Government Subsidies, Public Responsibility, Small Business, and the Estate Tax

Yesterday, Michael Perry suggested (tongue in cheek) that our estate tax exchanges were becoming “heated.” I was thinking that the fact-filled, statistically-intensive tax and fiscal slug-fest was just warming up and becoming more fun by the post. Still I do worry that we have taxed the patience of our readers (I can hear the groans from our audience), so perhaps it is time to draw the estate-tax-specific thread to a close. After my post for today responding to one discrete element of that debate, I’ll refrain from further disputation on the estate tax issue, instead trying to turn the thread later this week in the direction of broader questions about tax policy and government growth/regulation in terms of Catholic Social Thought.

At the outset, I say again that I have much appreciated the back-and-forth on this issue. Rather than resorting to class warfare cliches or glittering generalities about taxing the rich, the case for the estate tax under Catholic Social Thought needed to be made plainly and pragmatically, with at least some acknowledgement of possible externalities. On that score, I think my interlocutors on this issue have done a fine job. Not that I’m persuaded, other than being persuaded of my good fortune (uh oh, now someone will want to impose a tax on me!) to have such thoughtful partners involved in this great adventure of Catholic Legal Thought.

In her advocacy for the federal estate tax posted two days ago, my colleague Elizabeth Brown introduced the subject of government subsidies, asserting that small businesses and family farms “receive billions of dollars annually in agricultural subsidies, subsidized loans, technical assistance and regulatory relief.” Because of this past support, she then argues it is only fair to expect these business owners to “give something back to the common good” through the estate tax upon their deaths.

In a many other contexts, this would be a powerful argument. Elizabeth quotes our Lord saying: “From everyone who has been given much, much will be demanded; and from the one who has been entrusted with much, much more will be asked.” Government subsidies certainly deserve to be considered in the mix of comparative responsibilities and social welfare. Especially if someone grows fat when eating at the public trough, it only seems fair to expect payment in return for that healthy meal.

But the corporate welfare argument simply does not attach to small businesses in this country. (For reasons of limited time, energy, and blog space, I set aside the matter of agricultural subsidies, where the governmental outlays indeed are larger and more pervasive. The agricultural context must be evaluated in terms of the unique elements, stricter governmental regulations, greater investments of capital required, and year-by-year vagaries of the agricultural economy. See John XXIII, Encyclical Letter Mater et Magistra ¶ 133 (1961) (“[T]he common good also requires the public authorities, in assessing the amount of tax payable, take cognizance of the peculiar difficulties of farmers. They have to wait longer than most people for their returns, and these are exposed to greater hazards.”))

From tax policy to regulatory burdens to governmental support, small businesses hardly receive favored treatment as a economic sector, although the government has done a few things to equalize the situation in recent decades.

First, most small businesses receive little or no government aid of any kind (other than those public facilities enjoyed by all citizens). Most financing for small business comes from the commercial lending market (see here).

Second, the primary form of federal governmental aid to small business comes in the form of loan guarantees by the Small Business Administration (SBA) for firms that cannot easily qualify for credit under standard commercial banking guidelines. While there are some subsidized loans programs, the vast majority of such loans are made by commercial lenders. (See here) In this way, a few small businesses are granted easier access to financing, but do not obtain any subsidy.

Third, in the small business context, government outlays primarily consist of those appropriations to the SBA necessary to cover defaults on guaranteed loans made to businesses that later failed (and thus could not repay the loan). (See here and here) SBA-guaranteed loans tend to be made on a zero-subsidy basis, in which fees cover all expenses (other than of course for those who actually default). In sum, even among that slice of the small business sector that benefits from loan guarantees, those small businesses that actually succeed, and thus that are still around at the time of an estate tax event, will not have made any actual draw against the public fisc.

Fourth, within the general category of what she sees as extension of government welfare to small business, Elizabeth includes “regulatory relief.” As but one example of the many ways in which the demands of government fall more heavily on small business, the Small Business Administration reports that, on a per employee basis, it costs small firms about $2,400, or 45 percent more, to comply with regulations than it does their larger counterparts. That Congress has directed the government to lift some of that regulatory burden from small firms hardly qualifies as a bequest of government largess.

(In any event, since when did being spared from regulation count as the equivalent of a government subsidy? The suggestion that a person is the privileged beneficiary of government welfare and ought to be grateful when the government doesn’t tell him or her what to do is awfully hard to reconcile with the premises of a free society. We are citizens with rights in a free society, not subjects being conferred privileges by a monarchical regime.)

Fifth, large corporate entities also benefit from government subsidies and other assistance, mostly in ways other than loans that are repaid. But, publicly-held corporations do not need to plan for or consider estate tax consequences because they are taxed only once on their profits.

Sixth, even for those few small businesses that do receive some non-loan governmental assistance, why would we not conclude that the owner has amply repaid society through his or her devotion of time, savings, and heart to the creation of a successful business, the provision of new jobs for people to support families, and the strengthening of the economic and tax base of the local community?

Greg Sisk