There has been no zanier public policy in recent decades than the estate-tax cut passed by Congress last year as part of the larger Bush tax cut. Under the plan, the estate tax will be phased out gradually, reaching zero in 2010--and then be completely reinstated in 2011. Thus, we have the prospect of thousands of Arsenic and Old Lace scenarios in 2010--"Grandpa, eat these mushrooms and drink this funny-tasting wine"--followed by an equal number of Weekend at Bernie's scenarios--prop the corpse up in the corner and pretend she's still alive--the next year.

The reason for this ridiculous policy was politics--manipulating the numbers to reduce the projected long-term budget drain of big tax cuts. It is inevitable, and necessary, that the policy be adjusted. But Congress seems unable to find a consensus on what to do. The House passed permanent full repeal of estate taxes. The Senate last week refused to go along--but also rejected other alternatives, including setting a higher exemption level, and exempting family farms and small businesses.

This issue will have to be resolved and should be dealt with sooner rather than later. But Congress in general, and Republicans in particular, needs to step back from its political desires and think this issue through in a more cool-headed and rational way.

Few analysts doubt the wisdom of cutting estate taxes, even cutting them sharply. The estate tax isn't just for Rockefellers and Mellons anymore. Large numbers of middle-class baby boomers have accumulated enough assets, through 401(k)s and home ownership, to qualify for an estate-tax bite. And many middle-class small businesses are also within the estate-tax orbit.

There are thus good reasons, politically and substantively, to provide substantial estate-tax relief--raising the exemption over time to $4 million or more and reducing the maximum tax rate from 55 percent to 30 percent or less--and refocus the tax on the largest estates. But sensing a larger political victory at hand, Republicans in Congress and the White House have rejected proposals of this sort and aimed at the whole enchilada. On this issue, Republicans have brilliantly shifted the agenda, changing the lexicon from estate taxes to "death taxes," and focusing on the inherent unfairness of a family building a small business or family farm for a lifetime and facing its confiscation to pay those death taxes (despite the fact that existing exemptions put few if any small businesses or family farms at risk).

Ronald Reagan loved to say that often the right hand of his Republican Party didn't know what the far right hand was doing. That is the case with the call for the full repeal of the estate tax. Whether you call it "a thousand points of light" like President Bush's father, or "compassionate conservatism" like President Bush himself, the core conservative philosophy of the Bush GOP is centered on moving social policy from bureaucracy-led government to faith-based and philanthropic private organizations and initiatives. A dollar spent by a community organization or church on reducing poverty, promoting abstinence, encouraging adoption or treating drug addicts is far better and more effective than the same dollar spent by a government bureaucracy.

Government grants can help support such private activity to meet social goals. But the private philanthropic organizations that are the backbone of these actions rely first and foremost on charitable contributions through the generosity of individual Americans and their foundations. No other country can begin to do the same thing; Americans are far more generous than citizens of other countries. Surveys show that three-fourths of Americans contribute to charities, compared to fewer than half of Germans or French--and American donors give an average of nine times as much to the charities as their French counterparts.

That American generosity is expanding; a recent New York Times article was headlined, "The Newly Rich Are Fueling A New Era in Philanthropy." Models developed by Boston College researchers Paul Schervish and John Havens estimate that Americans will leave estates totaling between $40 trillion and $136 trillion over the next 50 years. Using the most conservative estimates of economic growth, they project at least $19 trillion of that going to charities, including $6 trillion over the next 20 years. Their projections, however, are based on assumptions of economic growth--not changes in estate-tax policy.

The Times used as an example of the new philanthropists Michael Zaleski, who left his investment partnership in 1997 and put a sizable share of his assets into a family foundation, with millions of dollars in gifts to Dartmouth College, the Council on Foreign Relations, the World Monuments Fund and others. But Zaleski himself says, "It's more tax-efficient to deal with these sudden increases in wealth by giving it away, although that's not the only reason people give."

No doubt, Americans give because we have a culture that encourages it. But tax incentives (or disincentives) play a significant role. Thousands of Americans who accrued impressive wealth in recent years have joined Zaleski in creating family foundations; the number of grant-making foundations has more than doubled since 1980, approaching 50,000. It may well be more efficient and effective to channel donations through a family foundation. But any trusts and estates lawyer will admit that the family foundation has become a core strategy for estate planning, enabling a wealthy individual or family to maintain control over assets and to employ family members while moving huge assets away from estate-tax liability.

Will philanthropists still give if there is no need to do estate-tax planning? Surely many will join in the plans of those such as Warren Buffett and Bill Gates, who have said flatly that they do no plan to leave billions to their children and other heirs. But many billionaires will wait to create their foundations, since maintaining full control over one's money will have no downside. Plans to create such foundations or fund them fully will more likely be contested by potential heirs. And many other wealthy people will change their plans when the tax incentives to give money away disappear. How much? Use as a reasonable estimate that one-third to one-half of the money targeted for philanthropy because of estate taxes will evaporate when the tax does; that means several trillion dollars lost to private charitable, faith-based and nonprofit organizations in the coming two decades, and up to $60 trillion or $70 trillion over the next 50 years. Will the federal government, scheduled to lose all the estate-tax revenue over that period, make up for the loss? Not a chance.

Dramatic reductions in the estate tax are good politics and good policy. Elimination of the estate tax may turn out to be good politics, especially if Republicans continue successfully to redefine it as a death tax. But it is bad and counterproductive policy. There are reasonable and prudent reforms that eliminate undue tax burdens without serious deleterious consequences. Let us hope Congress soon comes to that sensible conclusion.  

Norman J. Ornstein is a resident scholar at AEI.