Prospects on Estate Tax Repeal Jude Wanniski June 13, 2000

The House vote Friday on legislation that would phase out entirely the federal gift and estate tax by 2010 was awesome. When EVERY SINGLE REPUBLICAN votes to eliminate the “death tax” and they are joined by 65 Democrats, it is practically a certainty that if it passes the Senate it will be signed into law by a President who now is saying he would veto it. For the first time since Newt Gingrich created such chaos with his mismanagement of the 1994 Contract With America, House Republicans have demonstrated they are brave enough to back ideas the Democrats insist will only “benefit the rich.” Margaret Thatcher years ago made the argument that no conservative political party could succeed if it allowed its opposition to bully it with Robin Hood arguments. If there had been even one or two Republican votes Friday in opposition to the sensational package designed by House Ways&Means Chairman Bill Archer, I would not be as enthused as when I saw the unanimous vote. The GOP has left no “wedge” for the White House to exploit. When I expressed optimism the day before the vote, expecting only 50 Democrats, I never thought the Republican vote would be unanimous.

Unfortunately, the bill may well die in the Senate unless there is a big grass-roots push to prompt Republican senators to act. There has been no word yet from the Senate Republican leadership on how this issue will be handled. The impression exists that President Clinton’s veto threat will cause Senate Majority Leader Trent Lott to give it low priority and let it die with other House initiatives -- so that he can focus his energies on eliminating the marriage-tax penalty. Lott would like to see the Archer bill signed into law this year, but the Senate calendar is choked with appropriation bills that chew up tremendous amounts of time. Senior staff people tell us the traffic jam of legislation in the Senate greatly reduces the prospects for any tax bill to be voted upon this year. Moreover, Lott knows that Senate Democrats frequently kill legislation by offering endless amendments on non-related topics. This threat discourages Lott from scheduling votes on bills he thinks will meet this fate. As the WSJournal noted in its Monday editorial, “Undertaker Daschle,” Senate Minority Leader Tom Daschle has been given the job of making sure the “death tax” legislation does not come to an unencumbered vote.

If it does come up for a vote, it easily will pass, and as I pointed out last week, neither Vice President Gore nor Hillary Clinton could support the veto and survive in their contests against George Bush and Rick Lazio. Grover Norquist, president of Americans for Tax Reform, told me this morning he thinks “This will be the issue that elects George Bush and a Republican Congress.” Of all the quibbling Norquist and I have had about the Bush tax program, the Texas Governor for the last year has been perfect in his support for estate-tax repeal and he cheered the House vote last week. What’s still needed is the sense in the electorate at large that this really can happen if it turns up the heat on Capitol Hill. As long as the word remains that this is just happy talk for electioneering purposes, the national electorate will ignore the potential and enjoy the summer as the clock runs out. If the electorate can ignite, I doubt the issue can be stopped.

The reason so many Democrats could support the legislation is Archer’s pairing of the phase-out with an end to the step-up in basis provision that now applies to inherited capital gains. There would be no federal 55% estate tax in ten years, but those who receive assets from decedents would have to pay the capital gains tax on the decedent’s purchase price, not the value stepped up to market price at death. Of course, they only would have to pay the capgains tax if they sold the asset. The legislation would make totally unnecessary all the estate planning that the great majority of citizens have to begin working on practically as soon as they have incomes. The WSJ story Monday, which does not even mention the capgains provision, has this subhead: “Clinton Veto Is Expected On Measure Affecting About 2% of All Estates.” But one big reason is Americans spend billions of hours in aggregate over their lifetimes figuring out ways to avoid the death tax. The biggest losers would be the estate planning industry, although with a decade to adjust to this liberated economy, the industry could plan for its own extinction.

The estate tax was enacted during World War I to have Robber Barons finance the cost of the war, but there always have been plenty of loopholes in the code to avoid the tax. In recent years there has been a steady increase in the number of citizens who simply move to a tax haven. Instead, people now have a shot at voting away the estate tax. In The Way the World Works (p.4), I noted: “At an extreme, an old man will get out of his death bed to vote if he perceives that his legacy is sufficiently endangered by the outcome of a political contest, his long-run political calculations outweighing what remains of his short-run.” The “2% of all estates” masks the fact that the tax affects almost 100% of Americans, in that we are all part of extended families. In the broad middle class, a small portion of extended family members have meaningful wealth (the “rich uncle”), but if they want to plan for their sons and daughters to inherit a significant cushion, there is little room for nieces and nephews, private charities, or churches and synagogues when only a fraction of the assets can escape the tax. The NYTimes warns against elimination of the estate tax by saying people of wealth will no longer be forced to give their assets to charities and churches before they die. The argument is backwards, as it was when the Times argued in 1980 that the Reagan income-tax cuts would cause charitable giving to dry up. Charity begins at home, and when people have more wealth, their charitable giving explodes beyond the home. This was clearly the case when the Reagan tax cuts doubled the size of the national economy.

Another big reason repeal is popular is that a 55% estate tax is now increasingly viewed as a barrier to an accumulation of wealth. Rep. Bill Jefferson [D-LA], a member of House Ways&Means who understands this, talked eight other members of the Congressional Black Caucus into voting for estate-tax repeal. My friend Charlie Rangel, the ranking Democrat on Ways&Means, demagogued in voting against repeal, but may suspect I am right when I tell him he won’t get to be chairman of Ways&Means in the 107th Congress if this issue decides the election. He may say his alternative of a higher exemption is sufficient, moving the goal posts, but what he confronts is an obsolete idea that many Democratic economists agree is a barrier to capital formation. Those who have “surplus wealth” beyond their lifetime needs are those most likely to make riskier investments, including investments in private, charitable initiatives, such as Ted Forstmann’s scholarship fund. The 55% barrier simply changes the behavior of the most productive members of the national economy. My hunch is that the radio talk shows, which have in the past been the agents of change on topics like this, will have to start burning up the airwaves. The House Republicans already see how popular the idea is at the grass roots, so they can withstand assaults from the left. Now the Senate Republicans, who are not as close to the grass roots, have to feel the pressure. If they do, the year 2000 will experience quite an unexpected bang.