At the 12th hour, not even the 11th, Congress passed and the President signed HR8, the Taxpayer Relief Act that effectively raised the estate tax to a rate of 40% and kept the exemption level of $5 million but indexed it. Small business and farms are OK then, right? Not really.
Death is not an economic event. Death can occur at the worst possible moment for a private business, family farm or ranch. ASSET’s position has always been that if we must have an inheritance/estate tax, then make sure it is triggered by an economic event rather than a personal event.
We’re not trying to reduce the tax, or trying to eliminate the tax. Instead, we are tying it to an economic event so it gets paid when it makes sense to pay it.
There are many people who might want to take a rest from the challenges created by the estate tax mistakenly believing that the action just taken by Congress is a “cure all” when in fact a study based on the $5 million exemption by Professor Antony Davies in 2011 clearly stated that even “Increasing the estate tax exemption to $5 million will still leave multiple thousands of households hit with the tax, many of whom will be farmers and small and family business owners, the engines of job growth in America.” We need a new option.
When ASSET was first conceived the idea was to create a bridge that allowed for the capital gains on the sale of estate assets to pay the estate tax. The government requires a consistent revenue stream, so rather than just rely on the sale of assets at various times to trigger payment of the estate tax, ASSET developed a number of options as potential revenue sources until that moment. One option is a surcharge on high income taxpayers (those most likely to have an estate tax), that to be revenue neutral, must be phased out as the sale of estate assets brings in the traditional 1% of IRS revenue provided by the estate tax.
As ASSET evolved we explored other options as potential “pay fors” such as a phase out of tax preferences for taxpayers at the highest levels to generate the equivalent 1% of revenues traditionally provided by the estate tax to the IRS. Any option is better than requiring the immediate sale of a farm, ranch, or going concern to simply pay that tax because it could lead to layoffs and job losses.
With ASSET, the harm caused by the traditional method of collection stops immediately, yet the government maintains cash flow. It is a win/win. At the same time, people who would pay the transition charge/ASSET estate tax would in all likelihood save money, because of the enormous amount spent currently on tax avoidance strategies. An immediate drain on cash flow would cease.
But there is more good news from the fiscal cliff outcome. With the latest action by the 112th Congress, the Joint Committee on Taxation (JCT) has finally reduced the costs of replacing the revenue from the current estate tax collection method. Until the latest action, JCT required any projection of the costs of full repeal to generate $535+ billion in ten years. With the latest scoring, calculations can be made that the JCT estimates the revenue from the estate tax to be approximately 166 billion in ten years, or just under $17 billion annually. That’s a 69% reduction in projected revenues, making the transition costs of implementing ASSET that much more palatable to taxpayers.
Now is the time to move the ASSET plan forward, because without ASSET, the next debate is about raising the rate again. Let’s debate how the revenue is collected, not raising rates even higher.