Few people want to die and fewer still want to pay taxes. Put the two together and you have a tax that only a politician could love.
When the estate tax was enacted in 1916 it was touted as a means of equalizing wealth. Even if one thinks this a worthy goal, the death tax has never successfully redistributed wealth. Nor, at less than 2 percent of total federal revenues, does it amount to much. But it does wreak havoc on the dreams of small business owners and farmers, and it threatens the ability of a growing number of middle income investors to leave a legacy to their children.
The death tax is unfair. If you don't believe me, just ask Oprah Winfrey who told her audience, "I think it's so irritating that once I die, 55 percent of my money goes to the United States government . . . You know why its so irritating? Because you have already paid nearly 50 percent [when the money was earned.]"
Yet the ultra rich, like Oprah, use estate-planning techniques to protect more of their wealth. And because many estate planning techniques are costly and require long lead-times to implement, a disproportionate burden of the death tax often falls on those with recently acquired, modest wealth: small businessmen, farmers, and the growing pool of investors.
The death tax is devastating to small businesses. For instance, the National Grocers Association, made up of independent grocers, said 27 percent of its family-owned grocers reported in a 1995 study that they would have to sell all or part of the business to pay estates taxes if the owner died. And according to the National Federation of Independent Business:
Only about 30 percent of family farms and businesses survive a first-to-second generation transfer, and only about 4 percent survive a second-to-third generation transfer.
One-third of small business owners will have to sell outright or liquidate part of their firm to pay estate taxes.
This result is not surprising since a recent survey found that 41 percent of business owners would have to borrow against equity to pay the estate tax and 30 percent said they would have to sell all or part of the business.
The family farm is particularly vulnerable. Small farmers are often land rich – wealthy on paper due to the value of their land – but cash poor, with farm incomes often being low. For instance, the household income of the average tree farmer is less than $50,000, but the typical tree farm can be valued at more than $2 million. Thus, heirs often have to sell their farm to pay the estate tax. By some estimates, 25,000 acres of prime forestland in Washington alone is converted to other uses each year, primarily to raise money to pay estate taxes. This is bad for the environment since the highest bidders at estate auctions are often residential and commercial developers.
With the rise in the popularity of employee stock option plans, 401(k) plans and increasing home ownership, the assets of the nonwealthy have grown dramatically. Household wealth in the United States has doubled in the last 10 years, from $21.5 trillion in 1988 to $43.2 trillion last year. Since the population has only risen by about 10 percent over this period, wealth per capita has increased enormously. This reflects the fact that the stock owning class grew from approximately 20 percent of the population in 1980 to more than 48 percent in 1999. Even those with modest incomes can now expect more than $1 million at retirement. For instance, a person who invests as little as $2,500.00 per year at 10 percent interest from age 25 to retirement at 65 would accumulate more than $1,106,481 – and all of this before any other assets like houses, are counted. Thus, the number of heirs who will pay large taxes upon a family member's death is also on the rise. Is a big tax bill really what people want to leave their loved ones?
While death and taxes may be inevitable, the death tax ought not to be. When the little revenue the estate tax raises is weighed against the harm it causes, its easy to see why many people on Capitol Hill and throughout the nation are saying its time to ring the death knell for the death tax.
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The National Center for Policy Analysis is a public policy research institute founded in 1983 and internationally known for its studies on public policy issues. The NCPA is headquartered in Dallas, Texas, with an office in Washington, D.C.