A Democratic tax expert contends that more people would be required to pay taxes at death if President Bush's plan to eliminate the estate tax becomes law.
A permanent repeal of the estate tax, proposed by Bush, would result in up to 71,400 estates being subject to capital gains taxes every year starting in 2010, according to a report by John Buckley, chief tax counsel for the Democratic staff of the House Ways and Means Committee.
The existing law would subject 7,500 estates to the estate
If the estate tax is replaced by a capital gains tax, as Bush proposes, farm estates will be hit hard, the report suggests. Buckley said the people who will be hurt the most are those who have estates valued at between $1.3 million and $3.5 million that are tied up in farms and family businesses. Families with much larger estates will be less likely to realize capital gains by selling assets, according to Buckley.
“Estates with farms, other active business assets, or rental real estate would be most likely to have large unrealized gains,” Buckley's report said.
The article, published in the journal Tax Notes, raises the question of whether repealing the tax will hurt farmers and small business owners while benefiting the richest Americans.
The estate tax, which is being phased out, will be eliminated for one year in 2010. Bush wants to extend the repeal permanently. The estate tax would be substituted with a capital gains tax on all but the first $1.3 million in assets when they are sold.
In 2009, estates valued under $3.5 million would be handed down to heirs tax-free. Only 7,500 estates will have enough assets to trigger an estate tax that year, according to Buckley. The estate tax is 45 percent in 2009; 55 percent in 2011.
Dick Patten, executive director of the American Family Business Institute, a group that wants a permanent repeal of the estate tax, said the study presents only a “snapshot” of a period of time when the law is set to change three times in three years.
Patten acknowledged that replacing the estate tax with a capital gains tax will force some new families to pay taxes, but the system would give families more control over when they pay tax on inherited assets.
“We would rather see heirs pay taxes when they sell what they inherit, so the trigger of taxes is not by the fact of death but by decision to sell,” Patten said. “Do the families want to pay the taxes? No, they don't. But it is a much less painful scenario for families than a death tax."