Destroys Jobs and Economic Growth

1.5 million. That’s how many jobs would be created if Congress made estate tax repeal permanent, according to a study by economist Dr. Douglas Holtz-Eakin.[i]

The estate tax destroys jobs by reducing the stock of capital – the funds which businesses use to open new operations and create jobs. The Joint Economic Committee found that the estate tax reduced overall capital in the economy by $847 billion over a 10-year period.[ii]

The estate tax reduces family business capital stock in two ways. It directly confiscates capital from the businesses when the owner dies, and indirectly reduces capital by forcing business owners to use complex tax planning strategies to reduce their estate tax liability. These tax planning strategies may help a family business to survive the estate tax, but the resulting compliance costs (such as paying for an accountant or attorney, purchasing life-insurance, and otherwise misallocating capital) impose a heavy financial burden.

A leading economist formerly with the Clinton administration, Alicia Munnell, found that the compliance costs of the estate tax is nearly the same as the federal revenue it raises – an amount equal to roughly $24 billion in 2008 (the last year for which IRS data is available).[iii] This makes the estate tax proportionally the most costly tax in existence.

When businesses lose capital, they are less likely to expand and often must cut existing operations. The employees are the first to feel the cut.

Ruins Family-Owned Businesses

The estate tax falls hardest on those who maintain a family business, often forcing family business owners to sell the business in order to pay the tax.

Family-business owners and farmers are typically described by tax planners and accountants as “asset rich but cash poor.” That is to say, they often have considerable assets in the form of property, inventory, business equipment, productive land, crops and livestock, but little or no cash. This means that their “wealth” (on-paper) may be very large, making them liable for a hefty estate tax bill. However, without cash, they are forced to sell some of their property to pay the tax. For many family-business owners and farmers, selling even a fraction of their business or farm makes it less competitive and unprofitable, forcing the ultimate sale of the entire operation.

AFBI's estate tax testimonies document examples of family businesses and farms impacted by the estate tax. Consider Victor Mavar of Louisiana, who sold his seafood processing and pet-food manufacturing business due to the estate tax. Another is farmer Gary McCall of Iowa, who nearly lost his farm when his father died, and who is unsure as to how he can save it for his son. These stories give just a glimpse of the social and economic havoc that the death tax wreaks on family-owned businesses.

When surveyed, family businesses say that the estate tax is one of the leading causes of failure. Nearly two-thirds (64 percent) of respondents in one survey of family businesses reported that the estate tax makes survival of the business more difficult.[iv] In another survey, 98 percent of heirs cited “needed to raise funds to pay estate taxes” when asked why family businesses fail.[v]

Family-owned businesses are the pillars in small communities throughout the country. The owners and managers have personal ties the community and a direct stake in its existence. It is in the interest of small communities for family-businesses to thrive and grow, not to be destroyed by the death tax.

Redistributes Private Property

As defined by the IRS, the estate tax is a tax on your right to transfer property. The estate tax mocks the idea of fundamental property rights. By its intrinsic operation, the estate tax confiscates life-earnings and prevents families from passing a legacy of hard-work and delayed gratification down to the next generation.

Thomas Jefferson wrote that the “The laws of civil society….give the property of the parent to his family on his death, and in most civilized countries permit him even to give it, by testament, to whom he pleases.”[vi] Jefferson understood that government must protect – not inhibit – the right to acquire and pass on property as one chooses. One of Jefferson’s acts as President was to repeal America’s first estate tax.[vii]

As it turns out, the idea behind the estate tax was first proposed by the Communist theorist Karl Marx. In the Communist Manifesto, Marx recommended that the government “abolish all rights of inheritance.”[viii]

Marx did not believe in property rights, and he advocated that government should forcibly break apart family property. It should come as no surprise that Marx is the ideological predecessor to the estate tax.

The modern American estate tax was born out of the “progressive” political ideology which held that government should use tax policy to redistribute property. The estate tax was intended to “equalize” wealth by confiscating the life-earnings of “property owners.”[ix]

The death tax stands in stark contrast to the promise of America’s founding that government exists to secure the rights of life, liberty and the pursuit of happiness.”

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Handicaps America

What do Russia, Sweden, China, Canada, Mexico, and Israel have in common? None of them impose an estate tax. In fact, they are among more than 25 nations that do not impose an estate tax. Among the 25 nations that do have an estate tax, the average rate is 24% - roughly half the 2009 U.S. rate (45%).[x]

Prior to repeal on January 1, 2010, the U.S. estate tax was the third highest in the world. The death tax imposed a heavy penalty on American business owners and discouraged entrepreneurs from starting new businesses.

While many countries have eliminated their estate tax and others such as France, Finland, Hungary, and Jamaica are considering repeal or significant reduction, Congress threatens to shackle American companies with a reinstated estate tax.

Punishes Those Who Save and Invest

The estate tax effectively punishes those who save and invest, while exempting those who spend their money away.

