Schumer's Inheritance

This morning in the Dirksen Senate Office Building, the chairman of the Senate Finance Committee, Max Baucus of Montana, will convene a hearing on alternatives to the death tax. The newsworthiness of this lies in the fact that the Democratic Party of which Mr. Baucus is a member has long been an obstacle to Republican efforts to repeal this ghastly levy. An advisory on the hearing notes, "Chairman Baucus has long been in favor of repealing the estate tax, which can unfairly burden family businesses including ranchers and farmers in his home state of Montana and around the country."

One of the witnesses testifying at today's hearing will be a professor at New York University School of Law, Lily Batchelder. Ms. Batchelder, in a paper for the Brookings Institution's Hamilton Project (a link is at http://www.brookings.edu/papers/2007/06taxes_ batchelder.aspx), notes that the estate tax is scheduled to disappear in 2010 and reappear in 2011, "creating vast uncertainty and gruesome incentives for prospective heirs on the eve of 2011." The estate tax is scheduled to re-appear in 2011 at a 55% top marginal rate and an exclusion of $1 million, or, as we like to put it, well below the cost of an average apartment in Manhattan.

Ms. Batchelder proposes eliminating the estate tax and replacing it with an inheritance tax, at the rate of the income tax plus 15 percentage points, on heirs who receive more than $2.3 million. To the uninitiated an inheritance tax may sound an awful lot like a death tax or an estate tax, and it is, though Ms. Batchelder's paper points out some subtle yet significant differences. Ms. Batchelder also proposes a carry-over basis rather than the current stepped-up basis for inherited assets, thus reducing what she describes as "incentives for investors to hold onto underperforming assets purely for tax reasons as they near the end of life."

Also testifying at the hearing will be a law professor from the University of Toronto, David Duff, who in an article issued in 2005 in the Pittsburgh Tax Review on "The Abolition of Wealth Transfer Taxes: Lessons from Canada, Australia and New Zealand," wrote that "the political costs of these taxes tend to be much higher than those of broad-based income, consumption, or payroll taxes." He goes on to say that if wealth-transfer taxes such as the estate tax are to be maintained, "basic exemptions must exclude small and medium-sized estates and be regularly adjusted for increases in asset prices." Mr. Duff also suggests moving from an estate tax to an inheritance tax to demonstrate that "the tax is intended not to punish those who have succeeded in life or to compound the misery of death, but to regulate the distribution of wealth and opportunities among beneficiaries."

Neither Ms. Batchelder or Mr. Duff has what we'd call a growth-oriented or property-rights oriented approach to the issue, which would doubtless be more in evidence if the Republicans controlled the Senate. Even so, it's nice to see something from the Democrats on this issue other than a relentless campaign to, as Mr. Duff puts it, "punish those who have succeeded in life or to compound the misery of death." It's a moment to keep an eye on what contribution on the topic this morning is made by the member of the Finance Committee who represents New York, Senator Schumer.