THE ESTATE TAX

June 21, 2006

Dear Constituent:

Thanks for contacting me about estate taxes, the so-called “death taxes.”  
 

      This letter is unusually long because I think the subject is so important. My remarks lack any sound bite value. But they give me an opportunity to share my thoughts in detail and, hopefully, persuade. Please let me know where I go astray.  
 

      If you are interested in a detailed analysis and argument about why we should continue to tax truly large estates, I recommend Wealth and Our Commonwealth written by William H. Gates, Sr. and Chuck Collins and published in 2002 by Beacon Press. [I also recommend Death by a Thousand Cuts by Graetz and Shapiro published in 2005 by Princeton University Press.] 
 

      I have voted to cut estate taxes by immediately increasing the size of the exemption to $3.5 million per individual, $7 million per couple, inflation indexed. I’d vote for an even higher estate tax exemption. But at some point we have to prioritize which cuts to make and when to make them. We can eliminate taxes on large estates when we can afford it. We clearly cannot afford it now. 
 

      With an increased exemption (and stepped up basis) like the one I voted for, estate taxes do not threaten the survival of otherwise viable small businesses and family farms. I know this from personal experience having represented many financially troubled small businesses and family farms. Complete elimination advocates do cite a small number of instances where the estate tax did jeopardize a small business or family farm. But in each instance I have seen, that cash flow problem could have been avoided by the sort of advance financial planning done by the vast majority of small business and family farms owners. And in many of these instances, increasing the exemption to $3.5/$7 million or $5/$10 million would have been sufficient to save the farm or business even it it did not do the usual advance financial planning. 
 

      It is outrageous that complete elimination advocates regularly vote against permanently increasing the estate tax exemption. They hold hostage so many individuals, small businesses and family farmers who could get on with their estate planning. Immediately increasing the exemption to $3.5/$7 million or $5/$10 million would remove about 99% of estates from any tax whatsoever. And doing so now also immediately eliminates the planning nightmare introduced by the 2001 estate tax bill with its gradual increase of the exemption to $3.5 in 2009, elimination of the tax altogether for 2010 and then reinstatement of the tax with a paltry exemption of $675,000 in 2011 and beyond.  
 

      Our economic system has produced such a dramatic redistribution in income and wealth toward the richest Americans during the last two decades. This shift prompted two Boston College researchers to conclude that complete elimination of the federal estate tax would diminish federal tax revenues an average of 157 to 752 billion dollars per year for the fifty years beginning 2002. Other experts have a much lower figure for the diminished revenue from complete elimination. But everyone agrees that it is a very big number. 
 

      Eliminating such an enormous amount of money from federal revenues means either 1) increases in other taxes or 2) unsustainable deficits or 3) major funding shortfalls for national defense, health care, Social Security, veterans, education, agriculture, transportation, etc. or 4) some combination of the preceding.   
 

      I am an original co-sponsor of the latest effort to pass a balanced budget amendment to the Constitution. Continued deficits are unacceptable to any true conservative. For true conservatives, the question becomes one of priorities. Assuming we are going to have a government that provides for the national defense, etc., which taxes are fairest and least burdensome to our economy?   
 

      You may already know that I am leading an effort to end the Disabled Veterans Tax, a wrong done by our country to its disabled military retirees for more than one hundred years. How can any Member of Congress put complete elimination of the Estate Tax ahead of ending the Disabled Veterans Tax (and a host of other things as well)? If we can afford one or the other – either elimination of the Estate Tax or the Disabled Veterans Tax – but not both, which should it be? 
 

      And it’s not as if Georgia, and particularly Middle and South Georgia which I represent, would be net winners if estate taxes were eliminated completely and the revenue replaced by most other taxes. Just about any other tax to replace the revenue would result in a net increase in taxes for Middle and South Georgia since the lion’s share of estate taxes come from both coasts and from residents of big cities.  
 

      Complete repeal advocates do have a huge amount of money and very clever lobbyists. But it is kind to call their arguments weak:

       - The best full repeal argument is the alleged threat to the survival of otherwise viable family businesses and small farms. But as I already pointed out, this survival problem is fixed altogether by minimal planning and/or increasing the exemption to $3.5/$7 million or $5/$10 million. And my efforts to immediately secure this increased exemption have been repeatedly blocked by repeal advocates! Basically a large number of family farms and small businesses are being held hostage by an extremely small number of super wealthy estates.

         - It is true that wealthy individuals spend money on lawyers, accountants and insurance policies trying to avoid, minimize and/or prepare for their estate tax.  But wealthy individuals do this for all taxes, so completely removing the estate tax would only shift attention and expense to other taxes. 

         - To me at least, the “death tax” name is both politically clever and a formidable weapon in the era of sound bites.  But other than cowing opponents and misleading public opinion, it does not alter or enhance the merits of the case for complete repeal. 

         - Nor am I persuaded by the double taxation argument because it applies even more so to many other taxes that should be higher on the priority list for cuts. 
 

      So complete repeal, as opposed to continued reform by permanently increasing the exemption, is quite low on my tax cut priority list and the arguments I’ve heard so far don’t move it up.  That’s enough for me to vote “No” on complete repeal. Gates and Collins make many other arguments about why we should keep the estate tax on super wealthy estates. I append some notes on these to the end of this letter. 
 

