Mirror of Justice

A blog dedicated to the development of Catholic legal theory.
Affiliated with the Program on Church, State & Society at Notre Dame Law School.

Saturday, July 29, 2006

Responding to Elizabeth Brown: Family Businesses and the Estate Tax

I appreciate my colleague Elizabeth Brown’s thoughtful, informative, and well-researched contribution to the ongoing thread about the estate tax. I’ve enjoyed and learned much from the give-and-take on this issue, as well as the messages and interesting stories I’ve received from Mirror of Justice readers.

As I’ve stressed before in this thread, we as Catholic thinkers can only be enriched by broadening the discussion and being willing to consider other perspectives, other dimensions of social issues in a complex world, and other members of our larger community, even if we ultimately reject a particular argument based upon our appraisal of the evidence. Catholic Social Thought provides a means of evaluating the evidence but should not constrain what evidence is to be considered. This expansion of the dialogue, together with a resistance of the sometimes too-narrow class-warfare style and government-centric approach that may be uncritically adopted in such discussions, is of greater importance to me than any particular policy outcome.

Elizabeth questions what she calls my “assumption” “that all family businesses and family farms are small and thus, easily put at risk by the estate tax.” As a counter-example, she then describes one family enterprise that is anything but small. While I’ve never said that all family businesses are small, I stand firmly by my declaration that “small” indeed is the apt description for the overwhelming majority of family businesses in this country. According to the Small Business Administration (SBA), in 2003, 65 percent of all firms (small, large, family-owned, publicly-held) in this country brought in under $500,000 in receipts each year (not profits but gross revenues), and 79 percent of all firms employed fewer than ten employees. As these SBA figures encompassed all businesses, including major industries, but excluded those without employees, the percentage of family-owned businesses in this country that are small is even larger than revealed by these SBA statistics. Indeed, the Census Bureau reports that non-employer firms, which by definition are family-owned as the owner is also the only worker, account for three-quarters of all businesses. In sum, without question, the vast, vast majority of family-owned businesses in this country are neither large in size nor rich in profits.

As I’ve acknowledged in past posts, a handful of family-owned businesses have grown over time to a more considerable size, thus making the original owner modestly wealthy (although typically not among the fabulously rich). (Elizabeth indicates that this is even more true of family farms – which were not included in the SBA statistics I cited above – although the extensive real estate holdings and equipment purchases, etc., involving in farming together with the unusual seasonal and other vagaries make comparison more difficult and easy judgments suspect.) At least when it comes to these more substantial family-owned businesses, Elizabeth, joined by Tom Berg and Rob Vischer, appear sanguine about imposing the estate tax, whatever may come. I confess to being more concerned about the collateral consequences of the estate tax on the much more numerous and more typical small family enterprises than about shielding these larger family firms from the estate tax. At the same time, I have yet to hear a good argument why we as a society would want to place those larger family enterprises, which of course are among the most successful as evidenced by their very growth, at greater risk of being dissolved and sold off to large corporate entities upon the death of the original owners. My friends argue that few even of these substantial enterprises will actually be so liquidated, but they don’t deny that some have been and more will be if the estate tax is retained.

Should it be our public policy that family-owned businesses face a government-imposed ceiling on size (through the exemption rate for the estate tax), beyond which they grow at their peril? Is there a good policy reason for framing the tax system so that there is a greater risk of tax-death for family-owned businesses based entirely on size, thus focusing more punitively on the most successful in providing services and contributing to economic progress and creation of jobs? Is it fair and equitable for a family-owned business to be taxed once on the profits earned each year and then be taxed a second time on the same profits that were invested back into the business upon the death of the owner, while corporations are taxed only once on corporate profits? Is not tax equity a legitimate question for Catholic Social Thought?

Should we use tax policy to effectively create a preference in favor of large corporations as the favored entities in many sectors of the economy? Is the common good promoted when a family-owned business, of whatever size, is placed at a distinct tax disadvantage compared to publicly-held corporations? Is such a policy healthy for society, for enhanced competition in the economy, for fair pricing of goods and services? Is a policy that favors corporate giants over family-owned businesses consistent with Catholic Social Teaching as it pertains to the family and community?

