I met my lobbyist friends at a restaurant on K Street, but maybe that creates a false impression. The restaurant was mostly empty and quite silent—hardly the K Street scene that became the stuff of an HBO television series. My friends were drinking decaffeinated coffee, so I joined them in that beverage.

They were Howard Segermark and Dick Patten, who work for the American Family Business Institute. Founded 15 years ago with the sole purpose of repealing the federal estate tax, it claims 1,900 members who own family companies. Patten is the president of the organization, and he has worked on estate and gift tax issues for years, both at the state and federal level. Segermark was formerly a staff assistant to Senator Jesse Helms of North Carolina.

The estate tax is triggered when someone dies, so it is often called the “death tax”—Patten and Segermark always refer to it that way. The sinister overtones of the phrase probably help their cause. The tax has been in existence continuously since 1916, although the rate has varied considerably. At one point in talking with the two, I referred to the “inheritance tax,” and Patten immediately corrected me. It is not the same thing. An inheritance tax is imposed (by some states) on the individual who inherits money or other assets, and it is based on what that particular person receives. But the estate tax is imposed on the estate, or pile of assets, of the person who dies. The heirs themselves aren’t taxed, but, of course, the amount they inherit is reduced by the effect of the tax on the estate itself.

Most Democrats don’t want the tax to disappear completely, and most legislators, whether Republican or Democratic, don’t want to see it spring back full-blown in 2011.

I asked Patten and Segermark if they could bring me up to date on recent estate-tax legislation. In 2001, after a great deal of lobbying and pressure, Congress enacted, and President Bush signed into law, a complicated reform of the estate tax. Its complexity was a response to rules that have made it harder to enact permanent tax cuts. In 2001, an estate worth $675,000 or less was exempt from the federal estate tax. Amounts over $675,000 were taxed at graduated rates that started at 18 percent, rose to 41 percent at $1 million, and crested at 55 percent above $3 million. Since 2001, the exempted amount has been gradually increased and the tax rate gradually reduced. Today, the top rate is 45 percent with an exemption of $2 million. In 2009, the exemption will increase to $3.5 million (the rate will remain unchanged). Then comes the strange part. In 2010, the death tax disappears entirely, but it reappears in 2011 with the top rate restored to 55 percent and the exemption set at $1 million.

Few believe that this down-and-up-again roller coaster will still be in place by 2010. Most Democrats don’t want the tax to disappear completely, and most legislators, whether Republican or Democratic, don’t want to see it spring back full-blown in 2011. The great struggle in recent years has been to repeal the death tax, but with the Democrats now controlling Congress, compromise seems much more likely than repeal. So the issue now seems to be, where will the compromise fall?

The strategy of the American Family Business Institute has been to hold out for full repeal. “If we succeed, we will also abolish our own jobs,” Segermark said. “But we would welcome that.” Current law, with its looming abolition and restoration, is concentrating minds all across Capitol Hill, and the supporters of repeal see that as working to their advantage. “It’s not something that we want to trade away lightly,” Patten said.

The most important recent contest between the advocates of repeal and reform took place on the Senate floor in June of last year. The House of Representatives had by then already voted for full repeal by the wide margin of 272 to 162. But in the Senate, 60 votes are needed to overcome the threat of a filibuster. The supporters of repeal could muster only 57.

Negotiations leading up to that second rejection suggested the outline of a possible compromise. It would have fully exempted estates valued at $5 million or less; estates from $5 million to $25 million would have been taxed at 15 percent, and those above $25 million at 30 percent.

Later, in early August 2006, a compromise measure was proposed and passed the House. Again, however, 60 Senate votes could not be found. So the tax survives and the roller coaster approaches. Still, the negotiations leading up to that second rejection suggested the outline of a possible compromise. It would have fully exempted estates valued at $5 million or less; estates from $5 million to $25 million would have been taxed at 15 percent, and those above $25 million at 30 percent.

