Re-post – Opinion: To save the economy, federal taxes should encourage giving while we’re alive By William P. Fuller Special to the Mercury News Posted: 10/05/2010 12:01:00 AM PDT
We’ve just endured the worst financial crisis since the Great Depression and are now facing a potential “double dip” and an excruciatingly slow recovery. In just two and a half years, we have witnessed the metamorphosis of the U.S. from a nation of irrational spenders and consumers into a nation of irrational savers and scrimpers. Economists agree that until we get people to spend more, the destructive cycle of less consumption, leading to anemic corporate performance, leading to less demand for labor, leading to higher unemployment, leading to even less consumer spending, isn’t likely to correct itself.
Congress must shepherd the American people back to a place where they feel comfortable spending money and should enact legislation that puts more spending money in the pockets of Americans. It can achieve this by either printing more money and distributing it, which is not a good idea, or by implementing carefully conceived tax policies that nourish corporate growth and spending and that don’t impose a heavy tax burden on individuals. While income tax policy has the more important role to play in this arena, the significant potential of federal transfer taxes to help in this regard should not be overlooked.
Prior to the Great Recession, the aging World War II generation was expected to transfer an estimated $41 trillion to the baby boomer generation over the course of a decade or so. Although the recession may have substantially diminished the value of that $41 trillion, there is still enormous personal wealth that could be spent now either by the World War II generation or by their baby boomer and Gen X heirs. How can federal transfer taxes be remade to encourage consumer spending?
1. Bring the estate tax back with a vengeance. Congress should re-enact the estate tax immediately and set the highest marginal rate at 55 percent or higher to make it more attractive to give now rather than later. The estate tax exemption amount should be capped at $1 million (the amount currently set for 2011). The unlimited estate tax marital deduction (allowing a spouse to leave any amount to his or her spouse estate tax free) should be left intact, and I’d advise a return to stepped-up basis for estate assets.
2. Defang the gift tax. The federal gift tax allows one to make direct gifts to individuals of up to $13,000 per person per year without incurring gift tax. Any gifts over this amount reduce the donor’s lifetime gift tax exemption (of $1 million) and then are subject to a tax of up to 35 percent. Congress should raise the gift tax exemption amount to maybe $3.5 million (the amount of the estate tax exemption in 2009) and lower the highest marginal gift tax rate to a lesser amount, maybe 10 percent. A surge in intergenerational gifting may help increase consumer spending by pushing wealth down to younger generations who are more likely to spend it on homes and cars.
3. Tame the GST tax. Similar changes need to be made to the generation-skipping transfer tax (“GST”), a tax that applies to certain transfers to grandchildren and more remote descendants. It should be adjusted to encourage lifetime gifting.
Will it work? Even if that $41 trillion has been halved in value (to $20.5 trillion) by the recession, and the World War II generation is willing to spend or gift only 10 percent of its collective net worth, that’s a potential infusion of $2 trillion out of savings and back into the economy — a very real boost to consumer spending.
WILLIAM P. FULLER is a trusts and estate attorney and a director at the San Francisco law firm of Howard Rice. He wrote this article for this newspaper.