Why Death Taxes Should Be Abolished
Table of Contents
How the Death Tax Harms Family Businesses
Many farmers and small business owners earn relatively modest incomes even though the value of those farms and businesses make their estates subject to the estate tax. For example, Douglas Stinson, a tree farmer from Toledo, Wash., told the House Ways and Means Committee that the household income of the average tree farmer is less than $50,000, but the typical tree farm can be valued at more than $2 million.1 The result many times is that the heirs have to sell the farm or business to pay the estate tax. Stinson said 25,000 acres of prime forest land in Washington is converted to other uses each year, primarily to raise money to pay estate taxes.
The impact of the estate tax on small businesses can be devastating. According to a recent survey, 51 percent of family businesses would have significant difficulty surviving in the event of a principal owner's death, due to the estate tax. And 14 percent of business owners said it would be impossible for them to survive. Only 10 percent said the estate tax would have no effect.
"Due to the estate tax, 51 percent of family businesses would have difficulty surviving if the principal owner died."
This same survey found that 41 percent of business owners would have to borrow against equity to pay the estate tax and 30 percent said they would have to sell all or part of the business. Eighty-one percent of family businesses reported having taken steps to minimize the estate tax bite. These include purchasing life insurance, making lifetime gifts of stock, putting the business into trust or other arrangements.2
Recent academic research has also looked at the impact of the estate tax on small businesses. According to one study, its main effect is on business liquidity. Since most small businesses are undercapitalized to begin with, the estate tax can literally suck the life blood out of a business. Increasing the ability of entrepreneurs to leave an inheritance can greatly increase the chances of a small firm's survival.3 Other research found that the estate tax encourages small business owners to sell out or merge with large firms.4
The National Grocers Association, made up of independent grocers, said 27 percent of its family-owned members reported in a 1995 study that they would have to sell all or part of the business to pay estates taxes if the owner died.5
According to the National Federation of Independent Business:6
- Only about 30 percent of family farms and businesses survive a first-to-second generation transfer, and only about 4 percent survive a second-to-third generation transfer.
- One-third of small business owners will have to sell outright or liquidate part of their firm to pay estate taxes.
- The failure of 90 percent of small businesses after the death of their founder can be traced to the burden of the inheritance tax.