NCPA's Bartlett: Time To Kill The Death Tax

Washington (August 18, 1999) -- The federal estate (death) tax wastes resources, discourages work, savings and investment, and does virtually nothing to equalize the distribution of wealth. The death tax should, therefore, be abolished, concludes a report released today by National Center for Policy Analysis Senior Fellow Bruce Bartlett.

"Even those with modest incomes can now expect to have $1 million or more at retirement if they save early and invest aggressively," said Bartlett. "Little wonder, that many baby boomers still in the prime of life are already fretting about how to avoid the estate tax."

What is commonly promoted as a tool for redistributing wealth from the rich to the rest of society, is actually an attack on the middle class, small businesses and family farms. According to the report, the estate tax applies to assets of $650,000 or more at time of death. This figure is scheduled to increase to $1 million in 2006, a rate of increase that barely keeps up with inflation. Those with assets larger than $650,000 can expect to pay 37% of each additional dollar to the federal government.

While families with a long history of wealth and those with vast resources have the ability to aggressively take advantage of the estate tax loopholes that do exist, many farmers and small business owners do not. In fact, many farmers and small business owners earn relatively modest incomes, never realizing that they could be considered rich and would be subject to the death tax.

"I have witnessed first hand the anguish, grief, frustration and destruction of family businesses and family members," noted Lewis Zimmer from the Mountain West Farm Bureau Mutual Insurance Company after reviewing Bartlett's report. "These business owners (farms and ranches) have very low incomes, frequently in the one to two percentage range of the fair market value of their total assets. This means there is no large reserve of working capital, no huge pool of liquid assets with which to pay estate taxes. Often, businesses are liquidated to pay the taxes."

According to the NCPA report:

  • Only about 30% of family farms and businesses survive a first-to-second generation transfer, and only about 4% survive a second-to-third.
  • One-third of small business owners will have to sell outright or liquidate part of their business to pay the death tax.
  • The failure of 90% of small businesses after the death of their founder can be traced to the burden of the death tax.

"Since most small businesses are undercapitalized to begin with, the death tax can literally suck the lifeblood out of a business," concluded Bartlett. "Increasing the ability of entrepreneurs to leave an inheritance can greatly increase the chances of a small firm's survival."