Even liberal conomists Joseph Stiglitz and David Bern admit that the estate tax encourages consumerist behaviour. They explain: "Of course, prohibitively high inheritance tax rates generate no revenue; they simply force the individual to consume his income during his lifetime."[xi]

Economist Art Laffer aptly described the perverse incentives of the estate tax in a recent Wall Street Journal article: “Today in America you can take your after-tax income and go to Las Vegas and carouse, gamble, drink and smoke, and as far as our government is concerned that's just fine. But if you take that same after-tax income and leave it to your children and grandchildren, the government will tax that after-tax income one additional time at rates up to 55%.”[xii]

Impedes Upward Mobility

Inheritances can be one of the primary means for a family to improve their economic condition.[xiii] By confiscating inheritances, the estate tax is an obstacle to improved living standards and the promise of the American dream.

The estate tax poses particular trouble for minorities. According to one study, 87 percent of black-owned businesses said that the death tax is a major impediment to survival.[xiv] A survey of Hispanic business owners found that two out of three respondents said that the estate tax affects their ability to meet company goals by distracting their attention and wasting resources. Half of all respondents in that survey report knowing of a Hispanic small business that has experienced hardship because of the estate tax liability, including “selling off” equipment or the business.[xv]

The death tax is bad for everyone, but particularly for those who are trying to move up the economic ladder.

America is the land of opportunity. Making estate tax repeal permanent is one of the best ways to make sure it stays that way for everyone.

Is Double Taxation

The estate tax is a form of double taxation, which means that it taxes assets which have already been subject to the federal payroll, income and/or capital gains taxes. Consider the example of “Joe” who manages to get taxed three separate times due to the estate tax.

Joe is an electrician who recently started his own business. He takes home earnings of roughly $60,000 per year. All of his income is subject to the income tax (1st tax layer).

Joe wants to improve his family’s standard of living, and so he is frugal and saves his money and invests it in diversified mutual funds. Over the course of his life, he invests $500,000 of his income, where it grows to over $1,000,000. Upon selling his stock, Joe owes capital gains taxes on the profit above his original $500,000 (2nd tax layer).

Joe dies after enjoying a good life and nice retirement. Joe leaves his investment returns – along with his house, boat, and other belongings – as an inheritance for his son and daughter. Joe’s business, savings, and other belongings are valued at $11.5 million. Any inheritance that he leaves in excess of $7 million ($3.5 million if he is single) is subject to the death tax (3rd tax).

Hence, Joe has been taxed three separate times on the same dollar: once when he earned it, again when he invested it and later sold the investment, and again when he died. Is it right for Uncle Sam to nail Joe three separate times on the same dollar? Shouldn’t Joe pay taxes once and then be done with his obligations to the taxman?

[i] Douglas Holtz-Eakin and Cameron T. Smith, “Changing Views of the Estate Tax: Implications for Legislative Options,” American Family Business Foundation, February 2009.

[ii] “Cost and Consequences of the Federal Estate Tax,” Joint Economic Committee, May 2006.

[iii] Alicia H. Munnell, “Wealth Transfer Taxation: The Relative Role for Estate and Income Taxes,” New Englad Economic Review, Federal Reserve Bank of Boston (November/December 1988): 19.

[iv] Joseph H. Astrachan and Roger Tutterow, “The Effect of Estate Taxes on Family Business: Survey Results,”Family Business Review 9, no. 3 (Fall 1996): 303-314.

[v] Russ Alan Prince and Karen Maru File, Marketing to Family Business Owners (Cincinnati, OH: National Underwriter, 1995), 35

[vi] Thomas Jefferson, “letter to Thomas Earle, 1823,” in The Writings of Thomas Jefferson, ed. Albert E. Bergh, (Washington: Thomas Jefferson Memorial Association, 1904), Vol. 15, p. 470.

[vii] “Fact Sheet: History of the U.S. Tax System,” U.S. Department of Treasury, http://www.ustreas.gov/education/fact-sheets/taxes/ustax.shtml.

[viii] Karl Marx, “The Communist Manifesto,” 1848, http://www.anu.edu.au/polsci/marx/classics/manifesto.html.

[x] “New International Survey Shows U.S. Death Tax Among Highest,” American Council for Capital Formation, August 1, 2007.

[xii] Art Laffer, “Spent it in Vegas or Die Paying Taxes,” Wall Street Journal, April 2, 2009, http://online.wsj.com/article/SB123863067877680693.html.

[xiii] “Cost and Consequences of the Federal Estate Tax,” Joint Economic Committee, May 2006, 22.

[xiv] Joseph H. Astrachan and Craig E. Aronoff, “A Report on the Impact of the Federal Estate Tax: A Study of Two Industry Groups,” (Marietta, GA: Kennesaw State college, Family Enterprise Center, 1995).

[xv] “Five-State Executive Interview Study of 100+ Hispanic Family-Owned Businesses on Federal Estate Taxes,” Impacto Group LLC, (Washington, DC: Impacto Group LLC, 7/14/2004).