Estate tax just part of larger issue

Poor Paris Hilton. Her simple life has become a metaphor in Washington, D.C.

You know, socialites move into the country, ridicule the middle-class families that take them in, then hotfoot it back to the warm embraces of the glitterati.

Democrats claim Hilton typifies an idle socialite class living off fat estates that do not pay a fair share of federal revenues. They decry the proposed estate tax repeal as the “Paris Hilton Benefit Act.”

Republicans say hooray for Bergdorf Goodman. They have cleverly morphed the estate tax into the “death tax” hoping that all Americans, no matter their means, will infer they have a stake in putting a stake through its heart. Family farms and small businesses will be shuttered should heirs have to pay estate taxes, they warn.

But look at the numbers. This year the tax applies to only those estates worth more than $1.5 million. Of the 2.5 million Americans who will die, one estimate finds the heirs of fewer than 19,000 estates will pay the tax. As few as 440 estates with the majority of their assets in family farms or businesses will be affected. That’s for the whole country. A disproportionate number of those subject to the tax are in California, where more than half of all homes sell for more than $1 million.

The taxation rate has also been coming down slowly from its former peak of 55 percent, which was clearly excessive.

The tax will generate about $18 billion in revenues this year.

Wednesday, the U.S. House of Representative voted to permanently repeal the federal estate tax. The tax was scheduled to fade away by 2010 under the provisions of tax-cut legislation passed in 2001. In 2011, however, the tax would rewind right back to the parameters that applied in 2001. This is the third time the House has voted for repeal. The Senate blocked the earlier efforts, but Republicans hope their now stronger majority in the Senate will finally get the measure over the top and to the president’s desk. Complete repeal is unlikely. The more likely outcome will be some compromise shaped by Sen. Jon Kyl, R-Ariz., and Sen. Charles Schumer, D-N.Y., possibly one that sets the exemption at somewhere between $10 million and $20 million, and the rate at the 15 percent that is also the highest rate applied to capital gains.

In Olympia, meanwhile, Gov. Christine Gregoire has included a renewed estate tax in her budget plan. The state Supreme Court ruled early this year the tax was invalid given the 2001 changes in federal law. The decision will cost the state $430 million in lost revenues as well as refunds over the next two years. The governor’s plan would reinstate the tax, which would have a 16 percent top rate that kicks in at $10 million. Payments to the state would no longer be credited against the federal tax, as they had been in the past.

The reconstituted state tax would not apply to family farms. The Department of Revenue estimates only 250 estates would pay the tax, down from about 1,000 prior to the Supreme Court’s ruling.

Gregoire’s version would put $129 million back into the biennial budget. A Senate version would raise $135 million in revenue.

Should the estate tax pass the Legislature, foes vow to put an initiative repealing the estate tax on the ballot.

A strong majority of Americans support repeal. If rolling back the estate tax was not contributing toward a succession of record budget deficits, repeal would be a done deal. The same dynamic applies in Olympia, where the estate tax will help balance state ledgers.

Somehow, the kind of progressive taxation that imposes a larger share of the cost of government on the rich has fallen into disrepute. The estate tax is but one sign. Increasing discussion of a flat-rate income tax or a national sales, or value-added, tax is another. The tax study panel created by President Bush may well recommend one or both of these as alternatives to the existing income tax, which exempts too much wealth and perplexes too many of the taxpayers who dragged themselves to post offices Friday night.

All this, plus the debate over the future of Social Security, comes as the Bureau of Labor Statistics reports that real wages — wages compared with inflation — are declining. And the disparity in wealth between rich and poor in the United States continues to widen.

Some real interesting debates lie ahead over what the Wall Street Journal disparages as Paris Hiltonomics. But, please, can we keep her out of it? The last place we want Paris Hilton is Washington, D.C.