Death and Taxes – Can the Congress Kill a Pernicious Tax?

Bill Frist, M.D., the United States Senator from Tennessee and Republican majority leader, once began a speech on the horrors of the death tax with the cool observation by Jean Baptiste Colbert that "The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least amount of hissing."

Judged by this criterion, the death tax is a failure. In times of war, the goose is plucked in earnest, and the hissing is drowned out by the Battle Hymn of the Republic. Lincoln introduced an inheritance tax during the Civil War. Then an estate tax was levied in 1916 in the course of World War I, and the same tax has existed for almost a hundred years, but the reluctance to pay it has grown more intense. It is widely recognized that the estate tax is still another tax on money that has been remorselessly taxed before as income taxes (federal, state and municipal), property taxes, sales taxes, sin taxes and a mounting array of indirect excise taxes (less hissing) and therefore some 80% of Americans are said to be against it. As a result, the estate tax, or death tax, is now widely considered the work of the devil. It not only elicits hissing but downright fear and loathing.

When the decedent is hardly cold in the grave, and the miraculous strains of Samuel Barber's Adagio for Strings are dying away in the ears of the mourners, and the tears are hardly dry, the IRS and the Treasury spring into action to survey and ransack the accumulated assets of the deceased. And then the taxman cometh, and there is wailing and gnashing of teeth.

There was a time, and it was as recent as the lamentable year 2,000, that the exemption from the death tax totaled a mere $675,000 or so, and the maximum tax rate of the total over this amount was as high as 55%. It is plain that this confiscatory tax exacted a fearful toll on the holders of those estates – if they deserve the name – rich in tangible assets but poor in cash – farmers, ranchers, convenience store owners, fast food operators, contractors, auto dealers, and all the enterprising members of the minor bourgeoisie. The other affected class, the doctors, lawyers, dentists, corporate officers, are all educated men who have presumably prepared themselves and their heirs for a financial life after death. The plutocracy is, as always, in a class of its own, and has far more resources than even the professionals. We will briefly come to them later.

If these toilers in the business world failed to plan for the payment of high death taxes, they often had to sell part or all of their assets in order to pay the taxman. They were either ruined by the rapacity of the Treasury or they were put to desperate shifts and stratagems to make the payments. As a natural result, they were furious and desolated.

If they were realists and looked the hideous plans and plots of the taxman coldly and fearlessly in the eye, and tried to prepare for his depredations by drawing up an estate plan, they were forced to hire accountants, lawyers, insurance agents to look after their affairs. The obvious disadvantage is that they had to pay fat and substantial fees to these money management professionals, and they did not like it. They were, at the end of the tax avoidance plan, then prepared for death with taxes but they had less money in their purse. It is these vexations that make men and women unhappy with their lot in this vale of tears so aptly named. In any case, they still had to face the unpleasant fact that their lawful heirs and assigns would be compelled to pay vast sums to the Treasury post mortem. They buttonholed their congressmen and senators, both Republicans and Democrats, and filled the ears of these magnificoes with tales of woe and lamentation.

In 2001, these congressmen and senators then passed a triumphant piece of legislation which gradually raised the exclusion amount over a period of years ($1 million excluded in 2002-2003; 1.5 million in 2004-2005; $2 million excluded in 2006-2008; $3.5 million excluded in 2009) and slightly, grudgingly but perceptibly, dropped the highest tax rate from 50% in 2002 to 45% in 2009. Then, in the momentous year 2010 there will be great rejoicing in the land. It is the grand climax of the new death tax legislation, for in that year, 2010, the death tax was repealed, cancelled, and made null and void.

Unfortunately there was a great catch and anti-climax because the death tax was scheduled to return with full force and fury in the following year of 2011. With the repeal of repeal in the dreaded year 2011, the party would be effectively over and the maximum tax rate on estates would soar once again to a confiscatory 55% per centum at one fell and wicked swoop. Furthermore, there was always the problem that you could not do any effective estate planning with this joker in the pack. It was a given that it was a good time to die in 2010 if you planned to leave your heirs a liquid or an illiquid estate; but timing here was of the essence, and if it was a good time to die in the blessed year 2010, it was the very height of bad form and even worse judgment to die in 2011. Something clearly had to be done.

Action followed meditation on June 18, 2003, when those Republicans and Democrats opposed to the death tax in all its forms and all its manifestations, including especially its Phoenix like resurrection from the ashes in 2011, introduced H.R. 8 the "Death Tax Repeal Permanency Act of 2003" on the floor of the House of Representatives under the capable leadership of the able and supportive gentlewoman from Washington, Ms. Jennifer Dunn (Republican).

There followed a remarkable and noteworthy debate in the House of Representatives on H.R. 8.

Naturally, many of the short speeches on the death tax were simply calculated to raise the speaker's visibility on the radar screens of the voters back home, and induce these voters to vote for him, and therefore tended to be on the dull and predictable side of total repeal. However, some of the speeches were less predictable while others were downright startling and illuminating.

