by Bruce Fenton

An oxymoron—politics and principle—will clash when the Congress begins the full debate over President Bush’s proposal to eliminate the estate tax. Certain staunch, card-carrying Republicans who never met a tax cut they didn’t like are standing in line to fight this one.

President Bush has made repealing gift and estate taxes a centerpiece of his tax cut plan. Proponents and opponents of the repeal agree that, as proposed, it would save the wealthiest 2 percent of Americans about $236 billion over the next decade.

Estate tax lawyers and other experts are concerned that unless Congress writes conditions into the legislation, taxpayers will not realize the savings advertised, and certain government treasuries will be adversely affected

Not just the federal Treasury, but also the District of Columbia and the 43 states with their own income taxes, would lose far more revenue than they might anticipate, these experts said. They also said charities could feel the effects, since certain tax incentives for gifting would be eliminated.

The Unified Gift and Estate Tax codes assess taxes on transfers of property that exceed a one-time amount of $675,000, whether the transfers occur during a lifetime or upon death. Amounts above this threshold are taxed at rates that begin at 37 percent and rise to 55 percent on amounts greater than $3 million.

According to a report recently in the NY Times, nearly 48,000 Americans, or 2 percent of all the Americans who die each year—ranging from small business owners and professionals to multibillionaire executives—pay estate taxes. Just 4,000 people who die each year leaving more than $5 million dollars or more pay nearly half the estate tax.

Last year President Bill Clinton vetoed a bill that also would have repealed the estate tax, but it would have limited the income-tax avoidance strategies that are possible under the Bush proposal.

The proposed Bush plan will allow property to be gifted and transferred at death, escaping all capital gains and transfer taxes. This will not only impact federal taxation, but will deny the many state treasuries of their share of transfer taxes collected under current law. (State transfer taxes are deductible from federal transfer taxes and therefore appear transparent on a tax return.)

Charitable giving will be adversely impacted since transfer from an estate to a charity is also tax deductible.

Finally, a clever spouse could transfer property into a trust, without triggering a gift tax, and effectively deny their spouse access to the property after dissolution of the marriage.

Those who will be vocal in pointing out the shortcomings of the Bush plan will be none other than the life insurance industry and many estate-planning attorneys. The Bush proposal will eliminate the need for large, expensive life insurance policies that are currently used to provide tax-free funds to an estate at death which eventually are used to satisfy tax obligations.

Estate planning attorneys who specialize in arranging property ownership to avoid transfer taxation will have to find another way to use their talents.

Both of these groups will go to great lengths to point out the shortfall of revenue that will impact state coffers. Both will point to the negative impact on charitable giving this bill would have. Both have much to lose if the tax cut as proposed becomes law.

Bruce Fenton is a financial consultant, a writer, and the president and founder of Atlantic Financial Inc. Bruce welcomes inquiries, comments, and questions. He can be reached by contacting The Fenton Report.