Blackman on Taxes
Advice to the New President on Income Tax and Estate Tax Laws
Let’s take the income tax law and the estate tax law one at a time.
Raising the tax rate will mean more revenue. So claim those pushing for a higher rate. No, says the other side: Lowering the income tax rate will increase the tax base, resulting in more revenues.
Let me offer you some fresh new evidence. My information comes from an article that blew my socks off. The article, “You Can’t Soak the Rich,” by David Ranson, ran in the May 20, 2008, issue of The Wall Street Journal. It introduces “Hauser’s Law,” originally created by Burt Hauser, an economist who, in 1993, published eye-opening data about the federal tax system. Let’s start by stating Hauser’s Law (HL): “No matter what the tax rates have been, in postwar America, tax revenues have remained at about 19.5 percent of gross domestic product (GDP).”
The article contains a chart explaining HL. The chart has two tell-all lines:
1) The “top individual tax bracket” from 1950 through 2007—90 percent in the 1950s; 70 percent until the mid-1980s and rates from 50 to 30 percent until the mid-1990s; with a steady 35 percent rate since 2001. This line is all over the map, from 30 to 90 percent.
2) “Revenue as a percentage of GDP,” almost a straight line, holding at about 19.5 percent.
The 19.5 percent gives you the federal income tax yield—tax revenue divided by GDP. Easy enough. You don’t have to be a rocket scientist to see what HL means: Raising tax rates lowers GDP. “Higher taxes reduces the incentive to work, produce, invest and save, thereby dampening overall economic activity and job creation,” writes Hauser.
The most interesting thing about HL is that it is fact, not theory. A fact that has given specific, consistent and proven results with 57 years of easy-to-verify data. So let’s state the obvious conclusion: Raising taxes reduces GDP. Result? Lower yield (tax revenues); lowering the income tax rate increases GDP as well as tax revenues.
Now, let’s take a look at the robber-like estate tax. In 2008 there’s no tax on the first $2 million of your estate, rising to $3.5 million in 2009. Then absolute stupidity takes over: No tax in 2010, and finally, in 2011 only the first $1 million is tax-free. What are the top estate tax rates? For 2008 and 2009, 45 percent; zero for 2010 and for 2011(and thereafter), the insane rate of 55 percent.
The 2010 zero rate can’t survive. Too risky, politically. Neither candidate for president expressed an interest in killing the estate tax. Since I know in my heart that the estate tax will survive at least the next four-year administration, here’s my suggestion to Congress and the new president:
1) Make the freebie $3.5 million, which means that a married couple with $7 million of net worth could easily eliminate the estate tax;
2) Lower the top estate tax rate to 35 percent. Whatever the president and Congress finally do about the estate tax, the readers of the column know that this author and his network have devised a system that eliminates the estate tax. The system always works, whether you are worth $4 million or $40 million (or more). Best of all, the system is easy to implement no matter how complicated your situation, is always 100 percent effective and is legal.
Finally, here’s our advice to the president and members of Congress concerning the income tax: Keep your eyes on the real ball—GDP. Stop chasing higher or lower tax rates. Your job is to govern in such a way as to increase GDP. HL gives you sure-fire proof that increased income tax revenues always follow. Now for everyone who is reading these words, your job is to pass this what-seems-to-be-the-secret HL to your congressional representatives and senators.
Tax-Saving Business Transfer
Suppose you have four kids and all work in your business—Success Co. If you wait until you die, then leave Success Co. 25 percent to each of the kids, the IRS will value 100 percent of the business, focusing on the value of the total business (instead of each one-quarter part being left to each child). What’s the result? No discount for a minority interest. For example, a business with a fair-market value of $2 million would be stuck with a $2 million value (no discount) for tax purposes.
Instead, suppose you transfer Success Co. to your four kids—25 percent to each—during your life. This time, after years of fighting, the IRS finally agrees with us: The focus is on each one-quarter of the business transferred separately to each of your kids. How does the result differ now? The shares transferred to each child are entitled to a minority discount, with minority discounts running in the 35 percent range. Using the above $2 million example (and a 35 percent discount) would make the same business worth only $1.3 million (a $700,000 discount) for tax purposes.
You may be thinking along these lines: “Sure, I want to save taxes, but I’m not going to give up control of my business as long as I can draw a breath.” To do that, recapitalize. The recapitalization is a tax-free maneuver. You wind up owning all of the voting stock (say 100 shares) and all of the nonvoting stock (say 10,000 shares). Now you can give each of your kids 2500 shares of the nonvoting stock of Success Co. You get your minority discount. With your 100 shares of voting stock, you keep absolute control of your business for as long as you live. MF
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