The Estate Tax Problem:
Since 1960 it has produced only 1% of revenues to the IRS, yet it is overly complex and extremely unfair, has closed businesses and farms, and cost jobs.
Up to 22,000 Farms, 14,000 real estate partnerships, 29,000 privately held corporations and 170,000 total households will be susceptible to estate taxes in 2011 alone (Duquesne: Prof. Antony Davies). Most will avoid the tax with clever planning, the others will be forced to sell or liquidate to satisfy tax liabilities. But this costs jobs.
Analyzing estate tax returns produces data that conceals the magnitude of this problem and the negative effect on our economy. Who can take 35%, 45%, or 55% out of their farm or business and survive? Taxpayers will follow Professor Munnell’s[1] advice, hire “experts” like the super rich and pay nothing. But the business and jobs die.
The ASSET Solution
Change the collection method. Simply replace the estate tax which is imposed at death, with a tax on gains of estate assets. This tax on the gain in value would occur only when and if they are sold. The capital gains rate would be fair. Obviously it is best to keep businesses and farms in operation and keep people working, paying taxes etc. This will eliminate the need for wealthy taxpayers to hide assets in trusts to avoid estate taxes, as well as the need for the gift tax.
Assets would not be taxed at death, instead would pass to heirs at their original value (carryover basis). Taxes would be collected on these assets if and when they are sold. This provides for fair taxes on previously untaxed accumulated wealth. The IRS has assured us they can track estate assets.
Capital gains tax on estate assets will generate more revenue to the IRS than the current estate tax and is less complicated. (JEC 2006, 2012).
Anticipating a brief delay in tax revenues during a transition period, ASSET proposes a temporary annual transition charge or payfor by a phase out of certain deductions on high income taxpayers taxpayers earning $1 million or more. That is less than these taxpayers are paying now in life insurance, professional fees and other costs to prepare for the estate tax. As the JEC said, compliance costs are as great as the tax and all those costs are eliminated. Most of the taxpayers will save in cash expenditures from this approach. This will provide the Treasury 100% of the existing estate and gift tax revenue while the cash flows from taxes on estate assets increase and eventually exceed the transition charge or payfor.
To be revenue neutral, as the estate asset tax flow begins, the temporary annual transition charge on AGI/payfor will be reduced proportionately until it is completely eliminated. Only the tracking of assets for taxpayers with AGI of $1 million or more will remain. The additional revenue will go to the Treasury.
The results provide all the benefits of elimination, while assuring the estate tax revenues continue and indeed increase, which is completely consistent with the objectives of advocates both for and against the tax. The overall benefits to our economy would begin immediately the day this measure is signed into law.