Dems are unapologetic about their plan to significantly increase taxes on what they loosely define as wealth. Senators Sheldon Whitehouse, D-Md. and Bernie Sanders, I-Vt. And Chris Van Hollen, D-Md. have proposed such a tax and President Biden is including it in his American Families Plan to cover the staggering $1.8 trillion price tag. What was aptly called the Sensible Taxation and Equity Promotion Act is more deceptively named the Zombie tax.
That's because it comes back to haunt the living who attempt to carry on family businesses following the owner's death.
Currently, when family members inherit a business the law steps up the asset's cost basis to its value at the time of the owner's death. When heirs sell the asset, the step up limits the gain subject to tax to any increase in value after the owner's death.
This step up in basis is a recognition that decedent’s assets above current estate tax exemption were subject to 40% estate tax before passing on to the heirs.
The Zombie tax would upend this balanced approach.
Let's say the decedent owned a business. The Zombie Tax would both eliminate the step up in basis and impose a capital gains tax as if the business was sold on the day of the owner died. It would then reduce the value of the business by the amount of tax and apply 40% estate tax.
At the current federal capital gains and estate tax rates, combined tax would be about 54%, or over half of the decedent's estate. But Biden wants to hike the capital gains tax rate to 43.4%. At that rate, the combined tax would be more than 66% or two-thirds of the decedent's estate. It is all considered before any state capital gains or estate tax hits.
The estate would be forced to raise funds to pay these taxes at the time of death and heirs would also have to pay capital gains tax in the next 15 years. This would likely saddle the business with a burdensome debt assuming it could get a loan on reasonable terms with a 15 year cash flow reducing capital gains tax obligation on its books. If you are sold, the estate would have to pay taxes and then sell the business.
The Zombie tax's primary fault is its failure to recognize the nature of wealth. Anyone who has a mortgage has heard the old adage that is house rich and cash poor.
The same applies to heavy farms and land farms who think buildings, land, inventory, asset-reliant equipment, etc. but by multiple orders of magnitude. Many of these family enterprises operate on razor thin profit margins and seasonal income cycles, meaning they are often cash flow poor and asset rich.
We've met countless business owners, often made up of entire families, who scrapped and saved to achieve their piece of the American Dream. They've taken significant risks, worked seven day weeks and paid significant taxes all along the way creating jobs and supporting their communities.
These are not the hedge fund managers in the Hamptons or unemployable rich kids running vanity boutiques, but rather diverse men and women of all races, nationalities, faiths and economic backgrounds who have worked to build businesses in the hopes of leaving them to their families to continue on and grow.
Zombie Tax would compel many of these asset intensive family businesses to sell under pressure impacting not only heirs and family members, but also the jobs of longtime employees from factory workers and mid-level managers to ranch hands and research scientists. Ironically it would also create opportunities for the same wealthy speculators proponents cite as the need for taxation to scoop up these businesses at fire sale prices.
Absent leaving the law or adopting a rational solution, the personal and economic costs would be enormous. A study prepared by the research firm REMI and commissioned by Committee to Unleash Prosperity found that Zombie tax would result in the following:
Sustained annual job losses from nearly 1 million to over 500,000;
10 - year losses in the economic output and GDP of about $2 trillion and 1 trillion, respectively, with a $600 billion loss in investment and a $6 billion loss in research and development spending.
A 10 year loss in personal income of around $1 trillion, which translates to $8,000 10,000 per household.
The Senate biden sent a letter to the President of congress from May 8th, 2017 asking that all 50 Republican senators oppose the Zombie Tax.
Moderate Democrats in Congress should look very closely at upholding government mandated asset fire sales and mandating decades of foundational tax principles that allow family owned and private businesses to exist long after an owner's death.
The long-term economic and societal benefits of doing so are far greater than any immediate cash grab that ill-advised revenue measures like the Zombie Tax or other wealth taxes could ever provide.
This Zombie Tax scheme is so counterproductive that one wonders whether the Democrats' goal is more about punishing success than either tax fairness or increased revenue.
Andy Puzder was Chief Executive Officer of CKE Restaurants for more than 16 years, after a career as an attorney. He is currently a senior fellow at the School of Public Policy of Pepperdine University. He was nominated by President Trump to serve as U.S. labor secretary. In 2018, he created The Capitalist Comeback: The Trump Boom and the Left's Plot to Stop It. His latest piece, a Broadside by Encounter Books titled, It's Time to Let America Work Again was released on July 20th, 2020.