Even assuming that the moral and socially-responsible approach to wealth accumulated through entrepreneurial activity and dedicated to ongoing production is to transfer that wealth out of the private economy and into the federal treasury, might it not be more equitable to construct a means of taxing wealth incrementally as it is created rather than dropping the tax boom upon a person’s death? As long as death is fixed as the taxable event, the estate tax will be foreboding, be seen as intruding upon families at a particularly difficult time, and be uniquely disruptive to any ongoing enterprise. Are not these factors, which implicate human dignity and the relationship between people and their government, also vital to Catholic Social Thought? To be sure, I imagine any alternative tax scheme would be just as complicated, as unsettling in other ways, and as likely to create collateral damage, suggesting any tax on the mere presence of wealth (regardless of how it is being applied) rather than on income earned is simply a misguided approach to revenue-generation.

More importantly, and returning to the central subject of smaller family businesses (which as outlined above are far more typical), the pre-death consequences of the estate tax remain deeply troubling to me and others who (unlike me) face the problem. This is where the unfairness of the tax becomes most poignant. Elizabeth suggests that the additional planning required by the federal estate tax should not onerous because business owners still would need to retain accountants and lawyers for estate planning purposes anyway and perhaps even to address the identical problem in the similar context of (typically much lower) state death taxes. But the fact that a person has to go to the doctor because of one ailment hardly means that he or she welcomes yet another illness that requires a second and longer visit. Moreover, as I’ve emphasized, the problem here is not only the drain on time and money in visiting lawyers and accountants, but that business owners are forced to consider and adopt artificial structures and make decisions at awkward times or for reasons other than business and personal judgment by reason of the looming presence of the estate tax.

Before speculating that the burden is light, that the effects are "marginal," and that the concerns are the misguided fears of over-excited people, we ought to listen to the voices of those who own family businesses and farms. In response to my posts, I’ve received private messages in which people describe the businesses their families or friends have built and their resentment of the perverse effects of the estate tax. I speak also based upon the experiences of those in my own family and among my personal acquaintances who have maintained farming operations and established family businesses, and who confirm that the prospect of the estate tax can weigh heavily.

But don’t take my word for it. Spend some time talking with people who own family businesses and farms. Although no group is monolithic in thought and supporters of the estate tax will be found even here, I’d be surprised if you don’t come across quite a few more who are troubled by the estate tax than those who are not. Perhaps then you’ll better understand their genuine bewilderment when they find the government, rather than thanking them for what they’ve contributed to the prosperity and health of their communities, instead appearing as a jackal greedily lying in wait for their deaths.

Finally, I can’t help but observe the schizophrenic nature of the arguments made in favor of retention of the estate tax. On the one hand, we’re assured that the estate tax will have, in Elizabeth’s words, a “minimal impact” on family businesses and no “significant impact on the U.S. economy or even the economies of rural areas.” On the other hand, Elizabeth and Rob tell us that repeal of the estate tax would have catastrophic effects on the federal budget, costing as much as a trillion dollars in tax revenues. You can’t have it both ways. If this tax is big enough to produce a flood of revenues for the government treasury, then it necessarily will tear a correspondingly large bite out of the economy. And some portion of that bite inevitably will be taken out of the hide of family-owned businesses and farms.

Greg Sisk

July 29, 2006 in Sisk, Greg | Permalink | TrackBack (0)

Bush's Former Speechwriter on Christians and Politics

From a Christianity Today interview with Michael Gerson, Bush's recently departed speechwriter and advisor:

Will compassionate conservatism survive rising deficits, the cost of Katrina, and illegal immigration?
    There are some members of the Republican Party who do not understand the power and appeal of this set of issues and who have a much more narrow view of government's role. These issues are very much up for debate. Immigration is a good example. I understand the need for any nation to control its borders. But I do think that people of faith bring a little different perspective to this issue. There's a positive requirement to welcome the stranger and to care for people even if they're not citizens. Human dignity is universal and doesn't depend on what papers you hold. That brings a leavening perspective to a lot of these issues. And it's the perspective the President has brought to this issue. It would be a shame if conservatism were to return to a much more narrow and libertarian and nativist approach.

