveaway to the rich. A more reasonable compromise, they say, would have set the rate at 45 percent and the exemption at $3.5 million when the estate tax goes back into effect in January.

But instead of getting into any further arguments over rates and exemptions, Democrats would be better off conceding defeat. They should allow Republicans to get rid of the estate tax altogether — but at the same time arrange for inherited wealth to be subject to income tax.

After all, the Democrats have already lost the battle. The president’s proposal is fresh evidence that even Democrats have given up championing the fundamental value that the estate tax was originally intended to promote. This tax, first enacted in 1916, was never intended to be simply a device for raising revenue. Rather, it was meant to address the phenomenon of a small number of Americans controlling large amounts of the country’s wealth — which was considered a national problem.

As Justice Louis Brandeis said, “We can have concentrated wealth in the hands of a few or we can have democracy, but we can’t have both.” Even Andrew Carnegie testified in Congress in favor of an estate tax as the best way to address wealth concentration.

In its first 60 years, the estate tax, along with other progressive policies, went a long way toward accomplishing this goal. By 1976, the amount of the nation’s wealth controlled by the richest 1 percent of Americans had fallen from more than 50 percent to only 20 percent. And this greater dispersal of wealth fostered a strong middle class.

The tax policies of the past 35 years, however, have reversed the trend. Today the wealthiest 1 percent own more than a third of the country’s wealth, leaving 80 percent of Americans with just 16 percent of it. President Obama’s proposal would only accelerate this trend.

But Americans seem little inclined to resist wealth concentration. Efforts to impose taxes geared to the wealthy are lambasted as promoting class warfare. Moreover, because the estate tax is nominally imposed on the deceased, it has been vulnerable to the “death tax” rhetoric, which has convinced the public that it is a second tax imposed on the defenseless dead, who already paid taxes on the money they accumulated.

Missing from the debate has been any discussion of what level of tax is appropriate for heirs. Few Americans may realize that money received by gift, inheritance or life insurance is entirely free from income taxes. Of course, this made sense when there was a strong estate tax. But there is no other reason inherited wealth should not be taxed the same as wages, lottery winnings and all other forms of income.

President Obama is said to be considering an overhaul of the income tax code, beginning next year. That would be an ideal opportunity to make inheritances subject to income taxes.

If inherited wealth was taxed as income, exemptions could still be provided for smaller estates — up to $500,000 or even $1 million. And taxes on inherited family farms and businesses could easily be deferred, if need be, until they were sold.

Most important, by imposing the tax directly on those who receive the money, Congress could have a more honest discussion regarding the appropriate taxation of inherited wealth.


Ray D. Madoff, a professor at Boston College Law School, is the author of “Immortality and the Law: The Rising Power of the American Dead.”