Taking Dead Aim Washington may finally kill the onerous estate tax.
(FORTUNE Small Business) – There's no point in denying it: Repealing the estate tax would benefit the superrich. They've got a lot of money, and any plan to get rid of a tax that just about everyone concedes is wrong--short of going Communist--is bound to help out billionaires. So what? That's not what repeal is all about, and the barrels of ink spilled on this point miss the mark.
The estate tax is an embarrassment, amounting to multiple taxation on enterprise and hard-earned savings. Years ago, Tim Luckey's great-grandfather started a farm in Tennessee. When his grandfather and then his father inherited the farm, each paid an inheritance tax. When Tim inherits the farm, he'll pay the tax again--all for the same 650 acres.
Similarly, if you manage to save millions in your lifetime--after paying tax as you earned it--should the money be taxed again as it passes to heirs? We get taxed when we earn. We get taxed when we spend. We should not get taxed when we save. The estate tax in force today was instituted to help fund World War I. News flash: The war is over. We won. Peace reigns.
Basic inequities are at the root of newfound momentum in Washington to junk the death tax, which can reach a rate as high as 55%. But there's also a mysterious, sudden urge to help family-owned businesses. Maybe it's because unleashing the Internet has put a spotlight on entrepreneurial pursuit and its value in our economy. Or maybe it's because in flush times we can finally afford to do what's right. President Clinton's promised veto--expected in September--will delay things. The Democrats' choice to succeed him, Al Gore, may stall things further. But likely Republican candidate George W. Bush is for repeal.
Even Gore recognizes the onerous nature of the death tax on small businesses, though. He promises to double the exemption, to $5 million per family for a business left in an estate. That's a start. One problem with the exemption is that to be eligible, heirs must be active in the business for a set amount of time.
What if they'd rather go to college? Or are disabled? In survey after survey, owners cite the estate tax as one of their top concerns. They worry that their heirs will have to sell the business to pay the tax. Critics of repeal rightly point out that only 2% of all estates are subject to the estate tax, thanks to exemptions already in place, and that only 3% of the estates taxed are family farms or businesses.
But that fails to account for untold businesses that are sold before an owner dies just to avoid the tax. By selling prior to death, a founder gets the more favorable capital-gains tax rate of 20% and can shelter the estate through trusts and yearly gifting.
Statistics also do not address the waste of paying accountants and lawyers to prepare for the estate tax--or the extra cost of insurance to make sure the tax gets paid. In the five years ending in April 1999, family-owned businesses in New York State spent an average of $125,000 on estate preparation, according to New York's Public Policy Institute.
Take away that kind of expense, and small businesses will find it easier to grow. That's good for everyone, not just the rich. But if you're still worried about the privileged getting a break, take some solace in the fact that the repeal bill hits them with an additional levy on capital gains that common folk will never see. Forget Clinton. His veto rhetoric just gets louder. But with Bush for repeal and Gore behind in the polls, there's hope for next year.
www.fsb.com For information about how you can fight the death tax, log on to www.fsb.com/toc/.