Memo To: Website fans, browsers, clients
From: Jude Wanniski
Re: Dracula of the I.R.S.
I wrote approximately 120 editorials for The Wall Street Journal in 1976, and a significant number were about taxes and the need to reduce them. Supply-side economics was still in short pants that year, and no matter how many editorials I wrote, President Jerry Ford remained committed to the "Old Time Religion" of the Republican Party. He managed to barely fend off a challenge by former California Governor Ronald Reagan, who was rehearsing his tax-cutting ideas for 1980. In 1976, Reagan proposed a dollar of spending cuts for every dollar of tax cuts, but that scared people who were recipients of government spending. In 1980, Reagan went straight for the tax cuts with the Laffer Curve, and that was that. There was one tax-cut proposal by Jerry Ford that was both popular and supply-side -- an increase in the estate-tax exemption to $150,000 from $60,000. Even that was stingy, considering the inflation that had occurred. Note the exemption is now up to $1 million, with Republicans at least talking about its elimination at the federal level. (It would be a boon to state governments, which could raise oodles of money for education with a 10% estate tax.) Here is how the arguments looked as I wrote at the time:
The Wall Street Journal
REVIEW & OUTLOOK
The President's Estate -Tax Proposal
In 1972, when the Democratic presidential nominee proposed a sharp boost in estate taxes, in effect proposing to have the government take one more tax bite out of dead rich people he was amazed to find that blue-collar workers, union rank-and-file and even people he would classify as poor were turning away from him in droves. The only conclusion he could come to was that they all figured they might win a lottery in their winter years.
The fact is that inflation and the rise in real incomes now means that 11% of estates are now subject to the estate tax, against 1% prior to the 1940s. Which means that more than 75% of all Americans -- including the children, grandchildren and great grandchildren of the deceased, not to mention the favorite nieces and nephews -- have a direct interest in estate taxes. Even some retired elderly people, who never earned more than $4,000 or $5,000 a year in their lives have estates worth in excess of $60,000, the point at which the estate tax now begins to bite.
The proposal President Ford made last week in Illinois to raise the federal exemption to $150,000 is probably the most popular and correct tax proposal he has made during his administration. Since he began talking about it several weeks ago in less specific terms, his popularity on the campaign trail has been rising, especially among the elderly of Florida who are always preoccupied with the problem of their legacy, the penultimate problem that precedes only Providence.
Mr. Ford made the proposal in the context of saving the family farms from extinction, adding the provision that in the first five years of an inherited farm or business worth less than $300,000 there would be a moratorium on tax payment with no interest, and the total tax on that amount could be paid out over 25 years at a reduced interest rate. As it is, family businesses frequently have to be sold off or farms split up into pieces to pay off the tax. Individuals in their senior years must spend an increasing proportion of their productive resources hiring lawyers, finding loopholes and giving away assets as gifts. This is of course a total waste of their resources.
The only real benefit of the estate tax at all goes to tax lawyers and accountants, who are always the chief obstacle to liberalizing the provisions. The last time the exemption was raised was in 1942, and if only a simple inflation correction were now made the exemption would have to be $210,000. But because inflation has also had an equal effect on the difficulty of building an estate, Sen. Bartlett of Oklahoma has the right idea in proposing that the exemption go to $400,000.
Because so much of the society's resources are spent in avoiding estate taxes by paying lawyers and accountants, it doesn't yield much by way of revenues, a mere $5.1 billion last year or 1.6% of revenues. In 1930, when the tax hit only the genuinely wealthy, it produced 1.8% of all federal revenues. The tax was low enough so it wasn't worth hiring lawyers to avoid paying it, so it was an effective producer of government revenues.
On the advice of Treasury, which says the plan would cost $1.1 billion in lost revenues, Mr. Ford wants to phase it in over five years. But Treasury has given Mr. Ford a bum steer. Even on the increased prospect that the plan will be made law, Treasury has probably gained revenues already on the income tax as a result of improved incentives to build legacies.
The President should also guard against those in Treasury who, ever penny wise and pound foolish, want to combine the gift-tax provisions and the estate tax exemption at $150,000. Instead, the $30,000 annual gifting allowance should be doubled as well to correct for the recent inflation. The managers, professionals, farmers and small businessmen of the nation would have doubled incentives to build estates by putting themselves and the unemployed to work with risk capital. The blue-collar workers, union rank-and-file and poor people wouldn't mind at all.