Strengthening the Estate Tax to Strengthen the Country

In the December 17, 2009 Huffington Post editorial "Strengthening the Estate Tax to Strengthen the Country," Bill Gates, Sr. argues for strengthening the estate tax:

For eight years I have spoken to anyone who would listen about the importance of creating a strong estate tax, and there is no more critical time for action to be taken by Congress on this matter than now.

In a few days the Senate will break for their holiday recess and if they do not act the estate tax will disappear in 2010. The House of Representatives recently cast a 225-200 vote in favor of Rep. Earl Pomeroy's estate tax proposal, which makes 2009 estate tax law permanent, with a $3.5 million exemption ($7 million for married couples), and a 45% tax rate. If the Senate agrees, the result will still be a loss of $391 billion over 10 years, although that is better than no tax.

Letting the tax disappear entirely will be even more devastating and will cost upwards of a trillion dollars in lost revenue; revenue that supports vital public systems -- including transportation and energy infrastructure, education and healthcare -- that are the foundation of our broad-based prosperity and economic stability.

This is why I believe we must do more and strengthen this levy, which is our county's only tax on inherited wealth and applies to less than 1 percent of American families. The estate tax raises substantial revenue from those with the greatest capacity to pay.

If abolished or weakened, there are only three ways to make up the resulting shortfall: cut spending, raise taxes on the middle class, or pile it on to the national debt and leave it to our children and grandchildren who will inherit the consequences of the decisions we make now. This why I and thousands of other wealthy individuals have joined a campaign led by United for a Fair Economy to call on Congress to strengthen the estate tax.

A common, and misguided, criticism of the estate tax is that individuals who work hard and save their money should be entitled to pass on the fruits of that labor to their family. I am not against working hard, saving money, or taking care of your family.

However we must acknowledge that the person who accumulates wealth in this country was not able to do that independently. The simple fact of living in America, a country with stable markets and unparalleled opportunity fueled in part by government investment in technology and research (something my family has plenty of firsthand experience of), provide an irreplaceable foundation for success and have created a society which makes it possible for some men, women and their children to live an elegant life.

I attended the University of Washington under the G.I. Bill, and then became a lawyer enjoying a successful career that allowed me to provide well for my family so that they in turn were able to create their own wealth. So I believe that those of us who have benefited so greatly from our country's investment in our lives should be asked to give a portion of our wealth back to invest in opportunities for the future.

Society has a just claim on our fortunes and that claim goes by the name estate tax.

Democrats: Estate Tax Repeal to Be Short-Lived

In the December 16, 2009 article "Democrats: Estate Tax Repeal to Be Short-Lived," Associated Press writer Stephen Ohlemacher reports that the repeal of the estate tax for 2010 may not be renewed beyond it.

WASHINGTON

Heirs who come into big money after the federal estate tax expires at the end of the month might want to hold off spending it.

The Senate rejected a bill Wednesday to extend the estate tax for two months while lawmakers work on a more permanent solution. Majority Democrats, however, vowed to come back from their holiday break early next year and pass an extension, and several key lawmakers said they would make the tax retroactive to the start of the year.

The uncertainty is already causing problems for tax planners.

"You certainly have clients who may have a few months to live, and they need to get their affairs in order," said Charles Schultz, director of private wealth and tax advisory services at the accounting firm RSM McGladrey. "It makes it difficult to plan."

This year, the inheritance tax is 45 percent on estates larger than $3.5 million. Estates smaller than $3.5 million are exempt from the tax, and married couples, with a little estate planning, can exempt a total of $7 million. That leaves less than 1 percent of all estates subject to the tax.

Under current law, the federal estate tax is scheduled to temporarily disappear next year before returning in 2011 at an even higher 55 percent rate. However, during the year without an estate tax, many estates would be subject to a 15 percent capital gains tax that they now avoid.

Sen. Max Baucus, D-Mont., called it "the yo-yo effect."

"It is an outrage," Baucus said, "that the Congress allows estate taxes to change so much."

Baucus, who chairs the tax-writing Senate Finance Committee, proposed a two-year extension of the current estate tax while lawmakers "get our act together to determine what estate tax law should be." But under Senate rules, lawmakers couldn't take up the bill unless all senators agreed.

Senate Republican Leader Mitch McConnell of Kentucky objected, saying he wanted to extend the tax at a lower rate that would exempt more estates from the tax. McConnell proposed a 35 percent estate tax that exempted estates smaller than $5 million, in line with language the Senate adopted in drawing up a budget deal last spring.

"There's nothing that outrages the American people more than the thought that they will have to visit the IRS and the undertaker on the same day," McConnell said.

Baucus balked at McConnell's offer but said lawmakers will act early next year to deny heirs of multimillionaires an inheritance tax holiday in 2010.

