6.09.00
Coffin Up a Victory

6.08.00
Greenspan vs. The Economy

6.08.00
Greed vs. The Economy

6.08.00
City of Confused Angels

6.07.00
Corzine Looks Good, But…

6.07.00
Gore's Scary Internet Plans

6.06.00
Hillary at the U.N.

6.01.00
Clinton and Castro Game the System

6/09/00 5:15 p.m.
Coffin Up a Victory
In the House, a shocking win for economic justice.

By Alan Reynolds

y an incredible 279 to 136 margin, the House voted to phase out the estate tax by 2010. If asked a year ago about the odds of that happening, I would have said something characteristically omniscient like “fat chance.”

After battling bad economic policies for 30 years, starting with Nixon’s price controls, I find it easy to get cynical about anything ever getting changed. O.K., sure, we did manage to get rid of Communism and welfare. Big deal. But all those stories I was reading about tax cutting being out of style had me looking for a new hobby, even writing about technology and such.

Yet what is “politically possible” keeps being redefined, often in the right direction (there being only two schools of economics — the right-wing and the wrong). The first such surprise came when a juicy cut in the capital-gains tax slid through Congress quite easily in 1997 with barely a whimper of protest. Equally miraculously, Congress just ended the brutal earnings penalty on older workers, rendering my writings on that topic totally obsolete. And now this: many Democrats eager to axe the death tax. As Bob Mundell once told me, “Everything looks impossible until you do it.”

Recall that the idea of taxing accumulated wealth at death was a central defining issue for the first “liberals” (progressives). The Promise of American Life, a 1909 classic by New Republic founder Herbert Croly, aimed to shift power and loot from “corrupt and inefficient” state and local governments to those angels in Washington. To accomplish that, Croly boldly promoted an estate tax of “as much as 20 percent.” Subsequent leftists quickly became far more greedy. So it came as no surprise that a symbolically significant bit of nastiness in Bill Clinton’s 1993 tax bill was to hike the top estate tax from 50 percent to 55 percent.

To accumulate a taxable estate, people have to save out of income on which they have already paid too much tax, and then pay additional taxes that fall only on the frugal — taxes on interest, dividends, rent, and capital gains. After all that, the government has tried to take up to 55 percent of whatever is left from those who hired the wrong estate planners. The death tax is brutally unfair, and it involves massive anti-growth disincentives and distortions, in return for trivial revenue.

Because of the estate tax, we also have the absurd gift tax on generosity within the family. We can deduct gifts to total strangers, but are supposed to pay a steep tax on annual gifts in excess of $10,000 to our children and grandchildren, nieces and nephews. Would someone please explain the “fairness” of that?

Once you have foolishly accumulated “too much” by saving and investing, and had the audacity to die without squandering it, then the estate tax takes 37 percent out of the first dollar above the exempt amount, rising in steps to 55 percent. The message is clear and effective: The government does not want you to keep saving and investing beyond some arbitrary level. That is not only a powerful incentive to stop saving and start spending; it is also a powerful incentive to retire too young.

Previous efforts to do something about this mess have been wimpy at best. There were pathetic efforts to increase the exempt amount (which has no impact on marginal decisions to save), but not to even roll back Clinton’s vicious 55 percent rate. There were other schemes to grant generous exemptions only to those who kept their wealth in politically favored forms, such as a small business. If forced to buy some fast-food franchises to leave something to my granddaughter, then I suppose I could do that. But a dollar is a dollar, and wealth is wealth.

President Clinton threatens a veto, of course. That would prove to be another burdensome political inheritance (like the Microsoft mess) for poor Mr. Gore. Before emulating the old Herbert Croly tradition, Clinton would be wise to consult with Joe Stiglitz, his former chief economist. Stiglitz has long argued that the estate tax holds down the ratio of capital to labor, keeping real output and income per worker lower than otherwise. By keeping capital artificially scarce and valuable, the estate tax makes those who own capital more affluent, yet makes it harder for others to acquire capital to start new enterprises. That is, the death tax depresses real wages and thwarts upward mobility. Gee, that does not sound so progressive after all.

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