In my view, there's more than "some members" of the Republican Party who minimize compassionate conservatism": when the rubber meets the road, the dominant strain minimizes it in favor of libertarianism, nativism, or big-business handouts.  We don't all agree on that, but I'm sure we can all agree that we hope that the vision Gerson articulates makes headway within the GOP.

Until recently, the Republican Party and Christian conservatives have complained that government is the problem. Is that a view they will likely return to?
    I think it's a temptation, but I don't think it's going to happen. One reason is because of what's changed in evangelical political involvement.

    I think there are lots and lots of young people, in their 20s to 40s, who are very impatient with older models of social engagement like those used by the Religious Right. They understand the importance of the life issues and the family issues, but they know the concern for justice has to be broader and global. At least a good portion of the evangelical movement is looking for leaders who have a broader conception of social justice. President Bush has provided that in many ways. He ran his initial campaign on education and on faith-based answers to poverty and addiction. And then he's led the international efforts we've undertaken, both on the development and disease side, but also on the spread of human liberty.

You're starting to sound like Jim Wallis!
    No, because I also don't think the answers can be found in the Religious Left. I don't think we can minimize some of the traditional issues. I don't believe it's possible to be concerned about social justice without being concerned about the weakest members of the human family. I also think that America can play an active and positive role in the world and that we're not at fault for everything.

Well, the last sentence is a cheap shot at those who want America to "play an active and positive role in the world" but think this can only happen through generally emphasizing negotiation and multilateralism instead of military force and unilateralism.  He never confronts the moral and prudential costs of the Iraq invasion (even granting that there may still be some benefits from it).  But nevertheless, he makes many worthwhile pointsm, including about care for the unborn, in the worth-reading interview.

Tom

July 29, 2006 in Berg, Thomas | Permalink | TrackBack (0)

Friday, July 28, 2006

Evangelical Efforts to Convert Catholic Soldiers

An article in Our Sunday Visitor reports on the problem of proselytization of Catholic soldiers by evangelical Protestant military chaplains:

Although the military brass has stepped in on several recent occasions to address concerns about proselytism – including charges raised by a fellow Christian chaplain last year at the Air Force Academy in Colorado Springs, Colo. – the practice continues among many rank-and-file evangelicals who see Catholic soldiers as prime targets. Lacking a solid formation in their faith or an available Catholic priest to visit for counsel, some Catholic soldiers find themselves too poorly equipped to effectively defend church teaching and practices against the evangelicals’ charges.

For the most part, the remedy the article advises is to recruit more Catholic chaplains and supplement them with lay military volunteers to nurture and soldify Catholic soldiers in their faith.  Yet in that first quoted sentence above -- referring to "military officials [s]tepp[ing] in . . . to address [these] concerns" -- the article seems to hint that perhaps military officials ought to protect soldiers (Catholics, presumably others) from conversion efforts by chaplains of other (primarily evangelical) faiths.  If the article is suggesting that, isn't it misguided?  Set aside methods or situations in which conversion efforts are coercive (as they were in the Air Force Academy, apparently) or would undermine soldiers' morale or cohesion.  Outside of those cases, shouldn't the Catholic attitude be that proselytization -- which as Michael McConnell has pointed out, is just a nasty word for "persuasion" -- is a legitimate part of religious exercise, including chaplains' religious exercise?  Shouldn't the Church see itself as an evangelizing church too and seek to join evangelical Protestant chaplains in evangelistic competition -- not ask for limits on those chaplains' activities in order to protect Catholic soldiers from persuasion?

(HT: Christianity Today)

Tom

July 28, 2006 in Berg, Thomas | Permalink | TrackBack (0)

Elizabeth Brown Makes the Case for the Estate Tax Under Catholic Social Thought

My University of St. Thomas colleague, Elizabeth Brown, offers the following thoughts in response to the various posts on the estate tax question:

"I have been reading the estate tax postings with interest. When comparing the points made in favor of repeal with the other evidence that I have seen, I am not convinced that repeal of these federal estate tax can be justified either from a Catholic Social Teachings perspective or from a more utilitarian cost-benefit analysis.

