d. Collection of debts owed to Federal agencies Present Law Federal agencies can notify IRS that a person owes a past due, legally-enforceable debt to the Federal agency. The IRS then must reduce the amount of any tax refund due the person by the amount of the debt and pay that amount to the agency. This program expires on January 1, 1988. Under IRS regulations, the program only affects refunds due individuals, not corporations. Also, the program applies to debts owed to a limited number of Federal agencies. Possible Proposals 1. Extend the program for two years, either for only those agencies currently participating or for all Federal agencies. 2. Expand the program to cover corporate, as well as individual, debts owed to Federal agencies. Pros and Cons Arguments for the proposals 1. The Federal Government should use every means available to collect debts owed to it. The refund offset program provides a mechanism to collect debts owed to Federal agencies that the agencies have been unable to collect themselves. Arguments against the proposals 1. Taxpayers' confidence in the tax system may be eroded when the tax system is used for non-tax purposes. 2. The compliance level of taxpayers whose refunds are offset may decrease in years following the offset, which would decrease Federal revenues. 3. These proposals could distract the IRS from its primary goal, which is administering and enforcing the Federal tax laws. 4. Many of these debts could be collected by better enforcement and collection activities by the agencies actually owed the money. e. Escheat of refunds Present Law No provision of the Code requires that unclaimed Federal tax refunds escheat (revert) to the Federal Government. Some State courts have held that unclaimed Federal tax refunds escheat to the State. Possible Proposal The Code could be amended to require that unclaimed Federal tax refunds escheat to the Federal Government. Pros and Cons Arguments for the proposal 1. Because the refunds relate to Federal tax obligations, they are more related to the Federal Government than to the States. Arguments against the proposals 1. Escheat has generally been utilized by the States, rather than the Federal Government. E. Gift, Estate, and Generation-Skipping Transfer Taxes 1. Rates and Unified Credit Present Law A gift tax is imposed on transfers by gift during life and an estate tax is imposed on transfers at death. The gift and estate taxes are a unified transfer tax system in that one progressive tax is imposed on the cumulative transfers during the lifetime and at death. For 1987, the gift and estate tax rates begin at 18 percent on the first $10,000 of transfers and reach 55 percent on transfers over $3 million. For transfers after 1987, the top gift and estate tax rate is scheduled to decline to 50 percent for transfers over $2.5 million.1 In addition, the cumulative amount of any gift or estate taxes is reduced by a unified credit. The gift or estate tax is first computed without any exemption and then the unified credit is subtracted to determine the amount of gift or estate tax payable before the allowance of other credits. The present amount of the credit is $192,800.2 The unified credit of $192,800 effectively exempts the first $600,000 of transfers from gift and estate tax. In addition, a generation-skipping transfer tax is imposed on transfers from one generation to another that otherwise would not be subject to a gift or estate tax. The generation-skipping transfer tax has a flat rate equal to the highest gift and estate tax rate. Each transferor of a generation-skipping arrangement is allowed a $1 million exemption. Gift and estate tax rates Possible Proposals 1. Retain the gift and estate tax rates applicable in 1987 for transfers made after 1987. 2. Increase the maximum gift and estate tax rates for some higher level (e.g., 65 percent on transfers in excess of $10 million). 3. Provide a single flat rate for the gift and estate tax, e.g., 50 percent if the maximum rate of present law is retained. The Task Force on Transfer Tax Restructuring of the Section of Taxation of 1 Prior to the Tax Reform Act of 1976, the top estate tax was 77 percent on transfers over $10 million. The 1976 Act reduced the top gift and estate tax rate to 70 percent on transfers over $5 million. The Economic Recovery Tax Act of 1981 reduced the maximum gift and estate tax rate over a four year period to 50 percent for transfers after 1984. The Deficit Reduction Act of 1984 postponed the reduction in the top gift and estate tax rate from 55 percent to 50 percent for three years (i.e., until transfers made after 1987). 2 Prior to the 1976 Act, there was a $30,000 lifetime exemption for gift tax purposes and a $60,000 exemption for estate tax purposes. The 1976 Act converted the prior gift and estate tax exemptions into a unified credit that increased from $30,000 to $47,000 over the period 1977 to 1981. The 1981 Act increased the unified credit from $47,000 in 1981 to $192,800 over the period 1981 to 1986. the American Bar Association has recommended a single flat rate for gift and estate taxes. 4. Impose a 2-percent estate tax on the assets less liabilities held at death with no unified credit allowed. Unified credit 1. Reduce the amount of the unified credit. For example, the unified credit could be set at its 1982 level (i.e., $62,800 or an exemption equivalent of $225,000) and indexed for subsequent inflation. 2. Phase-out the unified credit for large transfers (e.g., transfers in excess of $10 million). Pros and Cons Arguments for the proposals Transfer tax rates 1. The scheduled reductions in the maximum Federal gift and estate tax rates were enacted in 1981 pursuant to a broad tax reduction measure. They are inappropriate in a time of budgetary restraint. 2. Increasing the maximum gift and estate tax rates (or retaining present gift and estate tax rates) will raise taxes only for the wealthy. The gift and estate taxes are necessary to an overall progressive rate system and increasing the maximum rate of gift and estate taxes insures a progressive tax structure. 3. With the present level of the unified credit, the gift and estate tax rates effectively begin with a rate of 37 percent on transfers in excess of $600,000 and reach a maximum rate of 55 percent on transfers in excess of $3 million (50 percent on transfers in excess of $2.5 million after 1987). Thus, the gift and estate tax rates are nearly flat. Nonetheless, much estate planning arises from attempts to utilize fully the lower rate brackets for estates of both spouses. Unified credit The increase in the unified credit enacted in 1981 was intended to offset the effects of inflation on property values. Since the rate of inflation has been significantly lower than anticipated, much of this increase has proved unnecessary. Lowering the unified credit to the 1982 level (adjusted for inflation) would still leave the great majority of estates exempt from Federal estate tax. Arguments against the proposals Transfer tax rates 1. Retention of the scheduled reduction in the maximum rate of gift and estate taxes is consistent with the general reduction in income tax rates. 2. A higher maximum estate tax rate creates hardship because cash needs are typically high at death. Unified credit 1. Reduction of the unified credit will subject many more estates to Federal estate tax. Since real estate and closely-held businesses often appreciate more than other assets, the estates of many homeowners and owners of closely held businesses would be subject to estate tax. 2. Death is an inopportune time to impose a tax, because needs for cash are typically high at that time. Thus, the estate tax should not apply to small and mid-sized estates (i.e., those with assets valued at $600,000 or less), which are most likely to have an acute need for cash. |