      This letter is far, far longer than any other I have written as a member of Congress. But the issue is one of great importance to our country’s financial condition, if not to our democracy. I am both impressed and saddened by the clever, lavishly funded, deceitful campaign that has brought us to the brink of completely eliminating the tax on large estates. I hope we come to our senses before stepping off this precipice. Let’s permanently increase the exemption, index it to inflation and get on to legislative work that brightens our nation’s future instead of dimming it.   
 

      Please let me know if I can help in any other way. 
 
 

JIM                                     

Some notes taken by Rep. Jim Marshall from Gates and Collins Wealth and Our Commonwealth (Beacon Press 2002) concerning why America should not completely eliminate estate taxes: 
 

Alexis de Tocqueville:  “What is important for democracy is not that great fortunes should not exist, but that great fortunes should not remain in the same hands.”

Supreme Court Justice Louis Brandeis: “We can have concentrated wealth in the hands of a few or we can have democracy.  But we can’t have both.”

“Concentrations of wealth are corrosive to liberty.  Today the levels of inequality in the United States are at their highest levels since the 1920s.  This is an unusually imprudent time to abolish one of the few taxes that has slowed this buildup of wealth in the hands of a few.”

“The United States is now the most unequal society in the industrialized world.  [As money managers, CEOs and some shareholders make huge fortunes moving middle class jobs overseas, two paycheck families and workers holding multiple jobs have become increasingly common.]  One cartoonist illustrated this development by depicting a politician speaking at a banquet, bragging that “his administration had created millions of new jobs.”  The waiter at the banquet observes, “Yes I know, I have three of them.”

“No one can fully explain the causes of accelerating income and wealth inequality.  But most economists agree that multiple forces are at work, including technological change, deunionization and global competition.  Public policies during this period, particularly taxation, have exacerbated inequalities by favoring large-asset owners and corporations over wage earners and smaller businesses.  The taxation burden on higher incomes and capital gains has consistently fallen in the last four decades, shifting the tax burden off of high earners and large corporations and onto individual taxpayers.  The effort to repeal the estate tax is part of this trend.”

[Warren Buffett, the world’s fourth wealthiest individual, a fact that “might insulate him from charges of class warfare,” has said] “repealing the estate tax would be a terrible mistake,’ comparable to ‘choosing the 2002 Olympic team by picking the eldest sons of the gold-medal winners in the 2000 Olympics.’ ‘We have come closer to a true meritocracy than anywhere else in the world,’ Buffett continued.  ‘You have mobility, so people with talents can be put to the best use.  Without the estate tax, you in effect will have an aristocracy of wealth, which means you pass down the ability to command the resources of the nation based upon heredity rather than merit.”

[And in arguing that individuals should not complain about the imposition of an estate tax on accumulated fortunes, Buffett has said] “I personally think that society is responsible for a very significant portion of what I’ve earned.  If you stick me down in the middle of Bangladesh or Peru or someplace, you’ll find out how much this talent is going to produce in the wrong kind of soil.  I will be struggling 30 years later.  I work in a market system that happens to reward what I do very well – disproportionately well.’”

“Imagine that God is sitting in his office.  He summons before him the next two human beings to be born on earth.  He explains to these two spirits that one of them will be born in the United States of America and that the other will be born in a poor nation in the southern hemisphere. . . . [He then says] that each spirit can write on a piece of paper the percentage of their net worth that they are willing to give to [their respective countries] when they die.  Whoever writes the higher number will be born in the United States.  Which of these spirits would be so stupid as to write a number as low as 55%?  What is it worth to operate in this marvelous system?  What is wrong with people who accumulate $20 million or $100 million or $500 million putting a third of that back into the place that made possible the enormous accumulation of wealth for them?  What is it worth to be an American?”

[Andrew Carnegie, at one point America’s wealthiest individual, published a book entitled The Gospel of Wealth in 1889.  Carnegie was a staunch advocate for high estate and inheritance taxes on wealthy estates, but he defended] “the concentration of business, industrial and commercial [wealth] in the hands of a few [as] essential to the future progress of the race.”  [However, he noted that industrial owners “under the free play of economic forces, of necessity, soon will be in receipt of more revenue than can be judiciously expended upon themselves.”  Carnegie believed that substantial inheritance taxes would discourage the wealthy from having undue advantages and would encourage charitable giving during a person’s lifetime. . . On the matter of estate taxes, Carnegie said, “Of all forms of taxation this seems the wisest.” . . . He believed that each generation should “have to start anew with equal opportunities.  Their struggle to achieve would, generation after generation, bring the best and brightest to the top.”  [Carnegie observed that] “the parent who leaves his son enormous wealth generally deadens the talents and energies of [his child], and leads him to a less useful and less worthy life than he otherwise would . . . . I would as soon leave to my son a curse as the almighty dollar.  [It is] not for the welfare of the children, but family pride, which inspires these legacies.”

In July 2000, just after Congress passed repeal of the estate tax for the first time, George Soros described in the Wall Street Journal the role of the estate tax in his own significant giving:  “I would be dishonest if I claimed that this consideration [the estate tax deduction] had nothing to do with my decision [to donate to charity]. . . .  Abolishing the estate tax would remove one of the main incentives for charitable giving.  College presidents and charitable organizations ought to be out in force lobbying against it.  It is no exaggeration to say that the Death Tax Elimination Act of 2000 would seriously fray our social fabric.”

“The more a society is organized around the preservation of wealth for those who already have it, rather than building new wealth, the more impoverished we will all be."