Last updated on May 13th, 2019 at 02:32 pm
Editor’s note: Stuart Schroeder, president of The Schroeder Group, S.C., Attorneys at Law in Waukesha, recently wrote this letter to President George W. Bush and shared its contents exclusively with Small Business Times.
An Open Letter to the President of the United States
January 4, 2005
President George W. Bush
The White House
1600 Pennsylvania Avenue NW
Washington, DC 20500
RE: Benjamin Franklin: "In this world nothing is certain but death and taxes."
Dear Mr. President:
As you approach your second term, I realize that you are extremely busy with the potential overhaul of Social Security; a budget plan that will require politically painful spending cuts; wholesale changes to the Internal Revenue Code; possibly the elimination of an income tax with a new system such as a flat rate income tax, a national sales tax, a value-added tax, etc.; the Iraq war; and the tsunami disaster in Southeast Asia.
Before you tackle those issues, I would recommend that you start with one small step that is, dealing once and for all, with the federal estate tax. I represent closely-held companies. Everybody loves closely-held companies. This is where jobs are created that keep this economy going. The owners of those companies and their executives are taxpayers, and the current state of the federal estate tax leaves these taxpayers in the one state that is intolerable, and that is a state of uncertainty.
You’ve heard the adage, "In this world nothing is certain but death and taxes." The federal government has proven that wrong.
Back in 2001, the Economic Growth and Tax Relief Reconciliation Act of 2001 made some major changes to the estate tax. That was the good news. The bad news was that they were temporary. Under that tax act, the lifetime estate tax credit shelter amount (exemption) was raised to $1.5 million for estates in 2004 and 2005, $2 million in 2006 through 2008, $3.5 million in 2009 and then in the year 2010, the estate tax is gone, only to reappear again in 2011 with an exemption of $1 million.
Likewise, the tax rates fall from 48 percent in 2004 to 47 percent in 2005, 46 percent in 2006, 45 percent for 2007 through 2009, and again, there is no estate tax in 2010. In the reemergence year of 2011, the maximum rate is 55 percent.
I’ve attached a chart which demonstrates the major differences in estate tax owed, depending on when an individual would die. When the tax rate drops 1%, this individual is saved $20,000 in tax, as seen between 2004 and 2005 and from 2006 to 2007. In relation to the entire tax liability, $20,000 is a fairly small amount. However, each $500,000 increase in the exemption results in a $225,000 decrease in the tax liability.
This amount is much more significant from a taxpayer standpoint, as seen by the change from 2005 to 2006 and from 2008 to 2009.
I have been working in the tax area for 28 years, and this is the dumbest tax law I have ever seen.
There are many arguments for and against the repeal of the estate tax. They were summarized in a recent article on the effects of a repeal of the estate tax on wealth apportionment.
Arguments in favor of the estate tax repeal:
- The tax is ineffective as a revenue raiser because the cost of administering the tax generally offsets any revenue received.
- The tax is also ineffective in that it does not achieve the purpose of redistributing wealth, for which it was originally designed.
- The current public opinion indicates the tax is unpopular with a vast majority of Americans.
- The tax is unfair and offensive to capitalism because it taxes growth and after-tax dollars a second time.
Arguments against the repeal and in favor of the estate tax:
- The well-being on an individual is not harmed during his or her lifetime.
- The tax does not prevent earnings, savings or lavish consumption; it merely prevents descendents and successors from automatically receiving the benefits of those people who earned it.
- Children of wealthy individuals reap the benefits of wealthy parents and grandparents during their lives through increased opportunities, so there isn’t as much of a need for those same children to obtain transferred wealth.
- The estate tax only applies to the wealthiest persons in America at this point, and those individuals do not need the tax cut because they can already afford to pay.
Would the repeal of the federal estate tax system give us certainty? Yes, but there is another alternative to the mess we currently have, that being to raise the exemption to a significant number, like $5 million, per individual. The exemption could be increased each year based on the cost of living increase, and then, a husband and wife could have an estate of $10 million which could be passed along to their children, free and clear of the estate tax.
Furthermore, other income tax items that would be amended with a repeal of the federal estate tax, such as the taxability of life insurance proceeds or eliminating the step-up in basis on property received from a decedent, would not have to happen.
At $10 million, a very significant number of closely-held business owners would be exempt from estate tax. Certainly, Bill Gates would still have to pay some tax, but as I understand it, he’s willing to.
This seems to be a relatively easy step for you to take before you get on with the major issues of today. It would give the taxpayers some certainty, which is not a bad thing to offer to the people that are paying the bills.
Very truly yours,
Stuart R. Schroeder