After September 11th, cash flowed into the coffers of assisting charities. But it has been gushing out of the federal treasury.
In the seven weeks after the attack, Congress has approved measures to bail out the airlines ($5 billion), aid the reconstruction of New York and the Pentagon ($20 billion), and to support increased homeland security and war-related efforts ($20 billion). Still to come are new investments in public health and security infrastructure, aid for the insurance industry, and a likely stimulus package. In all, the tab could run well over $150 billion.
These demands come at a time when the national fiscal and economic situation is deteriorating rapidly. Next year, the government will have to dig deep into the Social Security and Medicare surpluses to fund operations. And as the heavily backloaded Bush tax cut is phased in, the resulting short-term deficits could force long-term interest rates up -- even as short-term rates decline.
Thus far, the vastly changed conditions have not caused Democrats or Republicans to reconsider the far-reaching tax cut they passed last spring. Quite the opposite. In response to the events, in fact, Republicans have been advocating everything from reducing the capital gains tax cuts to abolishing the corporate alternative minimum tax.
But the new war on terrorism should cause us to reconsider at least one element of the tax program: the reduction and eventual repeal of the estate tax. In fact, we should halt the plan to roll back and eventually eliminate the estate tax, and dedicate all funds raised by gift and estate taxes ($30 billion this year alone) to homeland security. Such an admittedly gimmicky move would be an effective symbolic and financial contribution to the war on terrorism. But it would also be perfectly in keeping with the historic origins of the tax. And while it may not be the smartest tax or fiscal policy, it is smart politics. Doing so could provide an effective lever to open up debate on restructuring the misguided long-term Bush tax cut plan.
For most of American history, estate taxes have been closely associated with efforts to improve the national balance sheet in a time of military crisis. In 1797, when a blockade by the French navy threatened to snuff out trans-Atlantic trade, Congress passed the Stamp Act of 1797, which required citizens to purchase federal stamps on wills and estate. This first estate tax -- nobody called it a death tax back then -- raised funds to improve our navy. Once the French threat subsided, the tax was repealed in 1802.
Congress enacted the first direct tax on inheritances during the Civil War. Starting in 1862, blood relatives -- other than spouses -- receiving bequests of greater than $1,000 had to pay a .75 percent tax. The levy rose to 5 percent on bequests to distant relatives or strangers. In 1864, the top rate was raised to 6 percent. Five years after Robert E. Lee surrendered at Appomattox, the entire tax was repealed.
A generation later, the U.S. sprung into a war after a symbol of its might -- the Maine -- was destroyed. To fund the Spanish-American War, Congress passed the War Revenue Act of 1898, which imposed taxes on estates and gifts. After a $10,000 exemption, recipients paid rates rising from .74 percent up to 15 percent on estates over $1 million. The tax was repealed in 1902.
In 1916, as the nation was gearing up for World War I, the Revenue Act of 1916 levied taxes ranging from 1 percent -- after a $50,000 exemption -- up to 10 percent for estates valued at over $5 million. The following year, the top rate was boosted to 25 percent on estates above $10 million. In 1926, with the War to End All Wars a fading memory, the estate tax was lowered -- but not entirely eliminated.
The next national crisis was not military but economic. And during the New Deal, Franklin D. Roosevelt repeatedly raised the estate tax to fund efforts to combat the Great Depression.
After World War II, in a marked contrast from previous war-to-peace transitions, estate taxes were not repealed. Throughout the Cold War, the revenues collected from such highly progressive taxes helped fund a state of permanent mobilization. For nearly 45 years, the nation expanded its infrastructure, boosted defense spending, and engaged in a series of military efforts aimed at containing the Soviet Union and its allies.
Given this history, and the imperatives of what will likely be a years-long war on terrorism, repealing the estate tax seems remarkably wrongheaded -- especially now that we're strapped for cash to fund our new national defense priorities.
Estate and gift taxes were expected to bring in about $30 billion in Fiscal 2001. That's a tiny sliver of national revenues -- about 1.5 percent -- but still a significant chunk of change.
However, the federal take from the estate tax is slated to decline dramatically in coming years. Office of Management and Budget projections from earlier this year suggested that phasing in the increased exemptions and gradual reduction on estate taxes would result in $6 billion less for the Treasury in 2002, and $10.57 billion less in 2003. The figure rises to nearly $58 billion in 2011. The estate tax reduction will cost the government $60.18 billion between 2002 and 2006, and some $266.6 billion between now and 2011.
So here's the plan. Halt the estate tax reduction in its tracks. Let the amount of exemptions rise with the rate of inflation. Dedicate all revenues raised from estate and gift taxes to homeland defense, or to national security. Call it a trust fund, or a lockbox, or a budget item, but ensure that those revenues are used for that purpose -- and that purpose alone. Voila! Domestic security chief Tom Ridge would instantly have a $30 billion annual budget.
Naturally, supply-siders and their confreres will oppose such a plan. One can already anticipate the cries from Steve Forbes and economist Lawrence Kudlow about class warfare.
But if television commentator Bill Maher should watch what he says, so should those who toss about newly loaded terms like class warfare. Such analogies -- lame in the first place -- are even lamer now that we are in a real war. Besides, just as they did in the Gulf War and the Vietnam War, the people whom the estate tax affects will largely exempt themselves from front-line service in this military effort.
That's unfortunate. For the Blackhawks and A-130s hovering over Kandahar aren't merely defending the Constitution. They are defending our way of life, which has commercial freedom at its core. The United States has proven to be the world's most fertile climate for wealth creation. And whenever we go to war, we are also defending a system that protects intellectual property and promotes competition, a tax code that allows for the rapid accumulation of vast fortunes, and capital markets that are the envy of the world.
The U.S. government has contributed significantly to the climate in which entrepreneurship and business thrive -- whether by granting millions of acres of land for the construction of railroads in the 19th century, or backing the research that led to the creation of the Internet in the 20th. So in this time of fiscal, national, and military crisis, it is only fitting that those who have benefited most from the American system be asked to continue to fund its protection.
