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The Repeal of the Estate Tax Ignites Debate in Congress

June 7, 2006 at 6:35 PM EST
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RAY SUAREZ: Members of the families that own Wal-Mart, make Snickers candy bars, and make Gallo wine have been paying close attention. Maybe your family hasn’t been watching the Senate heat up over repealing the estate tax.

SEN. BARACK OBAMA (D), Illinois: Let’s call this a trillion-dollar giveaway what it is. This is the Paris Hilton tax break. It’s about giving billions and billions of dollars to billionaire heirs and heiresses at a time when American taxpayers can’t afford it.

RAY SUAREZ: The debate is simple: Should the largest estates in this country be taxed when they’re passed onto heirs? Under the current law, only people with a net worth of at least $2 million are taxed, or about 12,000 estates this year.

Today, the Senate began debate on cutting or possibly repealing the estate tax altogether. Advocates of repeal, like Senator John Cornyn of Texas, often refer to it as the “death tax.”

SEN. JOHN CORNYN (R), TEXAS: Once you earn income and pay taxes on your income, then Uncle Sam comes along, when your loved one is lying on their death bed, and says, “We want another bite.”

RAY SUAREZ: Senator Cornyn said the tax was unfair, hurts American businesses, and breaks up ranches and farms.

SEN. JOHN CORNYN: Some advocate keeping the death tax in the IRS code as the key to opening the door of fiscal discipline. I disagree. Following this path with lead to nowhere and lead there fast. What it will do instead is to slam the door on ranchers, and farmers, and family-owned businesses, and that’s not something that I’m prepared to do.

RAY SUAREZ: Many Democrats argued that, at a time of war, inflation, and a growing budget deficit, the country can’t afford to give a tax break to a small number of wealthy families. Senator Kent Conrad of North Dakota.

SEN. KENT CONRAD (D), North Dakota: Are we really going to take on a trillion dollars of addition debt in order to help a handful of very wealthy people who really don’t need the help?

Congress debates the estate tax

RAY SUAREZ: The vote to continue debate tomorrow is expected to be very close.

If Congress does not act, the threshold for qualifying for the tax will rise, next time to $3.5 million for an estate, before phasing out entirely for the year 2010, then going back to its old, pre-2002 rates in 2010.

For more on the debate over taxing estates, I'm joined by William Beach, who oversees data analysis for the Heritage Foundation, a conservative policy research organization in Washington. The group's work has often been cited in this fight.

And William Gates, Sr., a prominent Seattle lawyer and father of Bill Gates, the founder of Microsoft.

Very briefly, Mr. Beach, give me your best argument for repealing this tax.

WILLIAM BEACH, Heritage Foundation: Well, I'll try to keep the numbers out of this; this is how I make my living.

We think the central argument against the estate tax is a moral argument. The argument goes like this: People work hard all their lives. They succeed. They save their money. They play by the rules. They put aside the funds to build a business and to build assets for the next generation.

And then, late in their lives usually, sometime in their 50s, they're visited by an accountant who says, "Do you know about the federal estate tax?" And they say, "No. What is this?" And it's the nightmare of the American dream.

Suddenly, they are put in a position of buying insurance policies or doing a number of things to try to save those assets. Now, many succeed, Ray. There's no question about that, but many don't.

And when you go outside the Beltway and you ask people, "Is this fair? Is this the kind of tax system that you want?" They'll say, "We want wealthy people to pay their share, but we don't want to have something in the tax code that signals that, if you work hard, live by the rules, you're going to be punished."

Is this the most feared tax?

RAY SUAREZ: Mr. Gates, you heard Mr. Beach call it the most feared tax, but is it one that very many people are likely to pay?

WILLIAM GATES, SR.: No. As a matter of fact, it's most feared because 18 of the wealthiest families in this country have spent a ton of money getting across the idea that it's a tax that everybody ought to be worried about.

And your question goes right to the point, Ray. I think, under the current rules for exemption, somewhere in the neighborhood of 0.5 percent, 0.5 percent of the people who die each year are involved in the estate tax.

As we get out to 2009, when the exemption goes up a little further, which even those of us who feel the tax should be left in place would encourage some increasing in the exemption, 0.3 percent of all the people who die are involved in paying this tax.

t's a wonderfully progressive tax. And it's a tax which 99.7 percent of the people in this country don't even have to give a thought to.

RAY SUAREZ: But does the fact that the pool captured by that tax is a small one buttress your argument for its fairness? Just because it's very few people paying for it, does that make it any more fair?

WILLIAM GATES, SR.: Well, you know, as time goes along, the collections from this tax are going to increase enormously because of the enormous increase in the net worth of Americans, the richest Americans.

And I would suggest that Mr. Beach is correct when he says that an estate tax has not prevented our country becoming very top heavy, in terms of the distribution of wealth. It has diminished it, because, if the tax weren't there, then all of those wealthy people would be just that much more wealthy, but it nevertheless has not prevented that unfortunate occurrence.

The fact of the matter is, it's going to be a larger and larger contribution to federal revenues. And we haven't even discussed the fact that our country is in a deep fiscal crisis. Our country is committed to paying a Social Security and Medicare payments which nobody knows where the money is going to come from.

It's clear that we're on our way to bankruptcy. And in the midst of that, with levees to build in New Orleans, with the war to fight in Iraq, somebody is suggesting that we should take away a tax which, over even the earliest 10 years, is going to generate somewhere over $500 billion in revenue for the American economy, for the American treasury.

Can this be cut without an uproar?

RAY SUAREZ: William Beach, can this tax be cut without wreaking fiscal havoc?

WILLIAM BEACH: Well, yes, it can. I mean, the effects of this tax will go directly into the center part of the economy and boost economic activity. We think that we will see more income and we will see more taxable income as a consequence.

But, Ray, I want to directly challenge the point that this is a tax only paid by 3, 4 percent of the population. Remember, these are business owners. And for all of the estates that are taxed, there are workers, there are Little League teams, there are all these infrastructure of people, people who will never pay the tax but who could lose their job, who could lose the support of wealthy people.

And that's why, when you go outside of the Beltway, when you take off the green eyeshades, when you stop talking to the people who are in the top 1 percent of the wealthiest people, people of ordinary lives understand that this tax affects them because it affects their jobs; it affects their community; it affects their future, whether they should start a business or not.

And that's why we get the kinds of margins, us repealers, in the polls where 60 to 70 percent of the people consistently say, "OK, fine. Wealthy people need to pay their fair share, but this is not the tax to do it."

RAY SUAREZ: Are businesses being broken up, William Gates, in order to pay this tax, as Mr. Beach suggests?

WILLIAM GATES, SR.: This whole business of the family business being threatened by this is just such a huge exaggeration. I mean, the number of estates -- we know what the contents of estates are. And the number of estates where there is a significant holding of a family-owned business are, you know, down in the single digits in most states. In my own state, there's something like three of them.

And those cases have -- you know, people have not had to sell their businesses. This tax has been here for almost 100 years, and I don't think there's any suggestion that our economy has somehow been deteriorated because of the wages being lower on account of somebody worrying about paying the estate tax 20 years from now. I just don't think that's a realistic analysis of the facts of life in this country.

RAY SUAREZ: And the debate is going to continue in the Senate. Gentlemen, William H. Gates, William Beach, thank you both.