Three months later, Democrats won both houses of Congress, so a repeal measure seems unlikely to make much headway in the Senate. At the same time, Democrats, in particular, want to rid themselves of responsibility for the approaching upheaval. So the issue will certainly be revisited.

“The Democrats would like to see the issue go away,” Dick Patten told me, as a waiter came by and refilled our coffee cups. “The Republicans can raise money on the issue.” He quoted Senator Chuck Grassley of Iowa, chairman of the Senate Finance Committee until last year’s election, as saying that the death tax is a “cash cow for the GOP.”

In a backhanded acknowledgment of this assertion, Senator Kent Conrad, a North Dakota Democrat, allowed that “a handful of wealthy families...have spent $200 million over the last several years,” much of it trying to get the tax repealed. The New York Times identified the Mars (candy), Gallo (wine), Wegman (supermarkets), Dorrance (Campbell soup), and Walton (Wal-Mart) families as being among those supporting repeal.

At the showdown vote on June 7, 2006, when the Senate was three votes short of repeal, both Patten and Segermark were in the gallery observing the proceedings as the Democratic leadership pressured key members to oppose repeal. “At the last minute, Senator Mary Landrieu’s vote was reversed to ‘no’ with heavy arm-twisting on the Senate floor by Senators Harry Reid and Byron Dorgan,” Patten said, describing dynamics among Democrats.

“Senator Maria Cantwell was in the balance between ‘yes’ and ‘no’ and was pulled to the ‘no’ side by her leadership. We also found out that Senator Mark Pryor of Arkansas reversed his vote to a ‘no’ about 24 hours before the roll call.”

Senator Lincoln Chafee, a Rhode Island Republican who was defeated in his reelection bid in 2006, voted “no” despite a commitment to vote “yes.” Senator Tim Johnson, a South Dakota Democrat who has since suffered a brain hemorrhage and has been absent from the Senate throughout 2007, was another who voted against the bill. “The only time he voted in favor of repeal was in 2002 when he was running for reelection,” Patten said.

Then there is Senator Max Baucus, a Democrat from Montana, where sentiment runs high against the death tax. He did vote for repeal, but reluctantly and against the wishes of his party. After last November’s election, he became chairman of the Senate Finance Committee, so he is a key player today.

Senators Baucus, Landrieu, Pryor, and Johnson are all up for reelection next year. Johnson may not run and, if he doesn’t, the Democratic candidate may well turn out to be the state’s at-large representative, Stephanie Herseth Sandlin, whose grandfather was once governor of the state. In the House of Representatives last year, she voted against repeal of the death tax. But if the Democrats really want the issue to go away, I asked, why did their leadership arm-twist Mary Landrieu and others? They could have quietly accepted repeal and taken the death tax off the table as a fundraiser for the GOP.

“Because they didn’t want to give President Bush a victory on the issue,” Segermark said. “And they didn’t want to give Senator Frist a victory either,” Patten added, speaking of the former Senate majority leader.

Most of the arguments for or against the estate tax were brought up in the course of the Senate debate last year. One argument in favor—made by Warren Buffett, the chief executive of Berkshire Hathaway Inc., who, according to Forbes, has more than $50 billion in net worth—is that it prevents wealth being concentrated in the hands of a few families.

But the most prominent advocate of preserving the estate tax has been William H. Gates Sr., whose son, Bill Gates, cofounder of Microsoft, is worth $56 billion. In his book Wealth and Our Commonwealth: Why America Should Tax Accumulated Fortunes, written with Chuck Collins, Gates Sr. argues that “preserving our federal estate tax plays a critical role in limiting the concentration of wealth in our country.” There is a double irony here. First, of course, his son’s phenomenal business success owed nothing to his father. Bill Gates and Paul Allen started out, essentially without capital, by developing primitive software and selling it. Nor was Gates’s Harvard education the route to his success, since he dropped out without a degree.

