PERSONAL FINANCE

Why America Needs the Estate Tax

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Save small businesses! Save family farms! You'll soon hear those cries as Congress considers permanently eliminating the estate tax.

Don't be fooled. Estate tax opponents are taking refuge under Main Street awnings. The true beneficiaries are the descendents of the enormously wealthy.

Since it's the fabulously rich who'll benefit from eliminating estate taxes, the man leading the fight to KEEP the tax is surprising: William Gates, Sr. Yes, the father of THE Bill Gates. Gates, Sr. and co-author Chuck Collins have written a clear and compelling book in support of the estate tax, Wealth and Commonwealth: Why America Should Tax Accumulated Fortunes. (Beacon Press, $25).

"If that money is not there, then the funds are going to have to be raised in some other form," explained Gates in a recent interview. "It's particularly unfortunate (abolishing the tax) at a time when we have the accretion of huge wealth. Ever since this country was started, we've been anxious to avoid the evils of aristocracy," said Gates.

Estate tax opponents claim it dampens the entrepreneurial spirit, but history proves otherwise. Instituted in 1916, the tax was a response to the vast fortunes amassed by the handful of the robber barons and industrialists. Along with other progressive era reforms, such as restricting monopolies, the estate tax was designed to make competition fairer for newer, smaller enterprises.

Nevertheless, the tax got a bad reputation. Part of the problem was that the amount of an estate excluded from taxation wasn't adjusted for inflation. Prior to 2000, the exclusion was $600,000. Even so, fewer than 2% of estates were subject to tax.

In 2001, Congress responded with what some call the "Throw Mama from the Train Act." The law lowers tax rates and increases exemptions between 2001 and 2009. Then, the tax is repealed entirely - for one year! After that, it reverts to 2000 levels. In other words, if you're very rich, the best time to die is 2010.

How about small or family-owned businesses? Aren't businesses being sold or closed because of estate taxes?

"If you talk to lawyers who practice in this field, you'll find very few small businesses unprepared to handle the tax," said Gates. "Perhaps a very illiquid family business would have difficulty (paying). So Congress made special provisions; they can pay the tax over 14 years."

Gates and Collins recommend reform, not repeal, of the estate tax. "There needs to be substantial increase in the exempt amount," suggested Gates. He puts the figure for businesses at $7 million.

Increasing the exempt amount - rather than repealing the law - means few businesses of any size would be subject to estate tax. Look at the numbers for the year 2000:

-- 108,322 total estate tax returns
-- 4,218 taxable estates with "closely held stock" (e.g., small or family businesses)
-- 2,904 taxable estates with non-corporate business assets.

If you raise the exemption for small businesses?
-- $5 million: 1773 taxable estates
-- $10 million: 873 taxable estates

Moreover, the bulk of the money comes from really big estates. Two hundred and sixty estates worth more than $20 million represented two-thirds of all assets in closely-held stock.

"A lot of businesses?have gone through intergeneration change, some six generations," said Gates. "They plan, they buy insurance?Large scale businesses are inconvenienced and have to pay taxes, like the rest of us who are inconvenienced and have to pay taxes. But they're not put out of business."

Okay, but what about double taxation? The people who made their money paid taxes once. Is it fair their estate pays again?

"The bulk of assets in taxable estates are appreciated stocks and assets that have never been taxed," explained Gates. "It's the opposite of double taxation."

While the amount raised by estate taxes has not been huge - about $29 billion in 1999 - it had been projected to rise to $400 billion by 2010. If that money doesn't come from the estates of the very wealthy, it's going to come from you or me.

Repeal advocates call it the "death tax." That's fine by me. Frankly, I can't think of any time I'd rather pay taxes than after I'm dead. Nobody likes taxes. But as taxes go, the estate tax is one of the best.

Copyright Rhonda Abrams, 2003

Rhonda Abrams writes the nation's most widely-read small business column and is the author of The Successful Business Plan and The Successful Business Organizer . Register to receive her free business tips at www.RhondaOnline.com.

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Last updated: Feb 5, 2003




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