In America, when a product is faulty, there is a recall. The same should be said for malfunctioning provisions of the tax code. America needs an estate tax recall.
The current tax favors the wealthiest taxpayers, with assets in cash or overseas, while the less sophisticated taxpayers, many with employees here in America, have their businesses devastated. Loopholes allow the wealthiest taxpayers to pay nothing. It costs more in compliance and collection expense than it produces in revenue. It forces private businesses to close, destroying jobs and private capital.
A recent study by Professor Antony Davies at Duquesne University estimates that 170,000 households will be susceptible to the estate tax in 2011. In addition, 22,000 farms, 14,000 real estate partnerships and 29,000 private businesses — “where the jobs are” — also will be affected.
A solution to this “tax malfunction” has been debated for decades and yet it persists. Even today’s 35 percent is too much cash value to take out of a business without closing it, and the tax increases to 55 percent in 20 short months.
There are two main reasons for debate: Proponents believe accumulated wealth should not pass to heirs untaxed. Opponents believe capital gains taxes on estate assets, at carryover bases, would produce more than the historic 1.1 percent of all IRS revenue.
Americans Standing for the Simplification of the Estate Tax (ASSET) believe we have a redesign that can satisfy both sides.
For a limited time, apply a surcharge (less than 2 percent) to the adjusted gross income of taxpayers earning $1 million or more annually. It’s small because the entire target group pays. No loopholes, period. This completely replaces both the gift and estate tax revenue. In 2008, 323,000 Americans earned $1 million or more in AGI.
However, this would create a huge capital gains tax stream to the IRS from the sale of assets by these taxpayers’ heirs. To be revenue neutral, the IRS would reduce the surcharge as this revenue stream increases. The surcharge would be removed when the capital gains tax equals it. Additional capital gains revenue would go to the Treasury. Both sides get what they want.
We believe this will happen quickly because between 1985 and 2008, the top 1 percent of taxpayers earned over $21 trillion in AGI. Yet the estate tax added up to only 1.8 percent of that. Assets can be shielded, but the surcharge on AGI has no loopholes.
In addition, there is no reason to hide assets in elaborate estate tax strategies. Instead, they can continue to generate more economic activity, creating more jobs and building a stronger America.
These economic benefits would begin the day the law is signed. There will be no reason to sell assets at fire-sale prices just to pay a tax. No loss of jobs. No destruction of private capital. No auctions of family farms or ranches.
Small businesses that created most of the new jobs in America for the past 25 years would be saved from closing to pay the gift/estate tax — more revenue to the Treasury at much less collection expense to the IRS.
All this for less than 2 percent of AGI, on less than three-tenths of 1 percent of taxpayers. The ASSET method achieves all three principles of good tax policy: It is fair, simple and efficient. Recall completed, malfunctions corrected.
Jack Fitzgerald is CEO of Fitzgerald Auto Malls in Maryland, Pennsylvania and Florida, and founder of Americans Standing for Simplification of the Estate Tax.