NCPA - National Center for Policy Analysis

Estate Tax Hits Small Businesses

September 11, 2000

It has been argued that the estate tax is essentially voluntary because the estate planning techniques available to "the rich" are so effective. Actually, those with the largest estates generally have the greatest ability to engage in estate planning, because many estate-planning techniques are costly and require long lead-times to implement.

Thus a disproportionate burden of the estate tax often falls on those with recently acquired, modest wealth: farmers, small businessmen and the like.

  • In 1997, more than 50 percent of all estate tax revenue came from estates under $5 million.
  • The effective estate tax rate actually falls for estates above $20 million.
  • A recent study estimates that two-thirds of the wealth of the nation's richest families goes untaxed.
  • In many cases, the incomes of those who leave taxable estates -- estates with a value above $1.35 million for a married couple -- may not have been very high, and they died not even realizing they were "rich."

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 because of the estate tax.

A survey of family businesses in New York found that they had spent $125,000 each in estate planning. These include attorney's fees, insurance premiums, and other expenses designed to mitigate the effects of the estate tax. In a review of the data from this survey, economist Douglas Holtz-Eakin concluded that the estate tax has a much greater distortionary effect on entrepreneurs than previously thought. It causes them to cut back on labor, investment, and risk-taking.

Finally, the estate tax may not even net the federal government any revenue. Because of the interaction of the estate tax and the income tax, economist B. Douglas Bernheim estimated that lost income tax revenue may offset all of the revenue from the estate tax.

Source: Bruce Bartlett (NCPA senior fellow), "Death, Wealth and Taxes," Public Interest, Fall 2000.


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