The quirk in the law, in which the estate tax would disappear for only a year, came out of a series of tax cuts enacted in 2001. Many Republicans, who controlled Congress at the time, wanted to permanently repeal the estate tax then. But they settled on a gradual reduction, with a one-year repeal, to reduce the impact on the federal budget deficit.

"This chicanery has created a nightmare for families trying to plan their affairs," said Senate Majority Leader Harry Reid, D-Nev.

Two weeks ago, the House passed an indefinite extension of the estate tax at the 2009 rates. Since then, House Democrats have proposed a variety of shorter extensions, ranging from two months to a year. The Senate, however, has not been able to come up with enough votes to support any of the proposals.

"I have every confidence it will be fixed early next year," said Rep. Earl Pomeroy, D-N.D., who wrote the House-passed bill extending the 45 percent inheritance tax rate.

The American Family Business Foundation advocates the elimination of estate taxes.

The American Family Business Foundation maintains the Estate Tax Truth website to advocate the elimination of the estate tax, which the site explains as "a tax of 45% applied to all assets in excess of $3.5 million."

But as reported in Internal Revenue Service publication 950, "The estate tax has been repealed for 2010."

Many of the arguments against the the estate tax apply to many forms of taxation. This group would have a more compelling case if they proposed a solution to government funding difficulties, rather than worsening the problem.

Remember that government revenues lost from reduced taxes on the wealthy need to be offset by increased taxes on the rest of us or on future generations.

Wealthy Individuals Call On Congress to Strengthen Estate Tax

The December 14, 2010 press release "Wealthy Individuals Call On Congress to Strengthen Estate Tax Before Holiday Recess" by the advocacy group United for a Fair Economy announces a teleconference in which Bill Gates,Sr. and others argue for strengthening the estate tax:

BOSTON, Dec. 14 /PRNewswire-USNewswire/ -- As Congress prepares for the holiday recess, a group of wealthy individuals together with a national labor union, organized by United for a Fair Economy, are calling on the Senate to act before the break to strengthen the Federal Estate Tax. The tax will disappear for one year in 2010 unless Congress takes immediate action to either pass a one-year extension or a permanent estate tax. The U.S. House recently passed a bill that would permanently set the exemption level at $3.5 million per person ($7 million per couple), which would cost $234 billion over 10 years.

WHAT Teleconference: Need for strong Estate Tax

WHO William H. Gates, Sr., Co-Chair of the Bill and Melinda Gates Foundation

John C. Bogle, founder and retired CEO of The Vanguard Group

Richard Rockefeller, MD, family physician, Chair of the Board of Rockefeller Brothers Fund and great-grandson of John D.Rockefeller

Anna Burger, Secretary/Treasurer of Service Employees International Union (SEIU)

Lee Farris, Estate Tax Policy Coordinator, United for a Fair Economy

CALL-IN NUMBER 800-681-9883, Conference ID: 47047686

WHEN Tuesday, December 15, 11:00 am (1 hour)

SOURCE United for a Fair Economy

Absurd Opposition to the Death Tax

Wealthy members of U.S. society have succeeded in shifting the tax burden from themselves to the middle class by a careful choice of words. An estate tax is only paid when large estates are passed to heirs. However, in renaming it as the death tax, many poor and middle-class voters support its repeal. In the process, the government loses revenue that is typically offset by increases in other taxes and fees, the burden of which falls disproportionately on the middle-class and poor.

It is astounding how people vote against their current self-interest because of an illusory perceived future benefit.

Talk of Lost Farms Reflects Muddle of Estate Tax Debate

In the April 8, 2001 New York Times article "Talk of Lost Farms Reflects Muddle of Estate Tax Debate," David Cay Johnston explains that the risk of family farms being lost because of the estate tax has been exaggerated by some advocates of the tax's elimination.

Correction Appended

Harlyn Riekena worried that his success would cost him when he died. Thirty-seven years ago he quit teaching to farm and over the years bought more and more of the rich black soil here in central Iowa. Now he and his wife, Karen, own 950 gently rolling acres planted in soybeans and corn.

The farmland alone is worth more than $2.5 million, and so Mr. Riekena, 61, fretted that estate taxes would take a big chunk of his three grown daughters' inheritance.

That might seem a reasonable assumption, what with all the talk in Washington about the need to repeal the estate tax to save the family farm. ''To keep farms in the family, we are going to get rid of the death tax,'' President Bush vowed a month ago; he and many others have made the point repeatedly.

But in fact the Riekenas will owe nothing in estate taxes. Almost no working farmers do, according to data from an Internal Revenue Service analysis of 1999 returns that has not yet been published.

Neil Harl, an Iowa State University economist whose tax advice has made him a household name among Midwest farmers, said he had searched far and wide but had never found a case in which a farm was lost because of estate taxes. ''It's a myth,'' Mr. Harl said.

