None of us like to talk about the possibility of a death in the family. But these days, we would be remiss if we didn't take steps to ensure that our loved ones are provided for in case of the unthinkable happening. Unfortunately, an old government method of raising revenues is hurting our ability to do just this. The estate taxbetter known as the death taxinterferes in our families' personal affairs at the time when we can least afford it. It's time for this Congress to get serious about permanently repealing the death tax.
The death tax is one of those public policy experiments that never worked out right, but has been left in place nonetheless. It requires the inheritors of an estate over a certain value to pay significant taxes on the inheritance. Under this tax law, family business owners suffer from incredibly harsh tax penalties, often putting their surviving family members in difficult financial straights. In 2007-2009, for example, families and small businesses will face a top tax rate of 45% for estates over the $2 million exemption.
At first, two million dollars seems like a lot of money. However, let's consider the family-owned bakery in Lombard or the meat market in Villa Park. Over the years, mom and dad have worked hard to pay off their mortgage. They also own some equipment, a truck or two, and a cash register. With the influx of people and the recent rise in property values, this typical family finds the "value" of their estate to be well over the $2 million dollar exemption. If the unthinkable happens and dad passes away, his children may have to sell the business just to meet the tax liability. This hurts the immediate family's ability to get by without their primary breadwinner, but may also have a much wider impact when the family is forced to sell their business, laying off all of its employees. Remember, too, that all of these assets have already been taxed once as personal income. The death tax kicks in for a second round of steep taxes, with rates up to 45%!
Due to legislation approved in previous Congresses, current law includes a provision to totally repeal the death tax for one full year in 2010. Surviving family members are not penalized at all for taking over the business when their relatives pass.
In 2011, though, the death tax returns with a vengeance. The exemption sinks to $1 million dollars. Now families with local restaurants, cleaners, bakeries, or even historic homes, may fall victim to the death tax. What's worse, the highest tax rate jumps from 45% (already steep), to an oppressive 55%. In 2011, if Congress doesn't act, the government could claim more of your estate than your surviving children and family members.
What's wrong with the death tax? Well, first and most importantly, it is an unfair double-tax, re-taxing assets that have already been taxed as personal income.
Some mistakenly argue that this is a tax only for the wealthy. However, if you consider the cost of property these days, most small, family-owned and operated businesses with a building and some equipment are worth enough to trigger the death tax. And, the scenario is only going to get worse as Congress's short-term fixes begin to phase-out.
And what message does a death tax send anyway? It discourages savings and investment by promoting spend now or pay later. It hurts job and wage growth. Estimates by the Heritage Foundation suggest that the death tax is responsible for the loss of as many as 250,000 jobs every year! Most importantly, the death tax is inherently unfair. It sends the message that if you work hard and save your money, you and your family will not be able to enjoy the fruits of your labor because the government cannot get disciplined about its spending habits. Small businesses account for 99% of all employers, half of all employees, and create 65% of all new jobs. This is not a demographic we need to target with harsh, unfair taxes. It is time to get serious about permanently repealing the death tax. It's the right thing to do.