Death, Wealth, and Taxes

Last [month], President Clinton carried through with his threat to veto bipartisan legislation that would have repealed the federal death tax over the next decade. The death tax makes a trivial contribution to total federal tax revenues of $2 trillion -- about 1.5 percent or $30 billion -- but it can spell disaster for many Americans. Dr. Bruce Bartlett, a senior fellow at the Dallas-based National Center for Policy Analysis, reports in "Wealth, Mobility, Inheritance and the Estate Tax" that 51 percent of family businesses have difficulty surviving when a principal owner dies. Forty-one percent of business owners said they'd have to borrow against equity to pay death taxes, and 30 percent said they'd either have to sell all or part of the business to pay taxes.

The macroeconomic effects of death taxes makes all of us worse off: It is a direct tax on capital and hence reduces our rate of capital formation. That effect is magnified if death taxes reduce people's incentive to save. Saving and investment (capital formation) are the engines of economic growth.

Then there are what economists call deadweight losses imposed on the economy as a result of the death tax. First, there's the cost to hiring large numbers of IRS agents and accountants to collect death taxes. Second is the cost to taxpayers to employ legions of tax accountants, lawyers and estate planners to avoid the tax. Some 16,000 members of the American Bar Association report that trust, probate and estate law as their primary area of concentration. Repeal of death taxes would free up these resources for more productive activity.

If federal tax revenue from death taxes is trivial, the tax harmful to many Americans, and it's a drag on the economy, then why is there a death tax at all? The answer's easy: The death tax is a part of a crusade against people who manage to accumulate wealth -- it's class warfare. But even though Clinton vetoed the repeal legislation, the death tax's days are numbered. According to recent polling data, 50 percent of Americans strongly favor death tax repeal, and 20 percent more somewhat favor repeal. In favor of keeping the death, only 27 percent strongly, or somewhat strongly, oppose repeal.

As more and more Americans become wealthy, or expect to become wealthy, using the death tax as an instrument of class warfare is losing some of its broad appeal. Let's look at what is happening to wealth accumulation. Part of America's world uniqueness is that just because you know where a person ended up in life you can't be sure about where he started out.

Bartlett reports that a study of families between 1984 and 1994 found that 60 percent of families in the bottom 10 percent (decile) of the wealth distribution reached a higher decile 10 years later. An amazing 23 percent rose four or more deciles, with 1.5 percent rising from the lowest to the highest decile. A survey of American millionaires found that 80 percent acquired their wealth in a single generation. Another study showed that among the top 5 percent of wealthy households, inheritances account for only 8 percent of the assets. Unlike most other countries, in America it is possible to start out with a modest or poverty income and wind up wealthy, and that is becoming increasingly possible. As a result, political attempts to foment class warfare are going to be less and less successful.

Whether Congress will be able to override Clinton's veto is iffy, but given a robust and growing economy, growing chances and opportunities for people of modest means to become wealthy, I don't expect that the death tax has a long life.

Born in Philadelphia in 1936, Walter E. Williams holds a bachelor's degree in economics from California State University (1965) and a master's degree (1967) and doctorate (1972) in economics from the University of California at Los Angeles.

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