Estate Tax

BACKGROUND
Not long after the income tax was officially established, World War I began. Tax revenues were predominantly brought in by tariffs, but because Europe was at war, imports and exports significantly decreased. Therefore, tariffs decreased. Congress needed a revenue source and turned to the idea of taxes, much like they had for the funding of previous wars. In 1916, the estate tax became permanent through the Revenue Act of 1916.

WHAT IS AN ESTATE TAX?
The estate is the total money and assets of a person. The estate tax is a tax against total property of a person when they die. Appraisers will determine the fair market value of the assets and interests (business investments, etc.) and come up with an overall value of the estate. The federal government then receives tax money before an heir receives the inheritance.

SUNSET PROVISION AND RESURRECTION
In 2001, President Bush signed an Act which would repeal the federal estate tax in 2010, but would resume in 2011 at its old rate of 55%. A footnote in President Obama’s 2010 budget reads: “The estate tax is maintained at its 2009 parameters.” The death tax, which should have fallen to 0% next year, will now leave estates larger than $3.5 million or $7 million for a couple taxable by up to 45% and will rise to 55% in 2011 with a $1 million exemption. The US House of Representatives passed HR 4154 on Thursday, December 3rd which permanently extends the estate tax. Similar legislation is pending in the US Senate, however, the health care debate has taken precedent over any issue.

IMPACT ON THE FAMILY BUSINESS, INCLUDING THE FAMILY FARM
For many family businesses, passing the business to descendants after death would be ideal. Unfortunately, 70% of family-run businesses do not make it to the second generation and 90% never make it to the third. In a survey conducted by Prince & Associates asking why family-owned firms fail, 98% said “the need to raise funds to pay estate taxes.” After death, the taxes that must be paid on a small family business can be so large that dissolution of the business or sale to a larger corporation for the purposes of paying those taxes is an option the family must consider. Similarly, for family farms—which are often asset rich and money poor—the largest asset is the land. Upon death and an assessment of the highest and best value of the land, the difficult choice of selling the family farm is on the table. Given a deadline for paying estate taxes and little liquidity, a family farm will easily disappear. Currently, only .23% of estates
are affected by the estate tax. However, in 2011 the first $1 million is not taxable, but anything after it is.

CONFISCATORY ELEMENT OF THE ESTATE TAX
When small business owners and small farmers decide to put their money, time, talent, effort and risk into beginning a small business or farm, they should not have to worry that almost half of the accumulation of their life’s work will later be confiscated by the federal government. When a person earns, saves, invests or spends money, they pay taxes. When that person dies, they should not be taxed on those assets again. This double taxation is morally wrong. Punishing success is far from how the Founding Fathers envisioned this nation.

OBLIGATION
Rep. Jared Polis, D-CO stated, “In America, it’s not a sin to be rich nor is it a crime to die rich.” He’s exactly right. A lifetime of success is not a sin and those who profited from investments should not die with a bill from the federal government for those successes. The rest of Rep. Polis’ statement on the subject, however, is of great concern. “This bill gives our nation’s wealthiest families the ability to know exactly what their obligation to the nation that fostered their wealth will be, and it is fair and it is just.” Rep. Polis has confused the nation with the federal government. The obligation he speaks of, in regard to an estate tax, is to the federal government. The federal government did not, and never will, foster one’s wealth. Risk, ingenuity, sound decision making, capital, time and effort on behalf of an individual are the foundations
for the development of one’s wealth. An individual should have the right to choose where their obligation lies—whether it’s with their family, a charitable organization or any other place. Taxing an individual’s estate is a punishment for saving, gathering and investing. It is far from fair or just.

ECONOMIC DAMAGE
Lawrence Summers, top White House Economic Advisor to President Obama, wrote in a 1980 report that “The evidence presented indicates that intergenerational transfers accounts for the vast majority of aggregate US capital formation.” In other words, passing money and assets through families grows the US economy. In an effort to reduce the tax burden an individual will ultimately bear upon death, many people bind up their assets in tax shelters, such as foundations. Rather than finding ways to protect their assets, a person could have easily invested that money in other business ventures or in other people in the form of jobs. A study by Dr. Douglas Holtz-Eakin shows that eliminating the death tax will create over 1.5 million
small business jobs. The total number of jobs that would be lost in 2011 (with a $1 million exemption and 55% rate) amounts to 500,000. In North Carolina, Dr. Holtz-Eakin and other state analysts, estimate that the number of jobs gained by the repeal would be 42,669 and the number of jobs lost with $1 million exemption and 55% rate would be 14,223.

WERE YOU PROPERLY REPRESENTED BY YOUR REPRESENTATIVE?
HR 4154: Bill to reinstate the estate tax in 2010
YEAS: Butterfield, Etheridge, Price, McIntyre, Kissell, Shuler, Watt, Miller
NAYS: Foxx, Coble, Myrick, McHenry

WILL YOU BE PROPERLY REPRESENTED BY YOUR SENATORS?
Kay Hagan: 202-224-6342 Richard Burr: 202-224-3154