Late last summer, Republicans confronted the Clinton administration with a bill to repeal the estate and gift tax. President Clinton vowed to veto the measure, which the White House called too expensive and a targeted tax break for only the richest Americans. On Aug. 31, he followed through on the threat.

There were plenty of theatrics as 97-year-old Sen. Strom Thurmond, R-S.C., signed the bill at a special Capitol Hill ceremony. It was then taken to the White House by Montana farmer Lynn Cornwell, who drove his tractor through downtown Washington to dramatize the impact of the estate tax on family farms and small businesses. The bill had passed 279-135 in the House and 59-39 in the Senate.

After years of posturing and partisan wrangling, real life had finally developed in efforts to repeal the federal estate tax. Bipartisan support for ending it caught leading Democrats off-guard and gave cause for concern to liberal interest groups and to some charities who depend upon estate tax planning to provide substantial portions of their funds. At the heart of this groundswell was a fundamental shift in the demographics of the class struggle implicitly underlying this debate.

It has been said that the new key to winning elections has become the wooing of an expanded "investor class" as prosperity, small business start-ups, and the growth of 401(k)s and individual retirement accounts has brought some 60% of Americans into direct or indirect participation in the financial markets. These investors are well on their way to building substantial nest eggs, and they resent the idea that money earned and eventually taxed as income will be hit once again as they try to pass it along to their children. Politicians of both parties are recognizing this and other investor-related issues as candidates vie to endorse expanded tax breaks for IRAs, plans to personalize social-security accounts with market investments, and debate capital gains and depreciation tax modifications.

Up until now, proponents of the estate tax have argued that the tax affects only 2% of Americans, but working Americans are spending a lot of time running computer projections showing their estimated assets after 10, 20 or 30 years of retirement-plan investing, coupled with real estate appreciation. Many of them are finding that they will well exceed the tax thresholds. The politics of class envy, which long has fueled some liberal campaigns, just isn't working anymore. Large numbers of voters are tilting to the well-to-do side of the scale.

Family businesses at risk

According to the Center for the Study of Taxation, 70% of family businesses fail to survive through the second generation, and 87% do not make it through the third generation. The Center cites the death tax as a major factor contributing to this problem. Nine out of 10 businesses that fail within three years of the founder's death attribute part of the reason to estate tax problems.

Since there is no actual sales transaction at death, the valuation of the business made by the IRS becomes arbitrary, often resulting in litigation and expensive attorney fees, as well as forcing liquidation of the business. Further, minority businesses are often the hardest hit. They often find it more difficult to afford expensive estate planning to avoid the tax.

Federal Reserve Chairman Alan Greenspan has cited the low savings rate in the United States as the key domestic economic policy problem in this country. The death tax creates a bias against savings and penalizes success, encouraging consumption of assets. The economic activity it encourages is generally economically useless accountants' and lawyers' efforts.

U.S. Rep Chris Cox, R-Calif., points out that the death tax is extremely costly to administer. The transfer tax provisions take up about one-third of the Internal Revenue Code and an additional 300 pages of regulations issued by the IRS. Because of its complexity, the IRS must maintain separate units in its field offices to deal with it. There are more than 10,000 pending court cases to resolve disputes. Since the tax stifles economic growth, it reduces receipts from income taxes and hurts state and local tax revenues.

The Heritage Foundation predicts that estate and gift tax repeal would produce an average $11 billion per year in extra output and create 145,000 new jobs. It predicts that the additional revenue would more than offset revenue realized presently from the estate tax.

The result of these arguments was seen in a decision by the House leadership to move the estate tax repeal bill this past summer. The proposal would have phased out the tax between 2001 and 2009 with rates declining and exemptions rising over the period. The Senate followed with a similar version. The bill, promoted by Republicans, would have reduced federal revenue by more than $50 billion per year.

President Clinton and Democrats in Congress objected to the proposal but jumped on the bandwagon with an alternative plan to raise the exemption to $34 million, which would have exempted 90% of all estate tax payers. While the Republican bill did not distinguish between assets held in farms and small businesses and cash asset transfers, the Democrats' proposal targeted immediate relief for business asset transfers.

With the new Congress and president, it seems the only question faced this year will be when and how much estate-tax relief will be enacted. It may be included in a broader tax cut proposal or set forth in a separate death-tax bill.

The current estate tax is levied on all assets a person accumulates during life. The money has already been taxed when earned through income tax. It may have been taxed again with investment penalty taxes, state and municipal taxes and many other levies. Originally three taxes, they were unified in 1981. There is a tax on transfers at death, gifts during life and on skipped generations under certain estate plans. The rates go as high as 55%.

The estate tax is currently levied against everything you own when you die, though it can be deferred until your spouse's death. The first $675,000 of the estate is exempt as a result of the part of the Taxpayer Relief Act of 1997, which provided the first increases in exemptions since 1981. Inflation had badly eroded the value of this exemption. For example, the current value of $600,000 exemption in 1981 dollars is only $377,000. The 1997 law will gradually raise this to $1 million by 2006. Using the same rates, the gift tax allows exempted gifts of up to $10,000 per year per recipient.

Among the provisions that might be included in an omnibus package would be an initiative reducing depreciation of leasehold improvements from 39 years to 10 years. This currently has 17 bipartisan cosponsors in the Senate and 143 co-sponsors in the House.

With the Federal Budget Office announcing projections showing an added $1 trillion in projected surpluses over 10 years, additional fuel is added to the arguments that the national debt can be significantly reduced while still providing significant tax cuts.

The first and most logical step in the assault on excessive taxation rightfully should be the estate tax. It composes only about 1.5% of all taxes collected, and it costs the government 65 cents for every dollar collected. The death tax puts a price on those virtues we want to encourage. Work hard all your life, be responsible, sacrifice, take a few risks ... and when you die you can give it to the government.

Is this the American dream we brag about to the world?