The secret solution to the deficit; what the rich don't want you to know: a fair tax code would take more from the estates of the affluent.

• Author: Glastris, Paul

THE SECRET SOLUTION TO THE DEFICIT

Democrats have been congratulating themselves for out-maneuvering President Bush during this fall's budget battle with tax increases that "soak the rich." But while Rep. Dan Rostenkowski was capturing headlines with his plan to slap a tax surcharge on millionaires, he and Senator Lloyd Bentsen were quietly widening a loophole for those who earn their wealth the old-fashioned way: through inheritance. The two respected committee chairmen reopened an arcane loophole called the estate tax "freeze" that in effect allows private business owners to pass on large portions of their companies to their heirs without paying estate taxes. Total cost to the treasury: at least $775 million over five years. The Democrats taketh, the Democrats giveth away.

For whatever reason, estate taxes as a revenue raiser is an idea that now seems verboten, out of bounds, off the political agenda in Washington. This is folly. Even with the new budget accord, the federal debt, currently $3.2 trillion, will rise to at least $5 trillion by the end of the decade. It's tiresome to repeat the painfully obvious, but greater spending cuts and more taxes are going to be necessary soon. Why exempt wealthy inheritors from this burden?

Of course any kind of tax increase, if taken too far, can damage the economy, and conservatives will eagerly summon arguments against estate taxes that liberals must face squarely. Yet the $10 billion Americans pay in estate taxes annually represents only about 5 percent of the estimated $200 billion they bequeath each year, hardly a confiscatory sum. Moreover, of all revenue sources, estate taxes are among the least disruptive to the economy's productivity. In fact, higher estate taxes might even be good for economic growth, in ways that go beyond the obvious benefits of reducing the federal debt.

Trillions from heaven

This is a particularly opportune time to increase the estate tax, because inheritance in this country is entering a boom phase. Members of the World War II generation, people between the ages of 50 and 75, have done extraordinarily well for themselves. According to 1986 Federal Reserve data, Americans over 50 have a collective net worth of more than $8 trillion, not counting generous pensions and Social Security and Medicare benefits. Their great affluence provokes envy in their children and dwarfs what their parents accumulated. Thirty years ago, only the top 10 or 15 percent of older Americans had significant wealth to bequeath. Today, the upper quarter or third of older families are in that position.

Frugal habits learned during the Depression helped build this fortune, but simple good timing is the main explanation. The World War II generation entered the work force at the dawn of the famous postwar economic boom, when wages and salaries were rising. They bought homes when prices and mortgage rates were low. The affluent among them were also the main owners of stocks, private businesses, and other assets that soared in value during the eighties.

Despite this tremendous surge of wealth, the reigning wisdom on Capitol Hill is that higher estate taxes won't garner much extra revenue. The Congressional Budget Office (CBO), whose numbers Capitol Hill relies heavily on, projects at most $15 billion over five years in extra revenue from two key changes in the estate tax. That's not what Washington calls Real Money, or at least it's not seen as worth fighting for.

That $15 billion figure, however, is misleading. For complicated reasons, the real payoff from an estate tax change today won't begin flowing for 5 or 10 years. By the year 2000, say some federal economists, the...