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President Clinton threatened this summer to veto HR 8, the Republican sponsored bill to repeal the Federal Estate Tax. (The bill was passed on July 14th, but not submitted to the President until Congress resumed in September.) According to some, the President's veto action will 'doom small business owners and farmers', casting our economy and all those nice people into the blackest of financial ignominy. Well, just maybe Bill Clinton was right. Unfortunately Governor Bush has come down strongly for the repeal of Federal Estate Tax ('for the small businessman') and Vice President Gore is taking the opposite position ('for everyone who is not a multi-millionaire.') Wonder which group represents the most votes come election day? The bill, as submitted to the President for signature, was a lousy piece of draftsmanship. It replaced one tax (the federal combined estate and gift tax) with another (the loss of step up in basis of appreciated property at death). One is very measurable. The other is hideously complex. One of the architects of the bill was Congressman Bill Archer (R-Texas) who stated, "The death tax should be repealed for one reason, which is simply that Americans should not be taxed when they die. That is wrong." Well, perhaps the good Congressman is wrong - and the President is right! Why is it wrong to tax the accumulations of the wealthy, but right to tax the earnings of moderate-income persons with family responsibilities? (That's our much beloved income tax.) Why is it wrong to tax the inflation-driven assets of the wealthy after they pass away, but right to assess a sales tax on nearly every dollar spent by most families, even those on public support programs? (Nearly every jurisdiction has heavy sales taxes imposed on all citizens, regardless of their financial status.) Why is it wrong to tax the inflated estates of the dot com billionaires when we levy a 15 percent tax on the wages of every working person in this country, regardless of how many full or part time jobs they hold? (That's the widely accepted FICA Social Security tax.) Why is it wrong to tax the wealthy, but right to levy horrendous taxes on the gasoline needed by wage earners to get to the jobs necessary to support their economy? (Federal and state gasoline taxes exceed the cost of manufacture and delivery of the gasoline itself.) How many taxpayers can maintain the records of cost basis adjustments for decades and generations that would be required if the estate tax were replaced by the capital gains tax on the step-up in basis from acquisition? Certainly we should have rate reform of a system that has an effective starting tax bracket of 37%. The starting rate should be much lower (say 10% to 15% and the ceiling rate lowered to perhaps 20% to 25%). But, total repeal of federal estate taxes is wrong. Certainly we should continue a reasonable indexing of the starting point with which estates are taxed. However, this should be communicated in a simple fashion so that persons can effectively plan for it. For example, why not take the ceiling that will soon reach $1,000,000 and move it forward thereafter at a rate of 4%, which is not too far out of phase with the average long-term rate of inflation? Then the legislators can quit tinkering with the structure, and all financial advisors, accountants, attorneys and trust companies can guide their clients. Certainly we should provide some reasonable treatment for qualified plan proceeds that have not yet been taxed for income tax purposes, so that the combined tax is both fair and predictable. Remember, this is only a factor if the estate exceeds the $1,000,000 (adjusted) limit. It is wrong for very wealthy families to perpetuate future generations of idle rich, without making some contribution to the country that has provided economic opportunity and physical security. It is wrong to promote a generational record-keeping nightmare. It is wrong to replace one tax (estate) with another (capital gains) that will have a devastating affect on the tax-incented charitable giving. Most Americans have greater confidence in the spending effectiveness of non-profit institutions than they do in government spending. What will be the starting level of the capital gains tax? Will it be further reduced? Will it be increased? Will the rates be changed? No one really knows, because this is another aspect of our lives that the Congress likes to tinker with constantly. Let's advocate some type of long-term stability and reasonable estate and gift tax! And furthermore, let me say to Congressman Archer and his many associates, it is a dangerously wrong move for the Republican Party to become aligned with a 'benefit the wealthy proposition.' Most of these well-to-do retirees, farmers and business owners will already vote Republican. What you are risking are generations of votes for Democrats by the 97% of the population unaffected but still irritated by Estate Tax Repeal. As fiscal conservatives, most financial advisors resent excessive government taxation and spending. But HR8 is bad legislation. Bad drafting and bad concepts. But it is also bad politics for the Republican Party. Jane Bryant Quinn recently wrote an excellent article on this topic. I'm not one of her fans ã but on this issue she is right - = and she has also caught the feelings of the public on this issue. She realized that the primary beneficiaries of the repeal of federal estate tax are second, third and fourth generations that have not earned anything. What this country needs is a new bill that is fiscally responsible and socially acceptable, containing the following provisions:
For example:
This would produce
taxation of an estate with no surviving spouse for a death occurring in year 2011:
Many estate planning techniques would still be available:
Ed Morrow is the author of Computerizing your Financial Planning Practice, the Complete Millennium Preparation Guide for Financial Advisors . He is also developer of the Text Library System used by 3,000 planning firms. He is a frequent speaker on practice management and technology to such organizations as the IAFP, ICFP, MDRT, IARFC and Society of Financial Service Professionals. For further information you may contact him at Financial Planning Consultants, Financial Planning Building, Box 42430, Middletown, OH 45042-0430, phone 800-666-1656 or email to: edm@financialsoftware.com |
