As it was once written by Benjamin Franklin, "in this world nothing can be said to be certain, except death and taxes."
Americans pay all sorts of taxes: federal income tax, state income tax, payroll tax, sales tax, excise tax and property tax, just to name a few. Nearly everything we do is impacted by taxes of some kind - for some, even their own death is a taxable event.
Those who inherit estates worth more than about $5 million are forced to pay 40 percent of the estate's value upon the death of the owner.
Trust me, I know what you're thinking. Five million? That's a ton of money! Who cares if the government takes 40 percent? For some, especially progressives, this logic makes sense. However, here's the reality: the death tax is a tax on success, a tax on hard work. It's a perfect example of government greed. Often, the full burden of the death tax hits family farms and businesses the hardest. The death tax is wrecking entities like these all across America. Why?
Farms and family businesses are often "asset rich" and "cash poor". Basically, this means that a farm or business is worth a lot on paper (due to valuations of land, machinery, buildings, inventory and so on) while also being short on usable cash (they often operate on meager profit margins).
For example, let's analyze a U.S. farm. According to the U.S. Department of Agriculture, the average American farm spans 441 acres. According to OSU's Department of Agricultural, Environmental and Development Economics, farming land in western Ohio averages $9,190 per acre. Using these numbers, the land value for a U.S. farm is over $4 million.
What about equipment? A combine can easily list for $500,000. This doesn't include the price for add-on components required for corn and soybean harvesting - tack on at least $150,000 for those. The value of the farmhouse? Assume $201,900, the median price of homes currently listed for sale in the U.S., according to Zillow.
Add in the value of a work truck and a barn, and you've got a farm worth north of $5 million. Even though farmers sound rich, they often aren't - they operate in a demanding, high risk, low profit margin job field.
When the owner of this farm passes away, under the death tax 40% of this farm's asset value would be taxed - it's highly likely that heirs would sell the farm just to foot the bill.
When liquid cash is short (as it often is for farmers and small business owners), heirs often find themselves selling their family farm or business just to pay the tax on its value. This is simply wrong - no American should be penalized in this way for the death of their parent. No American should devote their entire life to hard work, building a business for their children, only to know it will be gutted by greedy government policies.
The death tax also hurts the workers of these types of businesses; if heirs are forced to sell assets and close down operations, jobs will be lost forever. The death tax is simply a tax on capital, a tax that discourages economic activity, business investment and job creation.
According to the American Family Business Institute, a repeal of the death tax would create 1.5 million private sector jobs. Another study from economists at the Heritage Foundation found the removal of the death tax would increase small business capital by over $1.6 trillion (yes, that's trillion, with a "t"). These jobs and this investment capital would greatly benefit small towns across the nation.
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You're still thinking of that $5 million number, aren't you? You're probably also thinking of America's growing income inequality statistics, and you're probably under the impression that the death tax is an effective barrier to even higher inequality. This isn't the case.
Those who are very wealthy can afford highly skilled tax lawyers and accountants, people with the know-how to effectively structure assets in a way that shields them from the tax. Trusts, LLCs, and special life insurance policies are just a few of these tools.
The death tax doesn't stop income inequality. In today's economy, most of the wealthy are also self-made, meaning the death tax had no effect on their original success. Of those on the Forbes 25, the list of the wealthiest people in America, all but the Waltons (the Walmart family) are self-made. Mark Zuckerberg, George Soros, Bill Gates and Michael Dell are perfect examples of people who have built their empires from nothing. These are the same people who can lawyer up to avoid the estate tax, while farms and small businesses can't.
The death tax is unacceptable. For its moral costs, and for the economic harm it causes, it returns much less than 1% of federal revenue according to the CBO. An analysis from the American Family Business Foundation even found that the death tax would incur the U.S. government a $89 billion loss in revenue over the next decade. Why? The death tax decreases investment, economic development, and job growth. Without it, normal taxation could actually increase overall tax revenue.
A more business-friendly economy would benefit all - it would mean more jobs, more investment, and more innovative products that will improve our quality of life. It would also make the American dream even more accessible for more hardworking Americans -to strengthen America's economy, let's get rid of the death tax.
schroelm@miamioh.edu
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