No repeal for estate tax

Mickey Hepner
The Edmond Sun

EDMOND July 04, 2006 03:50 pm

— It is a fact of life that some people have more money than others. This wealth inequality is a funny thing. On one hand this inequality encourages people to work more so they can get more. On the other hand though, this inequality sometimes discourages work effort.
Clearly, income inequality can be a good thing. People make more money generally when they are more productive at producing the items that society values. I teach students about the perils of price controls. Alex Rodriguez plays third base for the New York Yankees. He makes more money than I do because he generates more happiness for society — just ask my students on exam day.
Bill Gates made huge sums of money by revolutionizing the way we run our computers, and as a result the way we do business. Michael Dell revolutionized the way we buy computers. Jack Welch revolutionized the way General Electric operated. Each of them is wealthy because each of them was extremely productive.
It is the promise that a person can earn more if they do more that drives us to try to do more in the first place. After all, if everyone could earn a decent living without completing high school, few people would earn their high school diploma.
Likewise, if earning a college degree had little effect on one’s earning potential, few students would enroll in our universities.
It is the inequality of incomes — more productive people earn more, less productive people earn less — that gives people the incentive to work harder, to be more innovative and to invest in their futures. In short, inequality is a powerful force for good in our society.
However, sometimes wealth is tied not to a person’s productivity but to their circumstances. Some people did not create their wealth … they inherited it.
What is problematic with this is children from wealthy families have greater opportunities available to them. Parents of wealthy children have the financial resources to send their children to the best schools. They have the societal connections to open the doors of opportunity. In short, children of wealthy parents have an easier path to success. In baseball terms, some people were born on third base and as a result find it easier to score.
But opportunities to succeed should not belong only to the wealthy. We should strive to ensure every child has an equal opportunity to succeed. This is why I do not want to repeal the estate tax.
The federal estate tax is a tax paid by only the wealthiest families as only estates valued at more than $2 million must pay the tax this year — this amounts to one-half of 1 percent of all estates. Ninety-nine and a half percent of families will never pay this tax. Even those families who pay the tax still retain much of the value of the estate.
Consider an estate valued at $5 million. This year $2 million of the estate is exempt from the federal estate tax and goes directly to the heirs. This exemption will increase in the coming years.
Thus, only the remaining $3 million is taxable. Of that $3 million, the estate must pay a tax of $1.38 million. Thus, out of the original $5 million estate, the heirs still get to receive an after-tax inheritance of $3.62 million. They will hardly be destitute.
Of course some argue that taxing estates is immoral. Well, I think having nine million children in this country without health insurance is a moral issue. I think it is immoral that middle-class families cannot afford to send their children to college. Taxing the estates of multi-millionaires allows us address these problems, and open up the doors of opportunity to millions of poor- and middle-class children.
This last week, the “Oracle of Omaha” Warren Buffet announced he will give more than $37 billion of his personal fortune to charity and not to his own children.
But what surprised many was his defense of the estate tax as an “equitable tax” that is “in keeping with the idea of equality of opportunity in this country, not giving incredible head starts to certain people who were very selective about the womb from which they emerged.” Buffet, the second richest man in the world, understands more productive people should earn more money. But he also knows hope and opportunity should belong to everyone.
(Mickey Hepner is an economics professor at the University of Central Oklahoma.)