Dick Patten himself lived in Washington state in 1981, at a time when Microsoft had 70 employees, and he knew Gates Sr. at that time as a tax-planning attorney. Patten helped get the state’s inheritance and gift tax repealed in that year, and he has been working on the repeal or reduction of family taxes ever since.

Senator Jon Kyl of Arizona led the floor debate in favor of repeal of the tax and is the dominant Republican senatorial voice on the issue today. On the subject of wealth concentration, he said, “If there is any nation [in which] you don’t have to worry about that, it is the United States of America.”

The second and greater irony is that the death tax itself works to concentrate wealth—in corporate hands. The argument was made forcefully by a timber farmer in southern Arkansas named John Ed Anthony, whom I recently interviewed. His family company, Anthony Timberlands, has just reached its 100th anniversary, and he has been president of the company for 46 years. Anthony, who is now 70 years old, inherited it when his father died at the age of 48 in 1961, at a time when real estate with timber on it was far less valuable—worth about $100 an acre as opposed to $3,000 to $5,000 today.

“In industries such as ours, you accumulate the unimproved timberland and nurture it for decades, and then at death the government comes in and values that land and confiscates half of it in taxes,” Anthony said. What is taxed is not the profit, he emphasized, but the full value of the land and the timber. In December 2003, he wrote to his senator, Mark Pryor, explaining his own situation in these words:

“The question is whether our government wants substantial private companies to exist. A $3 million to $5 million exemption for a substantial company is insignificant in today’s economy. Any one of our [three] family mills would cost $40 to $50 million to replace. A timberland base held in family hands to supply the mills can have $100 million to $200 million in value.

“The exemptions offer no chance for such a private company to survive. Only the public corporation can survive. As the law now stands, our company would be forced to come up with $100+ million in cash to pay the death tax at my death and this could only be raised by the sale of the asset to such a public company.”

No business can survive “when 50 percent of its assets—not its profits but its assets, which were created after paying a full load of federal and state taxes—are confiscated at the death of the patriarch,” he told me. So the family sells to the corporation, “which never dies and never pays the tax.” As a result, he added, the bulk of the timberland in America is now owned by Weyerhaeuser or Plum Creek or some other large corporation. “The ever-living corporations end up owning all of the assets of the rural communities.”

No business can survive 'when 50 percent of its assets—not its profits but its assets, which were created after paying a full load of federal and state taxes—are confiscated at the death of the patriarch,' he told me. So the family sells to the corporation, 'which never dies and never pays the tax.'

When that happens, “the capital flows to New York or Chicago or Tacoma, Washington,” and the community is deprived of its previous leadership. The once active and vibrant community “dissolves into a blue-collar town.” This has happened all over rural America, he said. The old family owners lived in the community, were on the school boards and city councils, were pillars of the church, and would raise their children in the local public schools. The capital stayed in the community. When he was starting out over 40 years ago, Anthony could name 17 prominent timber operations in south Arkansas, all privately owned. Now there are only two.

“The family company, in distress as a result of that 50 percent tax (or the 45 percent proposed reduction), is the feeding ground for the corporations,” Anthony went on. “All they have to do is let the little guy accumulate the assets and wait until he gets old. Then they buy it…. And the other side of that is: Why try? Why grow the forest when you know the government is going to harvest it?”

This was precisely the basis for the late Milton Friedman’s opposition to the death tax. In a letter to Congress, co-signed by 278 economists, he wrote: “Spend your money on riotous living—no tax. Leave your money to your children—the tax collector gets paid first….The basic argument against the estate tax is moral. It taxes virtue—living frugally and accumulating wealth. It discourages saving and asset accumulation and encourages wasteful spending.”