1. Rationale for Estate Tax: In the posts favoring repeal, there were extensive descriptions regarding the sterling character of the owners of small businesses and family farms. Certainly, most of them probably are as virtuous as he describes. From his description, however, one might get the impression that the reason that the estate tax exists is to punish the rich for being "evil." So it would follow that if small farmers or small business owners are not evil, then the estate tax ought to be abolished.

Taxes, including the estate tax, are usually not imposed to punish people. (Obviously, the "sin" taxes on alcohol and tobacco products are an exception to this general rule.) As Oliver Wendell Holmes Jr. noted, "Taxes are the price we pay for civilization."

Since taxes must be imposed in some manner so that government can deliver those goods and services deemed necessary for the common good, the question arises as to what types of taxes to impose and on whom should they be imposed.

Catholic Social Thought supports the concept of progressive taxation. As Pope John XXIII stated in Mater et Magistra, "In a system of taxation based on justice and equity it is fundamental that the burdens be proportionate to the capacity of the people contributing."

The estate tax is an example of this sort of progressive taxation. Everyone who is subject to estate taxes, which includes some small business owners and family farmers, are being taxed because they have a greater capacity to contribute, not as a punishment for being the "evil" rich.

I think that it is worth noting that family farms and small businesses in the U.S. receive billions of dollars annually in agricultural subsidies, subsidized loans, technical assistance and regulatory relief. For example, the amount that just the U.S. Small Business Administration provided in assistance to small businesses in 2005 can be found here. It seems to me that these groups (small businesses and family farms) to which so much has been given, should not find it surprising that society might require them to give back something to the common good through the estate tax. As Christ stated in Luke 12:48: "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."

2. Costs of Estate Tax Planning: The discussion in favor of repeal also talked about the onerous burdens that the estate taxes imposes on small business owners and family farmers because they have to spend time and resources planning how to reduce or eliminate the burdens of estate taxes with their accountants, lawyers, bankers and other advisers. This raises two points.

First, many small business owners and family farmers will still have to engage all of these advisors to help them deal with the estate taxes imposed by states, even if the federal estate tax cuts are made permanent. Right now the only proposal on the table is to make the Bush estate tax cuts permanent. Those cuts only apply to federal estate taxes. Most states also impose estate taxes and not all of these are going to go away if the federal government decides to eliminate its estate tax.

States cannot as easily afford to eliminate estate taxes as the federal government can because 49 of the 50 states are required to balance their budgets. If the states eliminated their estate taxes, they would either have to cut programs or raise additional taxes in some other manner. If they raised the additional taxes by increasing regressive taxes, like the sales tax, then such moves would be at odds with Catholic Social Teachings. If they cut assistance programs for the poor and disadvantaged, they may also be at odds with Catholic Social Teachings. In fact, it was concerns about such cuts that led the Catholic Conference of Kentucky, which has the bishops in Kentucky as its board of directors, to issue a statement urging Catholics in Kentucky to support efforts to decouple the Kentucky estate tax from the federal estate tax.

Second, even if both federal and state estate taxes are repealed, taxes are only one part of the estate planning for small businesses and family farmers. Small businesses and family farms will still have to engage in extensive estate planning regarding concerns about whether the children want to run the business, which of the children should run the business, what to do if some children want to run the business and others don't, etc. It is not clear to me that the marginal additional costs of dealing with the issues raised by the estate tax on top of these other estate questions are as significant as some who favor repeal seem to believe. What is clear is that eliminating the estate tax would not eliminate the need of small business owners and family farmers to discuss estate issues with their lawyers, accountants, and other advisers.

3. Estate Tax Does Not Harm the Most Successful Family Businesses and Family Farms: One proponent of repeal stated that the estate tax would harm the most successful family businesses. The assumption seems to be that all family businesses and family farms are small and thus, easily put at risk by the estate tax. That isn't true. For example, SC Johnson, which is a large, progressive corporation, is a family business and it is hardly small. While only about 7% of family farms are large farming operations, these farms account for over 59% of all U.S. farm production. The large family farms have on average a 14% profit margin annually, which is better than the average profit margin for U.S. industries in general (which was 7.7% in 2005). See report done by oil industry comparing its profits to the profits of other industries in US. These farms, which are the most successful of the family farms, are not in danger of going under due to the estate tax.

