One of the problems with taxing the rich is that they can afford to hire better tax lawyers to avoid taxes than the government can hire to get them paid. Although tax reformers constantly decry the use of tax loopholes by the rich, many of the most important are almost impossible to eliminate. That is because they are inherent in the nature of economic relationships and embedded in our legal system. This fact is nowhere more apparent than in the area of estate taxation.

A December 22 New York Times article shows just how elaborate estate tax avoidance has become. Among the exotic techniques described are these:

• A New Jersey couple gave their house to their 11 year-old daughter in return for living in the house tax-free for 25 years.

• Thus all of the appreciation of the house for the next 25 years will completely escape estate tax.

• Many investors are putting their assets into partnership with their children or giving them stock options.

• Again, much of the rise in value of the assets will escape estate tax on the parents' estate.

There is really no way of stopping these sorts of tax avoidance techniques without imposing costs on the economy far in excess of the lost tax revenue. For example, trusts are an effective estate tax avoidance tool, but they also serve an important purpose in protecting the legitimate assets of minors or those not competent to manage their own affairs. One cannot abolish trusts without destroying a socially useful financial management device. But as long as trusts exist they can be used to avoid estate taxes.

However, setting up an effective estate tax avoidance plan is often very complicated, requiring the best legal advice. And plans must often be implemented many years before one's death in order to work. Therefore, in practice, estate tax avoidance is most easily practiced by families that have been rich for some time. Those who make their own money may not even realize until too late that they have large taxable estates.

Thus it is not surprising that the effective tax rate on estates actually falls the larger the estate (see figure).

• Even though the top estate tax rate is 55 percent, the effective rate on estates larger than $20 million is just 12.6 percent.

• That is one-third lower than on estates between $10 and $20 million.

• Indeed, a majority of all estate tax revenue comes from estates under $5 million.

So instead of soaking the rich, it turns out that the estate tax is mainly paid by the slightly well-to-do.

Source: Bruce R. Bartlett, senior fellow, National Center for Policy Analysis, December 30, 1996.