Some thoughts on wealth and taxation from someone who has more wealth than your average really wealthy guy. Your view may differ. See dealer for details.
We Still Need the Estate Tax
by Bill Gates Sr. and Chuck Collins
In December 1906, President Theodore Roosevelt expressed alarm about the dangerous concentration of wealth and power in the United States and called on the incoming 60th Congress to pass a federal estate tax. Its primary objective, intoned T.R., ``should be to put a constantly increasing burden on the inheritance of those swollen fortunes, which it is certainly of no benefit to this country to perpetuate.''
A century later, after a 10-year assault, the federal estate tax is here to stay. While the votes no longer exist for permanent repeal, action is still needed. Otherwise, the tax will vanish in 2010 and return in 2011, creating a one-year window for tax-free dying. Congress must act to discourage a year of mysterious accidents in affluent households, bring back predictability and prevent further deterioration of the nation's fiscal situation.
Year of reform
It is likely that 2007 will be the year of estate-tax reform because of these pressures and the rising cost of inaction. But before Congress simply raises exemptions or cuts rates, let's consider all our options.
Congress has been unable to have a reasoned deliberation on the topic, even after solid research and investigative journalists have dispelled most of the fallacies about the tax. The facts are clear: The estate tax raises substantial revenue from those with the greatest capacity to pay.
Abolishing the estate tax would cost $1.03 trillion over the first decade. There are only three ways to fill that shortfall: cut spending, raise taxes on the nonwealthy, or, the current favorite, pile it onto the national debt.
Starting in January, the amount of wealth exempted by the tax will be $2 million for an individual and $4 million for a couple, and the tax rate will fall to 45 percent. At that point, less than one-third of the richest one percent of households will pay the tax. Ample wealth will still flows to heirs and heiresses, as the effective tax rate on a $10 million estate is only 19 percent.
Repeal advocates are still gunning for the estate tax. They have offered several reckless proposals to gut the tax under the guise of ''reform.'' They need to explain how to pay for the billions in lost revenue.
Instead of leaving more debt for the next generation, the United States should retain a robust estate tax and dedicate its revenue to increasing economic opportunity for the next generation.
A responsible reform would increase the amount of wealth exempted by the tax to $2.5 million for an individual and $5 million for a couple -- and include provisions to assist in the transfer of closely held family businesses.
Instead of the present ''flat rate'' system -- where a $5 million estate pays the same rate as a $5 billion estate -- we should adopt a progressive rate structure. Lifting the tax off smaller estates could be paid for by higher rates on estates over $50 million.
In a November ballot initiative, Washington state voters chose to retain their estate tax by substantial margins. Revenue from the state's tax is dedicated to an Education Legacy Trust Fund that last year spent $100 million to reduce K-12 class size and provide college scholarships for working-class students. We should consider a similar design for the federal estate tax.
Such a prudent policy won't happen unless we change our attitude about taxing inheritances. No one makes a fortune alone, without the help of our society's investments. The moral justification for an estate tax is that some of us have disproportionately benefited from the fertile economic soil we have cultivated together.
How many billionaires land on the Forbes 400 list courtesy of our technological and scientific commons, including the Internet, airwaves, biotechnology and mechanical advances? Seeing the invisible role of the commons in individual wealth creation should foster both an attitude of gratitude and recognition of our obligation to pass on similar opportunities. Previous generations did it for us -- and it is our turn to pass on the gift.
Universal GI Bill
We are not fans of earmarking funds, but the estate tax should be appreciated as an ''economic-opportunity recycling'' program. Estate-tax revenue should go into an ''American opportunity fund,'' a sort of universal GI Bill for the next generation. It could provide grants for higher education and stakeholder funds to start businesses and purchase homes.
A progressive estate tax could serve as an intergenerational pact between the wealthy at the end of their lives -- and those in the next generation who are not born wealthy. Like the GI Bill, it could be one of the best investments our nation makes in its people's aspirations.
Bill Gates Sr. is co-chair of the Bill and Melinda Gates Foundation. Chuck Collins is a senior scholar at the Institute for Policy Studies. They are coauthors of Wealth and Our Commonwealth: Why America Should Tax Accumulated Fortunes.
