Is The Estate Tax An Entrepreneurs' Issue?

By Marc Tracy

We're having trouble with a post that appeared on Independent Street today, "Entrepreneurs Fight Death Tax Resurrection". For starters, there is its title: the term "death tax" is a politically-charged pejorative, not an objective description of a levy on a dead person's estate (the tax on income is called the income tax, the tax on payroll is called the payroll tax, and so on). But more worrisome is how the post subscribes to the false premise that small business owners have some special skin in the game when it comes to repealing the estate tax.

The estate tax doesn't by definition apply only to small business owners; it by definition applies only to rich people. Simply put, estates of individuals worth over $3.5 million, or of couples worth over $7 million, will be taxed at 45% in 2009 under current law. The main arguments for are that it generates extra revenue--$25 billion in 2005, the blog says--from those both rich enough to afford it and dead enough not to miss it, and it encourages investment and philanthropy over saving and passing on to heirs--in short, it encourages economic activity. The main arguments against are that the money in the estate is what's left over from money that, presumably, has already been taxed once, and that people should have the right to pass on what they've spent a lifetime developing to whomever they choose without the government taking a chunk of it away. It's a legitimate and important argument. But it's hard to see how it specifically implicates small business owners over other groups.

Really, the whole thing is eerily reminiscent of the Joe the Plumber thing from October, when an Ohio resident made the case against Barack Obama's plan to let expire George W. Bush's top-bracket income tax cut from the perspective of small business owners. As we pointed out at the time, those who would be affected by the expiration (which, incidentally, Obama has since suggested he may not go through with due to the current recession) are those who make over $250,000 in a year--a group that has only a small overlap with small business owners. In other words, reasonable people can and did differ over the wisdom of letting those cuts expire; but it is unreasonable to suggest that the expiration is an affront to "small business owners". And here, too: estate-tax repeal is simply not primarily an "entrepreneurs' issue".

Is there a smaller extent to which it is? Perhaps--and this is what's giving us some pause.

Unsurprisingly, Independent Street attributes the bulk of small-business opposition to the estate tax to the National Federation of Independent Business, which consistently advocates policies that lie on the right side of the political spectrum. According to the blog, "They argue the estate tax not only unfairly dings the estates of small-business owners and family farms, but also dissuades them from investing in their business (or starting a business at all). Business owners must purchase life insurance to cover the cost of the tax or keep enough liquid assets to pay for it, according to a 2005 analysis by the Congressional Budget Office.

Let's take these one at a time. Well, actually, we already took the first one: while we agree that there's a case to be made that the estate tax "unfairly dings," well, rich people--it is, as its critics allege, essentially double taxation--there is simply no basis for implying, as this argument does, that the category of rich people is synonymous with small business owners.

Secondly, the argument that the estate tax discourages investment in one's business is ludicrous. For one thing, by taxing large estates at such a high rate, the estate tax actually encourages the use of wealth while its owner is still alive. For another, nobody ever decided to forego making more money just to reduce tax liability. Even the most confiscatory tax leaves you with something.

The third argument, however, is a point well-taken. To the extent that the contours of an estate tax place an extra burden on those whose wealth is generated from a self-owned business, that is a playing field that needs to be leveled.

Beyond that, though, this is a debate that needs, for the sake of fairness and getting it right, to be made outside the confines of a supposed appeal to entrepreneurs' interests.

Comments (2)

January 13, 2009 1:34 PM