But, given the hardships that the unemployed and so many other people are facing right now, you can forgive me for being a little bit irked to read in the Denver Daily News that Michael Bennet, the Democratic nominee for Colorado's U.S. Senate seat, announced yesterday that one of his main tax proposals to provide small business relief that will support Colorado's small business community and energize the economy is to provide a tax break to heirs of couples who die with more than $7 million in net worth by increasing the amount that those couples can exclude from estate taxation to $10 million.
According to the print version of the article:
Bennet believes raising the estate tax exemption would reward small business owners and family ranchers who are growing their businesses and creating jobs.
The trouble is that you can fit in a small high school classroom all of the small business owners in Colorado who will benefit from this tax break. Most small business people and farmers don't have net worths in excess of $7 million (although many hope that they will some day), and the vast majority of families with a net worth in excess of $7 million are not small business or farm owners.
Senator Bennet's proposal would save the heirs of a deceased wealthy couple with a net worth of $10 million or more (whether or not that wealth came from a small business, which overwhelmingly, it did not), $1.35 million dollars at 2009 estate tax rates, and more if he is also calling for estate tax rate reduction.
Call me a socialist, but I really don't think that the secret to boosting small business in our current lackluster economy is giving heirs who are receiving multi-million dollar inheritances, the vast majority of which are made up predominantly of non-small business assets, a collective $1.35 million tax break.
He may think of this proposal as a natural move towards the middle as the general election approaches, but while I know Ken Buck wants changes to the estate tax that are even more generous to the rich, I'm hardly impressed with Senator Bennet's priorities.
In 2009, married couples who engaged in a modest amount of estate planning could shield $7 million from estate taxes. In 2010, there is no estate tax in force (although there are some still some fading calls for it to be restored retroactively). In 2011, if the law is not changed, that returns to $2 million, although President Obama has called for the estate tax exemption to be restored to the already generous $7 million that it was at in 2009. Nobody knows for sure what will happen at this point due to a standoff in the Senate on the issue. The article also fails to make clear what changes, if any, Senator Bennet would like to make to estate tax rates (those in the know are welcome to post the details, or a link to them, in the comments)
Most proposals to increase the estate tax exemption also propose a reduction in estate tax rates. Inheritances beyond the exempt amount were taxed at 45% in 2009, and President Obama has called for a return to that rate. If no action is taken by Congress, the rates will return to graduated rates with a top rate 55% on non-exempt amounts in 2011, and a bubble rate of 60% that unwinds the tax benefits of progressive estate tax rates in small taxable estate so that large taxable estates pay a flat estate tax rate of 55%. It turns out that estate tax revenues come predominantly from very large estates, so lower estate tax rates have much more fiscal impact than higher estate tax exemptions.
I would be more sympathetic if Senator Bennet were proposing an estate tax break targeted at small businesses and ranches, rather than just a large estate tax break for heirs of wealthy people in general. This would hardly be unprecedented.
Indeed, this actually hurts the poor, the working class, college students, public radio and television, the fine arts, churches, public hospital patients, and all of the other people who benefit from charitable bequests that are encouraged by the estate tax. While the impact of the estate tax on economic incentives to build businesses and employ people is dodgy at best, the evidence that estate taxes encourage charitable giving is clear.
The tax code already allows farms and small businesses that own property to value that property based upon its value attributable to the profits it creates for the farm or business, rather than its development value (a benefit forfeited if the farm or business is sold off in the next ten years by the heirs anyway) but puts a strict dollar limts and technical tests on that special valuation method (in Section 2032A). It might be sensible to liberalize those rules and eliminate the dollar cap on the special valuation method to encourage people to keep farms and small businesses running.
Once upon a time there was a qualified small business exemption, that allowed estates with substantial farm or small business value to double the amount of their estate that was exempt from estate tax (in Section 2057), that applied similar rules to the special valuation rules. But, this became obsolete as exemption amounts increased for other estates without a corresponding increase in the qualified small business exemption.
The tax code already allows estate with substantial business assets to pay their estate tax bill over ten years at a lower than average interest rate (in Section 6166).
Business assets are also particularly amenable to plans to reduce the value of the estate for gift and estate tax purposes (such as minority interest discounts in closely held companies).
There are plenty of people who could help him write a proposal that really would mostly help reward ranchers and small businesses that created jobs. I'd be the first to volunteer.