A crisis of tax policy is expected at the end of this year, when a bundle of deferred decisions and bills all come due at once. Tax writers, while grappling with the federal deficit, must also confront a slew of scheduled tax rate increases, as the Bush tax cuts and the payroll tax cuts expire and temporary fixes end.
The House Ways & Means Subcommittee on Select Revenue is due to hold a hearing Friday on how to deal with all these tax provisions
The strangest one is probably the federal estate tax — which Congress voted to kill at the beginning of the century. Its persistence has burdened family-run enterprises and dampened job prospects in the most dynamic sectors of the U.S. economy.
I’ve been concerned about this tax for years. I’m in my 70’s and have 1,200 employees. Their livelihoods keep me up at night. My family’s estate tax liability would be so large that my heirs would have to sell the company that I have spent 46 years building. They would likely have to sell off the real estate and effectively dismantle operations.
To prevent this, I have bought substantial life insurance – with annual premiums of $684,000 in after-tax dollars. So my employees will have jobs and my company can continue after my death.
This current estate tax is bad policy. It is complicated, inefficient, unfair and damaging to the national economy. It consistently generates only 1.1 percent of total Internal Revenue Service revenues — though it imposes costs that vastly exceed the actual proceeds to the federal Treasury.
Several years ago, a group of us posed the question: Is there a better way to generate the revenue? Can’t lawmakers devise a way to collect taxes fairly and efficiently without hobbling private family-run enterprises like small businesses and farms?
Our group, Americans Standing for the Simplification of the Estate Tax, grew out of this discussion. We aim to reform the estate tax collection method in a pro-growth, equitable, revenue-neutral and bipartisan manner. Our coalition has held more than 100 meetings with policymakers over the past 18 months, seeking common ground for a legislative solution.
We are trying to simplify the estate tax, by changing the collection mechanism for the same population that should pay tax on their previously untaxed accumulated value in assets. Our proposal depends on a temporary “bridge” — to maintain revenue neutrality for the first few years. It would then eliminate the need for the bridge mechanism through a revenue windfall from capital gains taxes on estate assets when they are finally sold.
This proposal would replace the current estate and gift taxes, substituting a temporary combination of offsets that could include: (1) a small surcharge, about 1 percent, on individuals whose adjusted gross income in a given year exceeds $1 million; or (2) reduced deductibility of state and local taxes for individuals whose adjusted gross income exceeds $1 million, and/or (3) reduced tax exempt treatment of state and local government bond interest for these same people.
This blueprint is an economic win for all parties – including the high income taxpayers contributing to the offset. Most future tax bills would prove less costly than their current elaborate tax avoidance strategies.
The ASSET proposal eliminates the need for sheltering assets in unproductive trusts — whose sole rationale is avoiding estate taxes. It also ends the need to over-purchase life insurance – which diverts resources away from investment and job creation. Its legislative language would phase out the budgetary offsets over time if, as we believe, there is a capital gains tax windfall for the Treasury as these billions of dollars held in trusts are unlocked.
Ultimately, in eliminating the need to liquidate businesses because the owner has died, this proposal preserves thousands of critically needed jobs in U.S. small businesses, farms and other financial companies.
In addition, the economic activity created by unlocking assets from unproductive trusts should stimulate our economy – without needing an extra dollar from the Treasury.
We hope the Friday subcommittee hearing , as well was the recent House Small Business Committee hearing on the federal estate tax can reengage public debate on the estate tax — and lay the groundwork for a better tax policy.
This estate tax proposal could make a timely down payment on fundamental tax reform.
Jack Fitzgerald, the chairman of Fitzgerald Auto Mall, is the founder of Americans Standing for the Simplification of the Estate Tax.