‘Unfair’ Tax Places Burden on Heirs
Earlier this year, the House passed H.R. 8, the Death Tax Repeal Permanency Act of 2005. This bill, approved by a bipartisan 272-162 margin, would bury the death tax once and for all.
In 2001, Congress passed historic tax relief legislation that let all income taxpayers keep more of what they earn. This effort included a repeal of the federal death tax, a top tax priority for many small businesses and family farms. Thus, under current law, the death tax is gradually phased out between now and 2010. This is accomplished by increasing the amounts exempt from the tax — currently $1.5 million — while simultaneously reducing the top rate imposed by
the tax, which is currently 47 percent.
Unfortunately, the death tax does not stay dead and buried. As things stand now, it will rise from the grave in its pre-2001 form in 2011. This quirk in the law can be directly attributed to the Senate’s Byrd Rule, which applies to the consideration of reconciliation bills.
As a matter of basic fairness, we must permanently repeal the death tax. Death should not be a taxable event. If repeal was a good idea then, it remains a good idea today.
Repealing the death tax is good policy. For starters, the tax is fundamentally unfair. By its very structure, it punishes thrift and hard work. Conversely, the tax forces taxpayers to engage in a host of economically inefficient activities to avoid the punitive nature of the tax.
Consider these facts. Before 2001, the top death tax rate was 55 percent, with some taxpayers subject to a 60 percent marginal rate. Today, the top rate is 47 percent. From the standpoint of basic fairness, these are exorbitantly high rates of taxation to impose on a lifetime of work.
Not only does the death tax have a very real effect on taxpayers and their behavior, but it also has a negative impact on the economy. With a tax like the death tax, a family business or farm has no choice but to divert precious resources to plan financially for the potential impact of the tax. Money that could be used to expand a business or hire employees is instead used to lessen the bite of the death tax.
Supporters of retaining the death tax will claim that the redistribution of income promotes economic fairness and social responsibility. I disagree. Instead of rewarding savings and investment, the tax actually rewards those who spend lavishly and leave no ongoing business interests or assets to the next generation. A small-business owner that tries to pass a family operation to his or her children will face a higher death tax burden than a person who earned the same amount of money and spent it lavishly on expensive cars and jewelry.
The death tax’s incentive to allocate capital inefficiently hurts job creation and economic growth. The Heritage Foundation estimates that the tax costs the American economy 170,000 to 250,000 jobs annually. The Joint Economic Committee noted that the tax reduces the stock of capital in the economy by $497 billion, or 3.2 percent.
It is worthwhile to note that permanent repeal of the death tax will simplify tax law and facilitate long-term financial planning. Right now, it is almost impossible to plan with any real degree of certainty for the effects of the tax. Most glaring is the situation where if a person dies on Dec. 31, 2010, no death tax is imposed. Should they, however, die on January 1, 2011, their lifetime of work can be subject to marginal tax rates as high as 60 percent.
By making the death tax repeal permanent, we can give taxpayers the certainty needed to plan for retirement and avoid wide disparities in the application of tax law as a result of the day of one’s death.
Some with a vested interest in keeping the death tax on the books will cite statistics claiming that few taxpayers, including small businesses and family farms, actually pay the tax. This is not an accurate barometer of the burden imposed by the death tax. The very wealthy have an army of lawyers and accountants at their disposal to avoid the tax. And for a small business, every dollar that is diverted in estate planning is a dollar that is not available to invest in a business venture that creates jobs and opportunity. Those claiming that few taxpayers are impacted by the tax conveniently ignore the death tax’s highly inefficient nature.
But don’t take my word for it. Organizations representing the interests of small businesses and family farms — such as the National Federation of Independent Businesses and the American Farm Bureau — are vocal supporters of permanent and complete repeal of the death tax. Common sense dictates that these groups would not support this effort if it were not having a real impact on the economic well being of their membership.
I have some first-hand knowledge about the death tax. I grew up on a family farm in southeast Missouri. The money my parents earned from the farm supported our family and helped pay for my college education. After I left home and started my own career and family, the Hulshof farm in Bertrand, Mo., supported my parents.
Over the course of the past two and a half years, I have experienced the passing of both of my parents. I have sat across from our family accountant in a cold sweat as the value of our family farm was totaled on an old adding machine, knowing that our proud farm tradition was in jeopardy. Ours is a modest farm, and from my experience, I know that small businesses and family farms across this land are being negatively affected by the death tax.
As a matter of basic fairness, I hope the Senate is able to act on this vital issue in the near future and give small business and family farms a deserved respite from the punitive death tax.
Kenny Hulshof (R-Mo.) is chairman of the Republican Policy subcommittee on Social Security and tax reform.