June 29, 2006

How Buffett Could Help the U.S. Treasury with His Billions

by William Ahern

Warren Buffett’s huge gift-giving plan is making him the focal point of the nation’s estate tax debate. While announcing a multi-year gift of roughly $44 billion in stock to foundations run by his children and Bill Gates, Buffett has continued his campaign to prevent Congress from repealing the estate tax.

His reasons for favoring estate taxation usually include the undesirability of inherited wealth and the virtue of higher tax payments.

Let’s briefly examine how the end-of-life decisions by wealthy people would affect tax revenue if the estate tax were totally repealed. We’ll assume two possibilities: a wealthy person dies and leaves everything to charity, or he dies and leaves everything to his children.

At first glance, without an estate tax, it would seem that the tax collector wouldn’t care – either way, no big check will be arriving at the IRS or at the state revenue department. But the tax collector should care because it affects the government’s bottom line quite a bit.

If all the money goes to charity, that money is tax-exempt forever, and all the money earned by that money is tax-exempt, and most of the purchases made with that money will be exempt from sales tax.

But if that money passes to an heir, all those downstream revenues will be taxed. Returning quickly to Buffett, let’s say he changed his will and left $44 billion to his children personally, not to the foundations they run. And let’s say he died in 2010 when the estate tax is currently scheduled to be totally repealed. That $44 billion would escape estate taxation, but it would generate a lot of taxable income for his children.

If $44 billion were invested in 2011 and generated a 7% return, that’s over $3 billion in income. Most of it would be taxed at the top rate, which is scheduled to be 39.6% in 2011. That’s well over a billion dollars in tax revenue every year. Within 20 years, if that huge fortune stayed in private, taxable hands, it would generate more income tax revenue than even the world's second-highest estate tax (U.S.) could collect.

See the paper on the curious revenue-losing aspects of estate taxation by Tax Foundation's former executive director and chief economist, J.D. Foster, Ph.D.