Even one of the leading advocates for repeal of estate taxes, the American Farm Bureau Federation, said it could not cite a single example of a farm lost because of estate taxes.

The estate tax does, of course, have a bite. But the reality of that bite is different from the mythology, in which family farmers have become icons for the campaign to abolish the tax. In fact, the overwhelming majority of beneficiaries are the heirs of people who made their fortunes through their businesses and investments in securities and real estate.

The effort to end the estate tax -- which critics call the death tax -- gained ground when the House of Representatives voted Wednesday to reduce the tax and then abolish it in 2011. The bill faces an uncertain fate in the Senate.

The estate tax is central in the debate over taxes, not only because the sums involved are huge but also because to both sides it is a touchstone of national values. To those seeking to abolish it, the estate tax is a penalty for success, an abomination that blocks the deeply human desire to leave a life's work as a legacy for the children. It is also a complicated burden that enriches the lawyers, accountants and life insurance companies that help people reduce their tax bills.

To its supporters, on the other hand, the estate tax is a symbol of American equality, a mechanism to democratize society and to encourage economic success based on merit rather than birthright.

Yet for all the passion in the debate, the estate tax does not always seem broadly understood.

While 17 percent of Americans in a recent Gallup survey think they will owe estate taxes, in fact only the richest 2 percent of Americans do. That amounted to 49,870 Americans in 1999. And nearly half the estate tax is paid by the 3,000 or so people who each year leave taxable estates of more than $5 million.

In fact, the primary beneficiaries of the move to abolish the estate tax look less like the Riekenas and more like Frank A. Blethen, a Seattle newspaper publisher whose family owns eight newspapers worth perhaps a billion dollars.

''Being ever bloodthirsty, the I.R.S. will start with the highest value it can on my estate,'' said Mr. Blethen, the 55-year-old patriarch of the publishing family. The figure for his share will probably be several hundred million dollars, more than half of which would go to the government. Mr. Blethen is trying to avoid almost all those taxes through a plan also used by other wealthy families, but if he does not succeed his sons' interest in the business will be wiped out, he said.

Estate taxes are paid by few Americans because they are not assessed on the first $1.35 million of net worth left by a couple. Amounts above this are taxed at rates that begin at 43 percent and rise to 55 percent on amounts greater than $3 million. As the Riekenas and the Blethens have learned, there are many legal ways to reduce the value of one's wealth for estate tax purposes. So even for the largest estates, the tax averages 25 percent.

Family farmers are often cited as victims. As Senator Charles E. Grassley, an Iowa hog farmer and chairman of the Senate Finance Committee, put it, ''The product of a life's work leaches away like seeds in poor soil.''

Yet tax return data show that very few farmers pay estate taxes. Only 6,216 taxable estates in 1999 included any agricultural land and equipment, the I.R.S. report shows. The average value of these farm assets was $440,000, only about a third of the amount that any married couple could leave untaxed to heirs. What is more, a farm couple can pass $4.1 million untaxed, so long as the heirs continue farming for 10 years.

In Iowa, the average farm has a net worth of $1.2 million. Loyd A. Brown, president of Hertz Farm Management in Nevada, Iowa, which runs more than 400 farms in 10 states, said none of his firm's clients nor anyone he knew was facing problems because of the estate tax.

Just 1,222 estates in 1999 had enough in farm assets to make the farm property alone subject to estate taxes. But these farm assets amounted to one-tenth of these estates, suggesting that the tax applies mostly to gentleman farmers and ranchers, rather than to working farmers like the Riekenas, whose fortunes are tied up in their farms.

As the Riekenas were surprised to discover, avoiding the estate tax was easy. Their lawyer developed a simple plan that involved making gifts to their daughters and buying life insurance to offset any estate taxes that might be due if the parents died before most of the farm had been turned over to their daughters.

There is a real cost, of course -- payments to the lawyer and for the insurance. And in any case the paucity of affected farmers does not end the debate. Patricia A. Wolff, the Farm Bureau's chief lobbyist, said the organization made estate tax repeal its top priority because, while it has not surveyed its members, she was confident ''the majority of farmers and ranchers believe that death taxes are wrong and that it is wrong to tax people twice on what they earn.''

But Mr. Riekena and all two dozen other farmers interviewed across central Iowa -- every one a Republican -- said that while they favored increasing the amount that could be passed to heirs untaxed, they did not support the repeal proposed by President Bush and other leaders of his party. A few snickered or laughed when asked whether the estate tax should be repealed to save the family farm.

But Senator Grassley himself opposes the estate tax, in large part because he thinks that while a decision to keep or sell an asset is an appropriate trigger for a tax, death should not be.