One of the observations commonly made about wealth and its effects over time is that it is often a case of boom to bust, or shirt-sleeves to shirt-sleeves, in three generations. The first entrepreneur in the family works and triumphs; the second generation falters and stumbles; and the third generation sinks down to the plebian pits to start the whole process all over again. One Congressman alleged, and I have no reason to doubt him, that the imposition of the death tax is apparently one reason, perhaps even the main reason? for this malign progression from prosperity to comparative poverty. That, at any rate, is the conclusion of Adam Putnam, freshman Republican from Florida, who said: "Despite their best planning efforts, 70 percent of small and family owned businesses do not survive the second generation and 87 percent do not survive the third. Mr. Speaker, 90 percent of those failed owners say the death tax was a contributing factor to the loss of that business."

The facts, statistics and case histories presented during the speeches in the House of Representatives were nightmarish enough to make the income tax, with all its convolutions, paper work and associated expenses, seem decent and restrained by comparison. Congressmen Foley of Florida, whose motto was u2018no taxation without respiration' remarked that "The bottom line is that we have more people in America engaged in the preparation and collection of taxes than we do in the growing of food and agriculture." This assertion, if true, gives some idea of the astoundingly high cost of the current tax system and offers a glimpse into the nature of the vaunted service economy we hear so much about. In many instances, this lauded service economy seems to produce nothing of substantial or enduring value to the country.

Some of the other statistics, when first uttered on the floor, seemed solid enough at first blush; but no sooner had the statistic been put on the table than others pounced on it and denounced it. Sander Levin, Democrat from Michigan, suggested that only about 400 farmers and ranchers were subject to the estate tax in any one year. Congressman Thomas Osborne, who represents a rural district in Nebraska, then leaped to his feet with the following rebuttal:

"We have 52,000 farmers and ranchers in Nebraska. I heard some figures that were unbelievable to me, that maybe only 400 farmers in this country would benefit from the repeal of the death tax. I would say out of 52,000 farmers in Nebraska, that we would look at probably somewhere between 15 and 20,000 that would benefit tremendously and will probably not be able to pass their farm on without some repeal of the death tax. Let me give Members an example. A small ranch in Nebraska is 12,000 acres. That will support about 300 cows and that will support one family. That probably started out at $25 an acre, it is now worth $300 an acre, so it was maybe worth $100,000 when the farmer started out roughly 30 years ago. So it has increased in value. If they have two children and the last surviving parent dies in 2010, that ranch, which is worth $5 million today, would go on to those two children and they would pay no tax. But in 2011, their tax bill would be $2 million. They cannot pay that tax. They have to sell the ranch. That is an actual example of an average to small-sized ranch in Nebraska. The Coble family in Mullen, Nebraska, had that happen to them. And who bought the ranch? Ted Turner bought the ranch. Ted Turner owns several hundred thousand acres in Nebraska today, most of which has been bought because people could not afford to keep the ranch because of the inheritance tax."

This is wonderful stuff, and if we take into account that the mortality rate among Nebraskans is 9 per 1000 per year, as it was in the year 2000, then perhaps about 135–180 farm and ranch families are affected each year by the death tax in Nebraska alone. In the larger sense, the Congressman is of course quite right. All of the 15–20,000 farmers and ranchers live in constant fear of the tax terror to come, and they will all hold their representatives and Senators responsible when the doomsday comes. But what on earth is Tycoon Turner up to in Nebraska? And furthermore, will his estate be subject to the estate tax when his time comes as it must to all mortal men? There are times when the most compelling questions of all are not addressed.

However, all is not lost. Mark Foley, Republican from Florida, suggested some of the intricacies by which the wealthy shelter assets from the wicked taxman. "The rich know how to shelter their income. They are very good at creating trust[s] and remainderman trust[s]. In fact, one of the premier families in America, the Kennedy family, has 40 or 60 or 80 trusts that were established to pass the money into different hands to avoid, I am sure, the estate tax liability. These are families that have properly prepared, but it has been expensive. It has been time consuming, and it is complicated." And that, as many of the affected families would surely say, is the bitter truth.

But the indisputable bombshell of the day was delivered by Christopher Cox, Republican from California who was introduced by the aforesaid Ms. Jennifer Dunn, as "the chairman of the Policy Committee, a cosponsor of this bill, and a longtime supporter and leader on this bill." Cox consumed just two minutes of the debate on that momentous day, but the value of his contribution went far above and beyond its modest length.

"I thank the gentlewoman for yielding me this time. Mr. Speaker, I will just make a few observations about the death tax. First, notwithstanding much of what is in the air here, it does not raise any material amount of money for the Federal Government. Nominally, about 1 percent. But, in fact, when we take into account the 65 cents on the dollar in compliance costs and the nearly $10 billion a year that is sucked out of the economy paid to lawyers and accountants and life insurance experts for compliance, it is a wash. Some estimates say it actually costs more than it raises. Second, it is not an income tax. You do not have to have any income to pay it, even though it is part of the Income Tax Code, 88 pages of it. Instead, it is a property tax and is meant to be confiscatory. These are confiscatory rates, well over half, and the purpose is [Page H5498] to break up large concentrations of wealth. But the tax does not do that, either. In fact, it concentrates wealth because family farms, ranches and small businesses that are liquidated to pay the tax man are absorbed by larger conglomerates. We have seen farmland turned into condos all over America for this reason. The rich do not pay it. They hire expensive lawyers and accountants to design trusts and foundations to avoid the tax so that only small business, family farms and people without cash who have to liquidate assets to pay the tax man pay it. . . It is time for the death tax to die, and today we are going to drive a stake through its heart."

