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Repeal Federal Estate Tax

by Rep. Christopher Cox

Reprint - The Small Property Owner, November 1995, updated in the Editor's note at the end

Isaac Newton said in the prologue to his great work in which he founded modern physics that if he had seen further than others it was because he had stood on the shoulders of giants.

There is a profound sense of what civilization is all about in that observation. Albert Einstein stuck alone in the middle of the Sahara wouldn't have come up with the theory of relativity. Every one of us is dependent upon the achievements of those who have gone before us.

I don't think there is a social theory, not even socialism, that argues that preventing one from benefitting from the work of others makes for sound social policy. Yet, if there is a theory behind the estate tax, that is it. The estate tax says that we should strip from every individual the most powerful incentive he or she has to work after having provided for food, clothing and shelter for themselves and their loved ones.

Everyone should pay taxes. But the inheritance tax is applied exclusively to goods that have already been taxed. Imagine having a business partner. This partner does nothing but takes half of everything; you do all the work. At the end, when even with that great burden you have managed to accumulate something, he says, "Thank you, and I'll take 55% of that too."

Take the case of Mississippi tree farmer, 83 year old Chester Thigpen. The grandson of slaves, he bought a little land in 1940, and slowly added to it over his lifetime. Today, he has 850 acres of trees -- but very little actual money, certainly not the $345,000 he expects to owe in federal estate taxes upon his death. How will his children pay that tax bill? By selling a large part of the land, destroying the farm Mr. Thigpen spent his lifetime building to pass on to his children.

That is the way the inheritance tax works.

Mechanisms put in place to supposedly shield the average taxpayer from this confiscatory tax have been severely eroded. The present $600,000 exemption was enacted over fourteen years ago and hasn't been raised since. Bracket creep has cut its real value nearly in half. More than twice as many people are now exposed to it as their incomes rise while what they really make actually declines. It's a pyramid.

In my hometown, the value of the average home is $245,000. If you add to that a standard life insurance policy, as a typical taxpayer you're getting pretty darn close to exposing yourself to that 55% tax. The exemption level hits virtually every homeowner.

This is not a tax on the rich even though it is constantly sold as one. It is uniquely ineffective at wealth redistribution. It accounts for barely 1% of federal revenues. The very rich are especially adept at avoiding a "soaking" by this tax. You may have read about the "state of the art" trust that Jackie Onassis left for her kids. They're not paying this tax. Their neighbors are paying this tax. You are paying this tax!

The estate tax may be ineffective at wealth redistribution but it is very effective at wealth prevention. It stops the creation of wealth. It demoralizes people who continue to work even after they have provided for themselves. It saps their energy. It makes extra work an exercise in futility. So it stops the creation of value. But it does something just as bad for everyone else. It prevents the creation of national savings.

Savings and investment, from an economist's viewpoint, are one and the same. Investment is nothing more than postponed consumption. It is a decision by someone to postpone consumption to later. Why would anyone do that if spending today saves you from taxes as high as 55%, but postponing that consumption will make half of it disappear?

Last year, as a result, our national savings rate was 1.7%, the lowest in my lifetime. This is a huge problem, a problem identified by Alan Greenspan, the Chairman of the Federal Reserve, by Laura Tyson, the Chairman of the President's Council of Economic Advisors, by Robert Rubin, the Secretary of the Treasury, by virtually everyone who calls himself or herself an economist. Everyone bemoans this tragically low rate of national savings. And yet, one of the main reasons we have this low rate of national savings is that we actually give a strong incentive to consume now, as opposed to postponing current consumption for future benefit. And so, we as a country are consuming and not saving.

Gross domestic product over the next seven years, according to economists Gary and Aldonna Robbins, would be $80 billion higher just seven years after we repeal this tax. We would create over a quarter million new jobs. Repealing the estate tax would destroy one of the worst and most noxious interferences of the federal government in the life of Americans at the same time creating new jobs and creating new wealth, and all the while expanding the gross domestic product.

As a result, I have introduced legislation that would do just that -- H.R. 784, The Family Heritage Preservation Act. Sen. Jon Kyl of Arizona has entered the bill in the Senate. In the House we have 77 sponsors, in the Senate, seven.

The White House Conference on Small Business, organized under the offices of Bill Clinton, asked people from all over the country to list their legislative priorities and rank their ideas. Number four on the list was H.R. 784, my bill. This was Bill Clinton's Conference on Small Business, the White House's conference on small business.

Repeal of the federal estate tax is an idea whose time has come. I know we can and will do it.

Congressman Chris Cox represents the 47th district of California. First elected in 1988, Rep. Cox chairs the House Republican Policy Committee.

Editor's note: House and Senate tax bills containing across the board provisions to raise the exemption from the current $600,000 to $750,000 over a period of years, were vetoed by the President.

All Material ©2001: The American Association of Small Property Owners
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