According to the Congressional Budget Office, the 15 farms that would have to sell some assets (but not necessarily the entire farm) to pay the estate tax would have to do so because they had insufficient "liquid assets" to pay the tax. In other words, these farms were asset rich but cash poor, which means that they were probably making little or no profit on an annual basis. Over 57% of all farms in the US are small farms that earn less than $10,000 annually in income. In addition, o ver 35% of all US farms are not profitable.

So how do the large numbers of family farms that operate at a loss continue to operate? Very often it is because the owners receive a substantial portion or a majority of their income from nonfarm sources.

Why do these farms continue to operate if they are not profitable? In some cases, their owners are using them as tax shelters. For example, in the case of the residential/lifestyle small family farmers, many of them appear to operate the farm at a loss in order to use these losses against the taxes that they owe from their substantial off-farm earned income. About 42% of residential/lifestyle farms operate at a loss and the average operating loss for residential/lifestyle farms was about 49%. Residential/lifestyle farms comprise 892,602 of the farms, or 42% of the total farms in the US. Farming can be a great tax shelter!

So I am not sure why people who may have avoided taxes by using their farms as a tax shelter should get to additional tax breaks by having the federal estate tax repealed.

4. Cost-Benefit Analysis Does Not Support Repeal: There are about 2.1 million farms in the U.S. While farm numbers declined in the 1980s, these declines virtually stopped in the 1990s. So the estate tax does not seem to have been having a measurable effect on the farm population prior to the implementation of the Bush tax cut. In addition, the 123 farms subject to the estate tax in 2000 represented only 0.0059% of the farms in the US. So it is hard to see how something that has a minimal impact on even those farms (only about 12% of even those farms would have to sell some assets, not necessarily the entire farm, to pay the estate tax) would have a significant impact on the U.S. economy or even the economies of rural areas. On the other hand, as Rob noted, it would cost the federal government over $1 trillion over 10 years if the estate tax was permanently repealled. If all of the states eliminated their estate taxes as well, the costs were be significantly higher. It is hard for me to see from a cost-benefit analysis perspective how repeal of the estate tax can be justified.

For a complete description of the finances of farms in the U.S., see the report that the USDA compiled a report in 2005."

July 28, 2006 | Permalink | TrackBack (0)

Dwyer: A Response to Rob

Thanks Rob for your comments on Dwyer.  The discussion about Dwyer’s views of child-raising overlaps nicely with recent discussions about a) the human rights, revelation, and natural law, and b) the destruction of embryos to harvest their stem cells.

Point 1.  Rob says that Dwyer’s “project does not necessarily ignore the nature of the human person, but recognizes the multitude of divergent anthropological premises to which Americans cling.”  My response is:  who or what is a “human person” that she is entitled to respect even if she holds anthropological premises divergent from the prevalent norms.  A Catholic anthropology has an answer to this question, but I don’t think secular liberalism (including Dwyer) has an answer to this question.  Rorty and Arthur Leff expose the nakedness of the secularist’s response.  In other words, Dwyer’s conception of the human person is so thin that it doesn’t provide a firm foundation for protecting society’s weak and marginalized, including the children he would like to “protect” by his radical shift toward a statist model for child-rearing.

Point 2.   Dwyer says that “moral rights and duties emerge from perceiving an overlapping consensus among people holding diverse conceptions of the good.” Journal of Catholic Legal Studies (vol. 44 at 225).  Are religious voices –whether expressed in terms of faith or reason – excluded from the development of Dwyer’s consensus?  Dwyer’s whole project seems aimed at eliminating religiously grounded conceptions of the good from informing or forming the consensus.  Like Leiter, he rules faith-based arguments out of bounds. (And, if his plan for a secularist takeover of childrearing is successful, one would expect that the ranks of the religious would diminish over the generations).  Dwyer also dismisses natural law arguments:  “An argument somewhat akin to, and often ‘code’ for, an argument based on divine command is one based on natural law or natural rights.  Many people, recognizing that no one will be persuaded if they base a claim on an assertion that ‘my god says so,’ translate that assertion into one that ‘nature says so.’” 

