Because some people are really wealthy doesn't mean they are well endowedwith common sense. Last week a handful of the richest people on the planet,including George Soros, Warren Buffett and Paul Newman, urged Congress notto end the death tax. More than 100 other rich people took out an ad thispast weekend in The New York Times essentially saying, "Please tax us!"Estate tax advocates in Washington are exulting that even the nation'syacht-owners don't want this tax repealed.
The truth is that these ultra-rich Americans aren't being as selfless as itmay seem. Most billionaire families long ago engaged in careful estate taxplanning by, for example, depositing their fortunes into family foundationsor by creating generation skipping-trusts -- to avoid having the long arm ofthe IRS reach into their graves for a dime.
Let's take the example of George Soros. According to research by BrettFromson of TheStreet.com, few Americans have been so successful at gamingour tax system as the billionaire financier. Many of Soros' investments are"off-shore" hedge funds often exempt from U.S. taxation. "Soros can affordto support high inheritance taxes," writes Fromson, "given the enormouspersonal income tax advantage he enjoys." I have no objection to Americansengaging in legal tax avoidance. It's smart personal finance. But Sorosshouldn't turn around and hypocritically urge other people to pay more taxeswhen he finds so many clever ways to avoid U.S. taxes himself.
The dirty little secret of the death tax is that the people clobbered by itare not billionaires. More often they are ordinary Americans with mediumsized estates -- the millionaire next door. I am talking about ranchers,farmers and self-starter business owners. They are the risk-takers in oursociety who have spent a lifetime pouring sweat equity into theirfamily-owned firms. They become anguished and enraged when they discoverthat their reward for a life of virtue is a confiscatory death tax that willrob their grave. Every year thousands of heirs are forced to sell the familyfarm or business to pay estate taxes. It's unjust given that this tax isimposed on dollars already taxed when the income was earned during thedeceased's lifetime.
Now, Warren Buffett worries that without a death tax America will become asociety of pampered third- and fourth-generation inheritors hoarding theirfamily fortunes without working an honest day or contributing to societytheir whole lives. (The image of Ted Kennedy jumps to mind.) But asProfessor Edward McCaffery of the University of Southern California LawSchool argues, "If breaking up large concentrations of wealth is theintention of the death tax, then it is a miserable failure." The Kennedysand Rockefellers still have massive family fortunes despite the estate tax.
The death tax rewards the life of lavish and unproductive consumption it isintended to discourage. This tax says to the elderly: Live high on the hog.Wrap yourself in material comfort. Eat, drink, be merry. You can't take itwith you, and you can't leave most of it to your kids. Your goal is to diebroke -- the ultimate form of tax avoidance. Meanwhile the frugal men andwomen who scrimp and save and build a legacy to leave to their children arehit by a tax that allows the IRS to snatch more than half. Through the deathtax, we reward vice and punish virtue.
One last argument used by the billionaires is that eliminating the death taxwill cause private charities to suffer. But volumes of evidence show thatcharitable giving is more influenced by the amount of economic growth thanthe value of charitable tax deductions. In the 1980s, the value ofcharitable deductions fell by almost half, but charitable giving soared. It's insulting to say that Americans give to their churches or the Red Cross orthe Salvation Army because they want a tax break.
Although we consider ourselves the freest nation on earth, we have thesecond highest death tax in the industrialized world -- higher than in thesocialist bastions of Sweden and France. Perhaps that's why Hillary Clinton,campaigning for the Senate last fall, said, "You ought to be able to leaveyour land and the bulk of your fortunes to your children and not thegovernment." Three out of four Americans agree with her.