When Anthony brought his complaint to his other senator, Blanche Lincoln, a Democrat, she immediately agreed. She “votes for repeal every time—one of the few Democrats who [does],” says Anthony. Mark Pryor is a different case. “When I go to him saying, ‘You’re going to cause three mills employing a thousand people in your state to be closed if you don’t help us repeal this thing,’ Pryor says, smiling back: ‘The government needs the money. We need the money.’ Without regard to what that is going to do to the community where they confiscate the money.”

The case that the government needs the money is a mainstay of the supporters of the tax. At the time of the vote last June, opponents said that full repeal would cost the Treasury $650 billion over ten years. On the other hand, the Tax Foundation, a nonprofit research group in Washington, says that the tax costs as much to comply with and administer as it raises. Others say that eliminating the tax would raise a great deal more revenue in other ways.

The problem here is that in recent years, despite their control of both houses of Congress, the Republicans failed to make an aggressive attempt to get the Joint Committee on Taxation to use what is called “dynamic scoring” in budget estimates. According to the “static revenue” method that prevails, it is assumed that economic choices throughout the economy are unaffected when tax rates are raised or lowered. This is like assuming that if a company sells hamburgers for $20 and then reduces the price to $10, it will sell the same number of hamburgers.

After all, the professors add, 'in a democracy such as ours, where vast inequalities of income and wealth coexist with universal suffrage, shouldn’t the poor be able to soak the rich?'

One argument used by supporters of the tax is that those exposed to it can buy life insurance as a form of protection. The insurance proceeds can soften the tax blow. For that reason, in fact, the insurance industry strongly favors the tax. The problem is that “the cost of insurance over a lifetime is a fortune in itself,” Anthony told me, “money that could have been spent improving and modernizing the plants as well as [providing] more benefits for the employees.” Raymond J. Keating, chief economist for the Small Business and Entrepreneurship Council, says that “buying insurance to cover the cost of taxation is a clear indication of a tax system gone awry.”

At a recent luncheon in the Rayburn House Office Building, a speaker presented a slightly different perspective on the issue. Gary McCall, a fourth-generation Iowa farmer, addressed a group of about 90 congressional staffers in a small room off one of those marbled corridors. Mr. McCall farms almost 2,000 acres in Ute, Iowa, where he grows corn and soybeans and raises cattle.

“We may be asset-rich but we are cash-flow poor,” he said. Margins are narrow, and his tax lawyer recently told him that his estate had grown in value—ethanol subsidies have caused land values to soar, so the tax exemption may not be sufficient to save his heirs from the tax. The scheduled decline of that exemption in 2011 concentrates his mind further. If he were to die, “suddenly you find there’s a new partner in the operation, and that is Uncle Sam.” Some of his land would have to be sold.

He mentioned no names, but he warned of a family with ties to a large meat-processing corporation that has been buying up acres sold off to pay taxes. “If that trend continues, and you have combined harvest operations that move in and out, I don’t think we’re going to have a lot of people left in these rural communities.” He appealed to the congressional staffers: “You have the knowledge to put together a bill...that will allow my son to carry on my legacy...and my father’s legacy.”

The point that emerged from his remarks was that the death tax weighs on many more people than actually pay it. McCall’s holdings are smaller than Anthony’s, and it is possible that if the tax exemption is increased to the level approved in the House compromise last year, he may not have to sell land if he dies. As it stands, however, the tax weighs on his mind, to the extent that he was willing to go to Washington to talk to congressional staffers for ten minutes.

The Heritage Foundation’s top government data analyst, William Beach, made a few remarks after McCall spoke, pointing out that The New York Times seems not to have grasped that the effect of a tax is far more widespread than might appear from counting those who pay it. Beach referred to an article the newspaper ran a few years ago saying the American Farm Bureau Federation couldn’t find a single instance of a farmer losing his estate to the death tax. Yet only two weeks earlier the Senate Agriculture Committee had held a hearing about the impact of the tax on rural America and “the witnesses that came to town filled the hearing room and were lined up outside.” Sixty of them were slated to address the committee, but there was time for only a few.