Id.

at 219.  Unless I am mistaken, Dwyer, with his extremely thin conception of the human person (which I said in Point 1 doesn’t even provide a firm foundation for his own project), would exclude all of us on MOJ from participating in the development of an “overlapping consensus” unless and until we renounced the Catholic Intellectual Tradition (rooted in faith and reason) as the foundation for our work.

Am I overreacting?  As to point 1?  Point 2?  Jim, I’d still love for you to weigh in.

Michael S.

July 28, 2006 in Scaperlanda, Mike | Permalink | TrackBack (0)

We're number (3 in) 1!

I will probably remain content to be baffled by the concept of the Trinity, but for those who are more intellectually adventurous, you'll want to check out this new blog.  It's all Trinity, all the time.

Rob

July 28, 2006 in Vischer, Rob | Permalink | TrackBack (0)

Dwyer: A Former Student Comments

William Castle, a MOJ reader and former student of Jim Dwyer, responded to our recent discussion of Dwyer's work:

“I took Professor Dwyer for jurisprudence while a law student …  While our class covered more than jurisprudential issues related to his specialty, we did spend a good deal of time covering his ideas ...  And time was spent on the pre-political nature of man which revealed that the thing called “family” was, of course, a mere social construct.  This sort of thing was a real eye-opener at the time to a Catholic....  I realized how radically different a place many on the left were coming from, particularly jurisprudentially, whether they knew it or not, and how claims of “attacks on the family” were hardly overreactions by Bible-banging lunatics.  I owe Professor Dwyer a debt of gratitude as he was eminently fair-minded, engaging and decent as a professor and person, and his directness was refreshing in contrast to his like-minded colleagues and truly enlightening, even if that light shed revealed only how much I disagreed with him.”

July 28, 2006 in Scaperlanda, Mike | Permalink | TrackBack (0)

Tuning out

The Christian Century reminds us of the post-Katrina conversation on race and poverty that never happened.  Admittedly, I find myself noticing the stories of rampant fraud (e.g., dog booties) in the government relief programs more than the ongoing suffering that I eventually begin to tune out as a sort of background dissonance.  (It's an even more pronounced phenomenon with my attention to Iraq.)

Rob

July 28, 2006 in Vischer, Rob | Permalink | TrackBack (0)

Estate Planning . . . with a twist?

I realize Rob is this group's music and dance critic, but here is a rather touching story from the Boston Globe about the last four Shakers left in the world and the estate planning they're doing.

Lisa

July 28, 2006 in Schiltz, Elizabeth | Permalink | TrackBack (0)

Thursday, July 27, 2006

Yes, Still More on the Estate Tax and Catholic Social Thought

Breaking my vow that I would post no more on the estate tax (and thus having now far exceeded my annual quota of comments on tax-related issues), I simply have to respond to Tom Berg’s suggestion that the owners of family businesses and family farms have been “worked up” about the effects of the estate tax by listening to misleading political advertisements.

Before I respond, however, I want to pause to emphasize how much I appreciate this expansion of this discussion beyond the narrow paradigm that often constrains Catholic Social Thought discussions. Too frequently, Catholic Social Thought appears to function in a two-dimensional world of (1) the deserving and oppressed poor and working class making claims against (2) the greedy and callous rich (and their compatriots in large unfeeling corporations). Especially when we are offered proposals for more governmental intervention to rearrange society in a preferred and assertedly more just direction, the multi-dimensional nature of these issues must be acknowledged, the law of unintended consequences must be seriously considered, and additional voices (such as those of the middle class, here in the form of owners of family enterprises) should be welcomed to the debate.

I’m also obliged to acknowledge again that I speak here only as a reasonably well-informed citizen. I claim no expertise in economic policy, small business finances, agricultural economics, or taxation. But then neither, I suspect, do my most of my interlocutors, and yet none of us are holding back from offering opinions (isn't the blogosphere grand!). Moreover, as a naturally risk-averse person, I confess that I opted for the comfortable (but not luxurious, as no one becomes a professor to get rich) life of the academic, isolated from commercial realities, sheltered from the ebbs and flows of the economy, immune (by freedom of speech and academic freedom) from most regulation of my activities, and never having to worry about making the payroll this week. In sum, I don’t have any personal stake in the estate tax question. Again, I think it fair to say that my interlocutors are in much the same position.

