Death Tax Reform — Keeping On the Pressure

By August 13, 2006Economy

The Seattle Times is one of the few remaining large family-owned newspapers in the country, and so it’s no surprise its editorial page has been an impassioned proponent of reforming the death tax. Despite having a firm majority in favor of reform, the Senate this month failed to gain the 60 votes needed to move ahead on H.R. 5970, Estate Tax and Extension of Tax Relief Act of 2006, which reduced and rationalized the death tax (and extended the R&D tax credit.) The setback must not be the final word, the Times argues today in an editorial that highlight the tax’s perverse incentives, i.e., it takes money out of productive economic uses.

In 2011, the top rate will revert to 55 percent of assets. Even with deductions, on a successful family business, the tax will approach half the value.

To avoid that, business owners collectively spend billions on attorneys, trusts and otherwise unnecessary life insurance. From their point of view, this spending is a good investment, but from the view of their employees and their community, it is wasted. It might have been invested in their business, but instead is diverted into activities that produce nothing.

The death tax brings in about 1 percent of federal revenues. That’s not much. Add up its perverse economic effects and the cost to collect it, and it destroys more revenue than it creates.

Washington’s two Senators voted against cloture on the death tax earlier this month, as did Rhode Island’s. In an opinion column in today’s Providence Journal (free registration required), NAM President John Engler examines the impact the tax has on one family-owned manufacturer, Ferguson Perforating:

Bruce Ferguson reports that his father, when he began the business, never realized that its success would bring down a penalty, as well: a great tax burden on his grandchildren. Says Ferguson, “I want my children to have the option to continue the business after I’m gone, but if the death tax continues, there will be no business to pass on.”

Like many small- and medium-sized manufacturers, much of Ferguson Perforating’s wealth — which looks so enticing to the tax collector — is tied up in machinery. For these sorts of capital-intensive businesses, selling just one multimillion-dollar piece of equipment to pay the tax can mean gutting a company.

Company owners of course resist that action, borrowing instead to pay the tax. In addition, they spend large amounts on the insurance and legal fees that guard against the impact of the death tax. That’s money that could be used for more productive purposes, such as capital investment or employee wages and benefits.

A majority of the U.S. Senate supports reforming the death tax. Inaction continues the tax’s inefficiencies…and injustice. At the NAM, we plan to keep the pressure on for much-needed reform.

UPDATE: Another illustration from Kip Coleman, vice president of Hamilton Supply Co. of Hamilton, N.J., reported in the Business Journals and MSNBC:

He and his brothers have been paying about $22,000 a year for a $1 million life insurance policy on their 81-year-old parents so they can pay taxes on the estate when their parents die. They pay attorneys another $5,000 or so a year for estate planning.

But they still might have to borrow another $2 million to $3 million against the business to cover estate taxes, depending on what exemptions and tax rates are in effect when their parents die.

Much of the estate’s value is tied up in business inventory and land. “There’s no cash lying around,” Coleman says.

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  • chris karabatsos says:

    The death TAX (Penalty) should be abolished. Instead, the company should be required to hire more people and expand the business. This will bring more prosperity. Giving it to Goverment to waste it is a big SIN. This way the goverment would collect more taxes in a better way. The government would save money firing the tax collectors.