This point about the tax was not fully appreciated by Yale professors Michael J. Graetz and Ian Shapiro, whose book Death by a Thousand Cuts: The Fight Over Taxing Inherited Wealth was published in 2005. They tell their story, perhaps for rhetorical effect, as though a great mystery needs to be unraveled: How come the opponents of a tax, paid by only a small percentage of the population, and those among the richest, managed to garner enough political support to repeal the tax (if only temporarily)? The book is partly journalistic, avoids academic jargon, and is more readable than most policy books. But the authors seem quite genuinely to be encountering anti-tax arguments for the first time in their lives.

They present the “nagging mystery” that even “unanticipated Democratic support for repeal” emerged on Capitol Hill, and emerged repeatedly. After all, the professors add, “in a democracy such as ours, where vast inequalities of income and wealth coexist with universal suffrage, shouldn’t the poor be able to soak the rich?”

Perhaps they should have given more weight to the two arguments that resonate most strongly, according to polls, with those of all income levels who oppose the tax: first, it is simply unfair to tax the income someone earns during his working years and then once again tax, at his death, what he’s saved and invested; and second, in America, people who aren’t yet rich think they have a shot at becoming that way.

There are moral arguments on both sides. Segermark told me he had lately been reading the influential book by the late Harvard philosopher John Rawls, A Theory of Justice (1971), which comes up from time to time in death-tax debates. Rawls regarded any innate or inherited advantage as unjust because it is unmerited. Patten has been a close observer at half a dozen showdowns in Congress and has noticed that when death-tax repeal is approaching a vote there are always legislative aides in the closing huddles who, when economic arguments fail, fall back on the claim that inequality is unjust.

When I interviewed Grover Norquist of Americans for Tax Reform, he said that the death tax is based on an appeal to envy and that he would like to see such appeals become as socially unacceptable as racial discrimination.

He quoted Senator Chuck Grassley of Iowa, chairman of the Senate Finance Committee until last year’s election, as saying that the death tax is a 'cash cow for the GOP.'

What are the prospects for compromise or repeal in the remainder of this Congress, which, after all, ends just two years before the witching hour on December 31, 2010? Representative Kenny Hulshof, a Republican of Missouri, has reintroduced a repeal measure in the House, but with his party in the minority, its chances of success are slim. In the Senate, Max Baucus hadn’t made a move by the August recess. The strongest Senate advocate of repeal is Arizona’s Jon Kyl, but he was preoccupied this summer by the immigration bill. “Despite the allegations, we have not unhooked our phones,” his press secretary Ryan Patmintra told me. Nonetheless, the death-tax issue continues to be “very important to Senator Kyl,” who is still hoping for “outright repeal.”

Any estimate of what a compromise will look like, in terms of dollar exemptions and tax rates, has to be guesswork, because those who have been holding out for full repeal, including the American Family Business Institute, do not want to tip their hand. In fact, they don’t want to concede that they are willing to compromise at all. They see the full repeal that will be upon us in 2010, however short-lived, as their ace in the hole. But in today’s political climate, compromise is far more likely than repeal.

Although many opponents of the death tax are holding out for a full repeal, in today's political climate, compromise is far more likely.

One plausible compromise figure—since it was debated in the Senate in 2006 and at that time had enough votes to pass but not to end a filibuster—is a full exemption for estates valued at $5 million or less. A graduated rate, perhaps ranging from 15 percent to 30 percent, would be applied to estates worth more. As the 2008 election approaches, Democrats might well go for that or for some approximation of this scheme. For one thing, it would get the issue off the table for all but the wealthiest Americans. The Republicans, for their part, would be disinclined to be as confrontational as they have been in the past. Holding out for full repeal at that stage just might give the appearance of pandering to the Paris Hilton vote.

Tom Bethell wrote about the microcredit phenomenon in the May/June issue of The American. He is the author of four books.

Image credit: illustration by Chris Murphy.