What is the Estate Tax?
It is one of the oldest forms taxation of property held by an individual at the time of their death. An estate tax is a charge upon the decedent's entire estate, regardless of how it is disbursed. An alternative form of death tax is an inheritance tax (a tax levied on individuals receiving property from the estate). Taxes imposed upon death provide incentive to transfer assets before death.
Does business benefit from the estate tax?
Because of their pivotal role in a market economy, the hampering of small business and entrepreneurs not only directly limits their ability to produce, but also exerts a serious drag on economic growth throughout the entire economy. The cost of regulations and mandates leads to inefficiencies in the production of goods and services that are translated into lower income levels of national income, compensation of workers, and employment.
In terms of Small Business Growth...
Small businesses are a major source of jobs, especially new ones in the American economy. It is large businesses that downsize their labor force. Small businesses create jobs and grow in size. Through 1989, the real cost of government mandates and regulations fell by about 8%. This is the interval in which the remarkable job growth of the 1980ís took place. Between 1973-1981, both years containing a business cycle peak; 15,323,000 additional jobs were created. Between 1981-1989; 16,945,000 additional jobs were created. In the case of small business, regulatory costs tend to be spread over a relatively smaller output, meaning that their cost per unit is higher than average.
Given that firms that employ fewer than 100 employees account for more than half of the total employment in the US, the link between the pattern of variation in the costs on small business and both the acceleration of job growth in the 1980s is clear. Small business has long been recognized as the backbone of America's economy - employing almost 60% of the workforce and creating about 2/3 of the new jobs in the U.S. since the 1970's. Our tax laws should encourage rather than discourage the perpetuation of these businesses.
In terms of Family-Owned Business
While some individuals try to imply that the estate tax only affects the rich, in reality the burden falls on family businesses and their employees. Within the definition that the family controls the business either by stock or through management, 91% of all businesses in America are family owned. More than 70% of family businesses do not survive the second generation. 87% do not make it to the third generation. Family businesses look upon the death tax unfavorably. Ninety trade and industry organizations have formed the Family Business Estate Tax Coalition, whose sole purpose is to repeal the Death Tax. Approximately 60% of family businesses said they would be able to hire more people if the estate tax were eliminated.
In Terms of Entrepreneurship
Small business owners can be regarded as the nerve center of the market economy. Entrepreneurial discovery leads to unforeseeable breakthroughs, thus policies that target or disproportionately hinder small business will have damaging effects that undermine innovation and creatively throughout the economy. The market economy provides the only way to utilize the knowledge divided among many people. This knowledge is incorporated in a market process that provides entrepreuers the incentives to discover and correct imbalances in the economy. Entrepreneurs jump start the innovation, creativity, and dynamism in the market economy.
The estate taxís 55% rate has roughly the same incentive effect as doubling an entrepreneurís top effective marginal income tax rate. As the rate rises, work yields, entrepreneurs become more likely to retire prematurely.
Placing Strains on the Economy...
The estate tax costs jobs. Potential employment is lost when business owners decide not to expand or open another store because of the always possible threat of the death tax, and current employment is destroyed when businesses are liquidated to pay estate taxes. If estate and gift taxes are eliminated in 1999, 275,000 jobs would be created between 1999 and 2010. The estate tax has a negative impact on current business decisions. Critical resources are diverted away from investing in people and growth, and spent on attorneys, accountants and insurance. It is estimated that family-owned businesses spent approximately $33,138 over 6.5 years on attorneys, accountants and financial experts to assist in estate planning.
Estate tax rates, which range from 41% to 49%, are substantially higher than other tax rates - the lowest estate tax rate is almost as high as the highest income tax rate of 39.6%. The estate tax is imposed on earnings and assets that have already been subject to income, social security, and other taxes at the federal and state level. This "disincentive to growth" effect of the estate tax is equivalent to doubling income tax rates. The estate tax, which was intended to break up large concentrations of wealth and promote economic opportunity, has instead become a barrier to economic growth and job creation. The estate tax amounts to less than 2% of total federal revenues while costing the government and taxpayers approximately the same amount collected for enforcement and compliance.
What the Opposition says
The estate tax reduces inequality of wealth and income
The deduction for charitable bequests encourages nonprofit donations
The billions of dollars in revenue gained helps the public service sector
What We have to say
The original purpose of removing inequalities through the tax has been a failure. The wealthy percentile of Americans can afford the taxes necessary for plant, property and equipment acquisitions. Those in the middle and lower classes are the ones who must forego the potential.
In 1995, the tax-filing estates gave almost 75% as much to charity as they paid in Federal estate taxes. Taking advantage of tax incentives, estates worth over $20 million gave almost double their Federal tax contributions. This benefit flows to the social services sector, as well, which shows that taxation is not the only means by which businesses give back to society.
To sum it up...
The Estate Tax is a hindrance on the free enterprise system that our nation's economy is built on. It has not served its original purpose of redistributing wealth, but rather allowing those with the funds to keep their wealth, and taking away opportunities of those who can not pay the taxes, many of whom are ambitious and motivated entrepreneurs who can contribute to the macroeconomics of the U.S. The appropriate plan of action for this is to write to your Senator and Congressman and ensure that continued support is given to the gradual phasing out of the Estate Tax (officially repealed by the House and Senate), despite moves to bring it back by those seeking yet another point of intrusion into free enterprise.
Estate and Trusts. The Legal Information Institute. [http://www4.law.cornell.edu/cgi-bin/htm_hl?DB=topics&STEMMER=en&WORDS=estat+tax+&COLOUR=Red&STYLE=s&URL=http://wwwsecure.law.cornell.edu/topics/estates_trusts.html#muscat_highlighter_first_match]
On Permanent Death Tax Repeal, Sen. Mary Landrieu a Big Question Mark. Americans for Tax Reform. [http://www.atr.org/pressreleases/2002/061102pr.html]
Present Law and Background Relating to Estate and Gift Taxes. The United States House of Representative. [http://wwws.house.gov/search97cgi/s97_cgi?action=View&VdkVgwKey=http%3A%2F%2Fwww%2Ehouse%2Egov%2Fjct%2Fx%2D2%2D98%2Ehtm&DocOffset=1&DocsFound=1454&QueryZip=estate+tax&SourceQueryZip=&Collection=comms&Collection=members&Collection=other&Collection=coxreport&ViewTemplate=memberview%2Ehts&]
Tax Foundation Commentary. The Tax Foundation. [http://www.taxfoundation.org/commentary.html]
278 Economists Agree: End Federal Death Tax, Don't Mend It. National Taxpayers Union Foundation. [http://www.ntu.org/main/press.php?PressID=408]