If you want to get a bill through Congress, the way to do it is to attach the word “reform.” This label appears to have magic properties to guide a bill successfully through the labyrinths of the legislative process.
That bit of semantics is the best explanation for the passage of the Tax Reform Act of 1976. It is a remarkable achievement that it could make so many changes in the tax laws, affecting nearly every taxpayer in the country, without giving any meaningful tax reduction.
Our Federal income, death, and gift tax structure is basically a system of self-assessment. Each taxpayer makes out his own tax return and pays what he believes he owes. The Internal Revenue Service audits only a small fraction of returns.
This system of self-assessment depends on the support of the general public and of the individual taxpayer. This basic premise is threatened by the Tax Reform Act of 1976 because of its immense and unnecessary complexity.
Congress’s avowed purpose was to plug so-called loopholes. The result was an act of such interlacing and interacting provisions that the individual is tempted to despair of his ability to calculate what he fairly owes without incurring the cost of legal or accounting help.
The death and gift tax provisions of the Tax Reform Act of 1976 have been widely heralded as a reduction in taxes on small estates, family—owned farms, and closely-held businesses. Any alleged saving will probably be illusory because the taxpayer will have to pay out as much or more in legal and accounting fees in order to comply with the new law.
Of the approximately 37 million wills estimated to be in existence, at least 20 million must now be revised. If the coat is $200 per will, this amounts to $4 billion – almost as much as the entire revenue produced by the Federal death and gift tax.
In addition, the intricacies involved in estate planning under the new law, its reporting requirements, and the penalties it imposes, make malpractice such a clear and present risk that higher legal fees will be inevitable.
Instead of simply raising the death and gift tax exemption or cutting the tax rates, Congress invented something called the “unified tax credit” and devised a formula for imposing death taxes that is beyond the ability of the average individual to figure out, or at least contains such high risks that he would be unwise to try.
The new expanded marital deduction and the new rules for joint tenancy are quite deceptive and in some instances may result in a higher total tax paid by husband and wife than under the previous law.
The 1976 Tax Act raises serious questions about how much of our tax money should come from income and how much from capital. The new carryover basis and generation-skipping provisions impose an additional tax on capital at a time when increased capital formation is urgently needed to reduce unemployment.
Now is the time to start studying how the 1976 Tax Act will affect your income tax, your will, and your estate plan. You may find that the price tag of “tax reform” is higher than you care to pay.