Now this was the Republican equivalent of a declaration of war, and it presented a problem to the Democrats, but not necessarily an insoluble one for resourceful and ingenious men and women. Clearly, the Democrats were not going to pluck the petals off this particular rose and face the wrath of the folks at home branded from snout to tail as partisans of the feared and hated death tax.

Their mission in an imperfect world of interested voters and potential campaign contributors was clear. They had to locate, devise and present a better death tax package than that presented by the Republicans. It had to be better than the Republican heresy on the one hand; and it had to be crafted in such a way that it would comfort and cosset the embattled left wing of the party, the tax and spenders, the bitter enders, the remorseless enemy, not to say nemesis, of the plutocracy, the Cape Cod crowd, the Jupiter Island sybarites, the Palm Beach parvenus and their dissipated wives and retainers. How to do it?

The Democratic counter-proposal was elucidated by Representative Earl Pomeroy of the great state of North Dakota, a state which I hold in particularly high regard because my grandfather attempted vainly but magnificently to earn a living as a farmer and rancher on those high plains in the first decade of the twentieth century. Pomeroy played a grand game of poker and raised the temperature of the game.

The Republicans would content themselves with trifling exemptions of $1 million (2002–03), 1.5 million (2004–05) $2 million (2006–08), $3.5 million (2009) for deserving farmers and ranchers? He, Earl Pomeroy and the munificent Democratic Party, would raise the exemption far above these squalid and grudging measures. He proposed an amendment to increase the exemption to $3 million per individual and $6 million per couple beginning in the year 2004. Under this provision, it was estimated by the best statisticians in the Congress that 99.65% of all estates would escape the estate tax altogether, so leaving only 0.35% of all estates to face the full fury of the tax. Observe, however, that the Democrats did not propose to ban, outlaw or otherwise make illegal, all trusts, foundations and tax havens of every kind and description. The lawyers would have raised Cain. The Democrats then denounced the coming of an aristocracy of wealth under the Republican proposal when the Republicans had been at pains to point out that it was the very estate tax which created concentrations of wealth. Vide, for example, the land acquisitions of Ted Turner in Nebraska. They also praised public-spirited souls like William Gates Sr. and Warren Buffett who opposed the abolition of the estate tax. (The Republicans promptly invited both men to line up at the voluntary tax window and pour billions into the coffers of the Treasury.) It was all in vain. A vote was then taken on the Democratic amendment and it went down to predictable defeat.

That left the original Republican proposal on the floor of the Congress, and the vote proceeded in due fashion in a recorded vote and to no one's great surprise, the coalition of Republicans and some Democrats passed the measure, and so it came about that H.R. 8, known as the "Death Tax Repeal Permanency Act of 2003" passed in the House of Representatives and as a result the estate tax was half-dead.

The House has now repealed the death tax; that is, it has repealed the death tax during and after the year 2010. The problem is that the House needs the concurrence of the Senate, and it is not totally clear what precisely the Senate plans to do. Congressman Kleczka, a Democrat from Wisconsin, gleefully predicted that the Senate would vote down the bill. "Mr. Speaker, the only good thing about today's bill to repeal the estate tax for the billionaires of this country is that it is dead in the Senate, so all of the talk and debate today and the vote we will have later is for naught because the Senate is going to kill it." He was reproached by the Speaker of the House for his pains. "The Chair must remind Members to avoid improper references to the Senate. Remarks in debate may not characterize, nor urge, nor predict actions of the Senate."

That rule may hold true for the floor of the House, but elsewhere speculation is of course predictably rampant and rife. The consensus seems to be that the Senate will not pass the measure (S13, S169) for one good reason: the existence of the Byrd rule, which stipulates that the measure must pass by at least 60-40 vote, and not a simple majority. The second reason, which has not been mentioned, is that many members of the Senate are extremely rich men, and it would probably be considered unseemly, if not worse, for them to pass a measure in their immediate and obvious self-interest. In the meantime, the battle continues. Immortality has been defined as a government bureau, and it is taxes that fund it and keep it immortal. Therefore, it is plain that this is going to be a battle royal, and those who are interested in contacting their Senators to find out their views on the matter and to argue the case can of course contact them on or off the web. It is time not only to drive a stake through the heart of the death tax but to bury it, to mount a wake, and to dance on its grave.

But always remember as you do so that individual states also have their own estate taxes, some of them arduous and nicely confiscatory. To get an idea of the estate taxes in your state, enlightened or unenlightened as the case may be, consult the CCH Financial Planning Toolkit and click on the map of your state.

July 16, 2003