But those who have contributed their time, talents, life savings, and sweat-equity to build family businesses and maintain family farms do have such a stake. And, in my experience, they are not the kind of nervous, financially ignorant, and gullible folks who could be easily-excited by the feverish imagations of a political advertisement. The Small Business Administration reports that half of new small businesses fail in the first year and 95 percent fail within five years. Not surprisingly, then, those who do succeed invariably are steady, clear-eyed, practical, and canny folks who respond calmly and confidently to challenges and who plan wisely for the future.

Spend some time talking with the owners of family businesses and family farms. Their concerns about the estate tax are grounded in their personal experiences and the practical (and negative) impact that it has on their lives (not to mention their deaths). They worry about being unable to transfer the family business to the next generation, not because they’ve been taken in by political hucksters, but because they’ve spent valuable time and money sitting down with their accountants and their estate-planning lawyers. Having examined their financial records, thoughtfully projected the likely trends for the future, and been advised by the experts about the tax consequences, they come to their keen unhappiness with the estate tax quite honestly and realistically.

To be sure, as I said previously, only a handful of family-owned businesses and farms will face the estate tax collector as a financial Grim Reaper. While Tom quibbles about the actual numbers of family enterprises that may have to be dissolved to satisfy the estate tax bill, he acknowledges there will be some and seems content to dismiss them as a “small tail wagging a very big dog of repeal.” He could be right, both about the small numbers and the worthiness of the sacrifice to fill the government tax coffers. I'm just not ready to follow him to that conclusion just yet.

Those few family businesses that would be destroyed to benefit the common ground would, of course, be the most successful of these enterprises, having grown through the efforts of the owners to a size that by their deaths exceeds the estate tax exemptions. Thus, the estate tax effectively punishes those family businesses that are most creative and effective in providing goods and services. And when those fairly sizeable family businesses are sold off to pay the tax bill, they undoubtedly will be submerged into large corporate entities, probably those already operating in the same economic sector, thus decreasing competition and removing one more locally-centered enterprise. But, hey, I guess we’re supposed to say (perhaps with a little tear of regret), that’s just the cost of keeping money flowing into the federal treasury.

The vast majority of family businesses and family farms will not come under the axe of the estate tax. Tom Berg and Rob Vischer, and the studies they cite, continue to place the greatest emphasis upon this fact, that most of these businesses will survive. And with that conclusion they dismiss any further concern about the tax and its effects. But, as I said earlier, that most businesses will survive hardly makes the continued presence of the estate tax inconsequential.

Again, spend some time talking with the owners of family businesses and family farms. Hear them explain how they have to employ lawyers and accountants, reframe transactions, create artificial structures, distribute ownership shares at earlier stages, etc., in order to avoid the estate tax and thereby allow transfer of the business to the next generation. For many such businesses, the estate tax hovers over every decision made, such as whether to rent facilities or buy real estate (as the latter adds to the capital, non-liquid assets of the business); whether to divert scarce resources to purchase insurance so as to create liquid assets to pay any estate tax burdens; whether to contract an element of the business out or instead add new employees (which again may affect the size of the business and the estate tax consequences upon the death of the owner), etc. And throughout they must compete with the large corporate entities for which the estate tax has no implications.

Most owners of even substantial family businesses and farms will tell you that they are fairly confident they can arrange things so as to avoid the estate tax. But they are resentful about this governmental intrusion. They’ll tell you that they have sacrificed their time and talents, invested their life savings, worked very long hours, built a business that serves needs in the community, created jobs and thereby supported families, participated in community improvements, etc. Then the federal government through the estate tax (and in other ways) imposes itself as an adversary, threatening to take away what they have built from their children.

Even the person who is able to evade the noose at the last minute is still unlikely to walk away with warm feelings for the hang-man.

Greg Sisk

July 27, 2006 in Sisk, Greg | Permalink | TrackBack (0)

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