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The Estate Tax and Family Business
Proponents of estate tax repeal claim that the estate tax is the leading cause of the dissolution of family businesses. However, the effect of the estate tax on family business has been greatly exaggerated.
According to Tax Policy Center estimates, of the 2,462,000 people who will die in 2004, only 440 will leave a taxable estate with farm or business assets equal to at least half the total estate. Put another way, only two out of every 10,000 people who die in 2004 will leave significant taxable farm or business assets. A recent Federal Reserve study found that the average small business is worth $702,566, well below the $1.5 million level at which estate taxes now kick in.
Family businesses are sold or closed for a variety of reasons.
Most often, other family members are not interested in running the business any longer. These firms would be sold with or without an estate tax. Because only a very small portion of small businesses ever pay estate taxes, the estate tax has little if any impact on the proportion of businesses that make it to the second generation or beyond. The estate tax has become a scapegoat for a plethora of reasons why businesses fail, the vast majority being totally unrelated to tax policy.
There are already special estate tax rules for family businesses.
First, business property can be valued at less than market rates for estate tax purposes. Second, any taxes due can be paid over 14 years, at interest rates as low as 2 percent. In addition, small businesses enjoy a number of special income tax subsidies for making various investments.
You’d be surprised by some of the companies that consider themselves "family businesses."
The “family businesses?behind estate tax repeal include giant companies like Mars Candy, Gallo Wines, and the Seattle Times Company. Many other “family businesses,?such as L.L. Bean, Campbell Soup, S.C. Johnson Wax, Levi Strauss, Hallmark Cards, and Enterprise Rent-a-Car, are owned by extended families, employ thousands of people, and are worth hundreds of millions or billions of dollars. It’s also important to remember that between 66% and 80% of the value of family-owned business is made up of unrealized capital gains which have never been taxed. The estate tax is a legitimate mechanism to tax those gains that would otherwise escape income taxation.
Proponents of estate tax repeal have blocked reforms that would have protected family businesses.
In 2000, 2001, and again in 2002, the Senate rejected reform proposals that would have instantly tripled the basic family business exemption to $4 million for individuals and $8 million for couples. This reform, combined with routine succession planning, would have protected virtually all family-owned enterprises. Unfortunately, few small business owners knew about these reform options. By taking an all-or-nothing attitude, and refusing to compromise on reforms that would immediately protect family businesses, pro-repeal forces have shown that they care more about their ultra-wealthy patrons than truly small businesses.
The vitality of the American small business sector can be traced in part to the estate tax.
By preventing the accumulation of vast family dynasties over generations, the estate tax has leveled the playing field and allowed new small businesses to compete and succeed. To truly protect family businesses, it is better to reform, rather than repeal, the estate tax.
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