This month’s Alert examines the Obama Administration’s 2012 budget proposal and how it might affect estate, gift, GST, and income taxes. Further, the Alert looks at how our tax system compares to other developed countries.
The Department of Treasury “General Explanations of the Administration’s Fiscal Year 2012 Revenue Proposals” presumes several important changes in the estate, gift, and generation-skipping transfer taxes. These changes include:
- Restoring the 2009 estate, gift, and GST tax rules on January 1, 2013. This would provide for estate tax and GST tax exclusion amounts of $3.5 million, a gift tax exclusion amount of $1 million, and a maximum marginal tax rate of 45%;
- Making portability of the deceased spouse’s unused exclusion amount permanent;
- Require consistency in valuation for income and estate tax purposes, so that beneficiaries would be required to use estate tax values to determine the adjusted basis of property received from a decedent;
- Permit the Department of the Treasury to issue regulations that expand Internal revenue Code § 2704(b), to ignore in valuing partnerships, LLCs, and other entities, a new category of “disregarded restrictions,” so as to reduce the use of valuation discounts for such entities;
- Require a minimum ten-year term for GRATs, require a positive value for the remainder interest in a GRAT, and prevent the use of decreasing payments in a GRAT; and
- Provide that the allocation of GST exemption to a transfer protects that transfer from generation-skipping transfer tax for no more than ninety years.
It is unsure at this time how the reduction in the lifetime gift tax exemption amount, from $5 million currently to $1 million, would affect those taxpayers who take advantage of the current higher limit. Many pundits do not believe it would be tenable for Congress to reduce the gift tax amount without grandfathering or providing other relief for those taxpayers who make gifts greater than $1 million in 2011 and 2012. Other commentators believe there will be some type of “claw-back” provision that would subject these gifts that escaped gift taxation in 2011 or 2012 to estate tax upon death. As such, Congress and the President have managed to preserve the uncertainty that existed from 2001 through 2010 for at least a few more years.
Commentators Call for Flat Tax Solution
Groups such as Americans for Tax Reform (http://www.atr.org), Citizens for Tax Justice (http://www.ctj.org), and Americans for Fair Taxation (http://www.fairtax.org) have called for the simplification and/or elimination of the federal income tax and its replacement with a system that applies a flat tax on all income above a certain threshold or replaces the income tax with a consumption tax (or both). The flat tax would eliminate most, if not all of the current deductions and tax credits. The flat rate would be between 15% and 35% on taxable income depending on which proposal you are analyzing. The fair tax would eliminate the income tax (and the IRS) completely and impose a consumption tax that is in part designed to harvest revenues from the large underground economy (such as “under-the-table” transactions and illegal activities). A fairly unbiased comparison of the similarities and differences of the various proposals can be found at: http://www.pafairtax.org/resrcs/FlatTaxFairTaxComparison.pdf
How does the income and Social Security taxes being paid currently by U.S. citizens compare with those pad by citizens in other countries? A study of the taxes paid by taxpayers in the “G-8 countries” was recently conducted by UHY International, a London-based association of accounting and consulting firms and was published in the International Herald Tribune. The study compared the net pay of citizens in the eight countries after taxes and social security contributions. Two different income levels where analyzed, the first for taxpayers earning $25,000 in annual income and the second for those earning $200,000 annually.
For the lower earnings level, the Germans had the highest level of taxes and social security contributions imposed upon them – retaining just 72.6% of their earnings deducting these expenses. The Japanese were the lowest taxed, keeping some 90.8% of their earnings. The U. S. (where nearly half of all families pay no federal taxes other than social security tax withholdings), had the second-lowest tax rate of the G-8 countries at the $25,000 income level.
| Country | Net Amount of a $25,000 salary kept after federal income taxes and Social Security contributions |
| Germany |
72.6% |
| France |
75.0% |
| Italy |
75.2% |
| U. K. |
83.2% |
| Canada |
84.8% |
| Russia |
87.0% |
| U. S. |
90.6% |
| Japan |
90.8% |
At the $200,000 income level, Italy, Germany, and France still paid the highest taxes, though they changed positions a bit. The U. S. had the third lowest tax rate, keeping almost seventy percent of income.
| Country | Net Amount of a $200,000 salary kept after federal income taxes and Social Security contributions |
| Italy |
54.1% |
| Germany |
56.0% |
| France |
58.8% |
| U. K. |
60.9% |
| Canada |
64.7% |
| U. S. |
69.9% |
| Japan |
72.0% |
| Russia |
87.0% |
The report notes that making comparisons among tax rates across countries is no easy task.
For one, sales taxes vary greatly from one country to another. Most states in the U.S. also impose a state income tax. Also, higher taxes in Europe cover national medical care, generous retirement benefits, longer paid vacation periods, and universal education programs. The study did not include the new taxes that will be imposed under the new Obama health law.
Another factor to consider in making comparisons of this type is the amount of spending done by the government versus the private sector. There’s been a lot of concern in the United States lately regarding how much government spending has increased over the past few years. Based on our first quarter GDP report, government spending was about 24% of overall Gross Domestic Product. This is about a thirty percent increase from historical norms. However, when compared to government spending in Europe, the amounts appear quite reasonable. Many European governments spend as much as 40% of their GDP on an annual basis.
There seems to be a growing consensus among taxpayers in the United States that lawmakers here need to rein in spending to levels closer to historical norms and decrease the exploding debt levels of the last several years. This will definitely require change, whether it comes in the form of increased taxes, reduced spending, or some of both. It will likely include changes to our income tax, gift tax, estate tax, and sales tax systems as they currently exist. These changes will likely require a review of existing financial and estate plans in order to assure they are tailored to take advantage of these changes in the law, however they might materialize in the future.
Our law firm focuses its practice on estate planning and administration of trusts and estates. As a member of the exclusive nationwide group of estate planning attorneys, the American Academy of Estate Planning Attorneys (http://www.aaepa.com), we are kept up-to-date of new tax developments as they occur and we receive continuing legal education regarding how to effectively plan for these law changes. You can take advantage of our specialized knowledge by scheduling a free consultation with one of our attorneys for yourself or your clients by calling or visiting our website.
