March 22, 2001 | Read Time: 4 minutes
By DONALD B. SUSSWEIN
The estate tax has the noble goal of reducing economic inequality, but it is poorly designed to achieve that purpose. Instead of confiscating roughly half of all large estates, Congress should allow the estates of wealthy people to remit what they otherwise would pay in estate taxes directly to charities.
If all taxpayers took advantage of such a tax-credit plan, $24-billion that now flows annually to the federal government in the form of tax revenue would instead go to the nonprofit world. The government’s loss would be trivial — less than 2 percent of federal revenue. But the benefits to society would be tremendous.
Currently, if a taxable estate worth $10-million bequeaths $5-million to charity, a tax of approximately 50 percent is imposed on the remaining $5-million. That means the government collects about $2.5-million, and a similar sum can go to heirs.
Under my proposal, a $5-million charitable bequest would eliminate all estate-tax liability, leaving the remaining $5-million available for heirs. Gifts made during life could count toward lowering a person’s estate-tax bill if special rules were in place to prevent double counting of income-tax benefits.
Thus, big estate-tax cuts would go only to those who make substantial gifts to charity. And the “cuts” would really equate to the ability of people to use their wealth for a charitable purpose rather than paying it in the form of estate taxes to the government. The Scrooges among us would still be subject to the full estate tax — unless the spirits prevailed in encouraging them to embrace the charitable impulse.
While donations to nonprofit museums, hospitals, and similar institutions would qualify for a tax credit, one would hope that a good portion of the philanthropy would come in the form of scholarships, job training, or other aid that would help make the United States more equal — by raising those at the bottom rather than merely taxing those at the top.
Some donors might endow scholarship funds in the field of their success, whether it is technology, the performing arts, or some other area. Others might create funds to lend money at low interest rates to start-up businesses in inner cities. Still others might subsidize health care for children.
Thus, instead of merely punishing the rich with the estate tax, we would be giving our most successful citizens the opportunity to use their considerable talents to identify charitable programs that most effectively achieve the goal of increasing economic and social equality.
This is really the only way to make sense of the estate tax in the 21st century. As our economy continues to mint new millionaires based not on dynastic accumulations of wealth but on intelligence and business savvy, the efficacy of the estate tax as a curb on economic inequality is seriously overrated. What is needed to address inequalities of wealth and income is more opportunity for upward mobility through education and capital formation. Taking half of a tycoon’s property at death for general government spending does nothing to further that goal.
What’s more, for some successful entrepreneurs who have created wealth and paid income taxes already, the hefty tax conveys a subliminal message that their gains are somehow ill-gotten. Such an anti-capitalist message is hardly what is needed to further a culture of achievement and self-improvement.
An estate-tax credit could be embraced by “compassionate conservatives” as well as socially conscious liberals who favor smaller government and more innovative approaches to solving social problems.
It also should be more than acceptable to charities, many of which fear that eliminating the tax would cost philanthropy billions of dollars in donations.
As foes of the estate tax point out, the levy has evolved into one designed mainly to reduce economic inequality. Only its secondary purpose is to generate federal revenue. There may well be agreement that the most successful among us should share our good fortune, but there is no need to run this exercise in compassion through Washington’s legislative and bureaucratic maze.
Critics may say this idea would shift the power of the purse from Congress to wealthy donors. If the alternative is full repeal of the estate tax, that is obviously not correct — because then the money would be in the hands of the wealthy to spend however they wish.
But even if traditional big-government types think they can prevail and keep the estate tax in place, that is not the best alternative if the goal is to do something positive to promote economic opportunity and upward mobility.
Donald B. Susswein, a principal in the Washington office of
KPMG, a tax, auditing, and consulting company, served as tax counsel to the U.S. Senate Finance Committee from 1981 to 1985. His e-mail address is dsusswein@kpmg.com.