He added another reason: ''I do not think that the function of government is to redistribute wealth.''

Indeed, that seems to be the fault line in the debate: should the government play Robin Hood with estates?

''If you worked hard and put your money away, you paid tax on it as you went along, so it's yours and you should be able to pass it on to your children without the government penalizing you,'' said R. Elaine Gunland, who grows grapes in Fresno, Calif., and whose family may owe estate taxes when she dies.

Mr. Blethen, the fourth-generation publisher of a newspaper started in 1896 with $3,000, says he speaks for many others in supporting repeal of the tax in the name of preserving family businesses.

''I firmly believe that family-owned businesses are the heart and soul of the country,'' said Mr. Blethen, who has created a Web site called deathtax.com.

Mr. Blethen says the estate tax benefits publicly traded companies at the expense of family-owned businesses. The reason is that the public companies can often buy family businesses at a discount because the owners did not raise the cash to pay estate taxes and must sell quickly at fire sale prices.

Mr. Blethen said some of the seven smaller papers his family bought in Washington and Maine came from families that had not planned carefully for the estate tax and decided it was easier to cash out.

''If you like corporate culture, and think America needs more of it, then you love the estate tax,'' he said. ''I think this march toward corporatism is not healthy and we lose innovation, jobs and charitable giving.''

Mr. Blethen said the estate tax also discouraged major new investments in family businesses late in the life of the primary owner because such investments consumed cash that might be needed at any time to pay estate taxes.

He said the estate tax also ''forces you into irresponsible gift making'' to heirs. He felt compelled to give half the future growth of his fortune to his two sons when they were not yet kindergartners even though he had no way of telling whether the boys would turn out to be industrious, as they did, or scalawags.

Despite his fierce opposition to the estate tax, Mr. Blethen does not support President Bush's current plan to repeal the tax because it would also exempt from capital gains taxes the profits on assets passed to heirs when those assets are sold. ''That's not fair,'' Mr. Blethen said.

He said Mr. Bush's proposal would have the perverse effect of encouraging the sale of family-owned businesses, because heirs would see death as their chance to sell tax-free and to diversify their portfolios, instead of continuing to bear the risks of holding a single enterprise.

Mr. Blethen thinks that rather than taxing an estate, taxes should apply when a business is sold. ''You want to defer those capital gains and let them grow so large that the family will keep the business to avoid the capital gains taxes,'' he said.

The debate does not divide neatly among rich and poor. Since February more than 800 wealthy Americans have joined in a public appeal to keep the estate tax. They argue that repealing the tax would further enrich the wealthiest Americans and hurt struggling families. They also argue that financial success should be based on merit rather than on inheritance.

Warren E. Buffett, George Soros, Paul Newman and William H. Gates Sr., father of Microsoft's chairman, William H. Gates III, are among the most prominent in that group, which also includes many people with holdings of just a million dollars.

Mr. Buffett said the estate tax fosters economic growth by encouraging Americans to rise based on merit, not inheritance. ''If you take the C.E.O.'s of the Fortune 500,'' he said in an interview, ''and put in the eldest son of every one of those who ran the place in 1975, the American economy would not run as well as letting the Jack Welches, who started out with nothing, rise to the top of General Electric.''

Back in central Iowa, Mr. Riekena had another reason. He said Washington was focused on the wrong issue when it came to saving family farms.

''For most farmers around here, the estate tax is not high in their minds,'' Mr. Riekena said. ''What we need are better crop prices.''

Photos: Harlyn Riekena, who owns 950 acres of farmland in Iowa, expects to owe nothing in estate taxes. (Suzanne DeChillo/The New York Times)(pg. 1); Frank A. Blethen, publisher of The Seattle Times, says the estate tax could cost his family many millions of dollars after his death. (Peter Yates for The New York Times)(pg. 24) Chart: ''Few Farms in Taxable Estates'' Estate tax opponents say the levy is destroying the family farm. But only the richest 2 percent of the 2.4 million Americans who died in 1999 left estate tax bills. Only one in eight of these taxable estates included any farm property. On average, only one in 40 taxable estates included enough farm land and equipment for the farm asssets alone to incur estate taxes. 49,870: Total number of taxable estates in 1999 6,216, or 12.5 percent, of the taxable estates had any farm assets 1,222, or 2.5 percent of estates, on average, might have had to pay taxes because of their farm assets. (Source: Internal Revenue Service)(pg. 24)

Correction: April 12, 2001, Thursday A front-page article on Sunday about farms and estate taxes referred incompletely to the position of Loyd A. Brown, president of Hertz Farm Management in Iowa. Mr. Brown said that while he did not know of anyone who had lost a farm because of the estate tax, he thought Congress should either eliminate the tax or increase the amount that could be inherited untaxed.