The Death Tax and Small-Business Mortality

July 25, 2012 J

There’s nothing worse than experiencing the death of a loved one, but if that loved one prudently saved over their lifetime, don’t look to the federal government for sympathy.

Congress is formulating plans to deal with the death tax, which is currently a 35% tax on the estates of those with more than $5 million in assets. Countless small business owners and farmers  have felt the crushing blow of the death tax, and for many, it has destroyed the legacy they wished to pass on to their children. Despite the fact that these hard-working Americans have paid hundreds of thousands of dollars in income, payroll, and capital gains taxes throughout their lives, the government finds a way to tax them again, even at death.

John Anthony, whose family owns timberland and is a producer of forest products, provides one such an example.  His third generation company has over 750 full-time employees, hires hundreds of contractors, and is one of the only family owned timber companies left in Arkansas. Because his company’s value lies mostly in its land, the Anthony family will be put out of business by the death tax. As a result, he’ll have to sell his company to a major corporation with no family ties. He’ll also have to lay off workers, cut ties to his community, and lose the ability to pass on his life’s work to his children.  All so that he can pay Uncle Sam’s death tax.

The death tax is also especially detrimental to farmers, who make up a significant portion of businesses that fall into the taxable threshold for the tax. If a farmer doesn’t have the money to pay the tax, he has to sell his land to foot the bill, resulting in lost production and jobs.

The examples of John Anthony and small farmers demonstrate that the death tax has serious consequences for entrepreneurs. Fortunately, some on Capitol Hill are considering eliminating the death tax completely. The Repeal the Death Tax Act, introduced by Senator John Boozman, could help save small business owners and their employees from the enormous financial and psychological burdens imposed by the tax. It could also create an uptick in economic productivity: a study by the former director of the non-partisan Congressional Budget, Douglas Holtz-Eakin found that repealing the death tax would create 1.5 million small business jobs and expand investment by 3%.

Getting rid of the tax would not only improve the economy, but would also ensure that people retain the incentive to grow their businesses. In a world without the death tax, business owners would have the assurance that their surviving family would receive their due inheritance. Keeping the death tax under the status quo deters business owners from investing in their companies for fear of surpassing the asset threshold for taxation.  Even worse, lowering the exemption and raising the death tax rate would only further decrease incentives for small business owners.

In spite of these facts, Major Leader Harry Reid’s tax bill allows the exemption to fall to $1 million and raises the rate to 55%. If this proposal is accepted, more than 53,000 Americans will be burdened with exorbitant taxes and lost property. Money that could have been potentially used by a small-business owner to expand his business will be lost to inefficient government programs, or to attorneys who are hired to avoid the tax and fill out paperwork. While supporters of redistribution of wealth believe this tax only targets the rich, the death tax also affects those who can’t avoid it, e.g. entrepreneurial small business owners.

At a time when small businesses and farms are struggling to make ends meet, unemployment is high, and taxes and regulations already hurt employers, the death tax will deal another crushing blow to American entrepreneurs.  A tax that adds insult to injury, and will only account for less than 1% of federal revenue is toxic to the American economy. It’s time for Congress to repeal this tax and allow job-creators, like John Anthony, to build their family businesses without worrying that Uncle Sam will prevent his family from enjoying the fruits of his labor after he is gone.


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