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Wealthy couple circa 1920s
1.17.03
Politics and Economy:
Debating the Inheritance Tax
More on This Story:
Overview

Conservatives call it "the death tax." Lawyers call it the "estate tax." It used to be known as "the inheritance tax." And each group has a different assessment of who pays the tax, and who would profit from its repeal. After a ten-year campaign, Congress delivered a repeal of the tax to President Clinton, who vetoed the measure. President Bush made reducing the estate tax one of his first priorities and it being phased out. A movement is underway to make the scheduled 2010 repeal of the tax permanent.

But now there's a campaign to restore the inheritance tax. And it's being led by some of the country's richest people. Bill Gates, Sr., the patriarch of the Gates family, who heads the Bill and Melinda Gates Foundation, and Chuck Collins, an heir to the Oscar Mayer fortune who

founded the organization Responsible Wealth. They want the tax reinstated, saying that it's crucial to American democracy and entrepreneurship great. But the debate goes on.

Among the reasons for keeping the estate tax listed on Responsible Wealth's Web site are that the tax limits the size of private fortunes that, if allowed to grow unchecked, could concentrate political and fiscal power. The elimination of the tax has already had an effect on some state budgets and could lead to further cuts in social services and other funding. (See "In the Red.") And, Responsible Wealth contends that eliminating the tax will stifle opportunity, specifically by limiting equal access to educational and economic opportunities.

On the other side of the question the lobbying group The National Federation of Independent Business (NFIB), says that the tax forces many of its members to sell up each year when an owner dies without leaving enough money to pay estate taxes.

A study instrumental in getting the repeal though Congress, the 1998 House Joint Committee Study "The Economics of the Estate Tax," lists more considerations:

  • The existence of the estate tax this century has reduced the stock of capital in the economy by approximately $497 billion, or 3.2 percent.
  • The distortionary incentives in the estate tax result in the inefficient allocation of resources, discouraging saving and investment and lowering the after-tax return on investments.
  • The estate tax is extremely punitive, with marginal tax rates ranging from 37 percent to nearly 80 percent in some instances.
  • The estate tax is a leading cause of dissolution for thousands of family-run businesses. Estate tax planning further diverts resources available for investment and employment.
  • The estate tax obstructs environmental conservation. The need to pay large estate tax bills often forces families to develop environmentally sensitive land.

  • Take the Poll: Do you believe inherited wealth should be taxed?

    The federal government first taxed estates in 1916, although such taxes a long history in English common law and as a source of state revenues. Cornell University Law School offers a comprehensive history of estate tax. The Web site also tracks federal and state statutes and legal challenges related to estate tax. Part of the confusion over the effects of the repeal of estate tax may result from confusion over just who pays it. See the figures below.

    The Phase Out of the Federal Estate Tax

    Year of death 2002/2003: Federal Estate Tax Exemption:
    Highest rate:
     $1 million
     50%/49%
    Year of death 2004/2005: Federal Estate Tax Exemption:
    Highest rate:
     $1.5 million
     48%/47%
    Year of death 2006-2008: Federal Estate Tax Exemption:
    Highest rate:
     $2 million
     46%/45%
    Year of death 2009: Federal Estate Tax Exemption:
    Highest rate:
     $3.5 million
     45%
    2010: Tax Repealed   
      

    Tax statistics: Internal Revenue Tax Statistics: Estate, Wealth, Gift

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