symposium

0 Comments | Insight on the News, July 5, 1999 | by Jennifer Dunn, | Robert S. McIntyre

Q: Should Congress phase out the family estate tax?

Yes: This archaic tax punishes most entrepreneurs, farmers and many family businesses.

BY REP. JENNIFER DUNN

Leonard L. Harris, a first-generation owner of Chatham Food Center on Chicago's South Side -- and one of the fewer than 20 black-owned supermarket owners in the United States -- recently was in Washington, D.C., to meet with lawmakers in Congress. His rise to prominence as a businessman is emblematic of the values that drive success stories: hard work, common sense and a desire to make a better life for his children. The freedom to attain prosperity and accumulate wealth is uniquely American and, when unfettered, it is a wonderful thing to behold. So what would make this successful and busy entrepreneur leave his business and travel to Washington, D.C.? The answer is simple: Everything for which he has sacrificed during the years is at risk of being confiscated when he dies.

It has been said that only with our government are you given a certificate at birth, a license at marriage and a bill at death. One of the most compelling aspects of the American Dream, as Harris will attest, is to make life better for our children and loved ones. Yet, the current tax treatment of a person's life savings is so onerous that, when one dies, the children often are forced to mm over half of their inheritance to the federal government. The estate tax is imposed at an alarming 37 percent to 55 percent rate. This is higher than in any other industrialized nation in the world except Japan. Even worse, not only does this take place at an agonizing time for the family, but they also have to watch their loved one's legacy be snatched up by the federal government -- an entity not known for great wisdom in spending money. This is as wrong as it is tragic. And it dishonors the hard work of those who have passed on.

"My focus has been putting my earnings back in to grow the business," Hams said at a press conference with other minority business owners advocating repeal of the estate tax. "For this reason, cash resources to pay federal estate taxes, based on the way valuation is made, would force my family to sell the store in order to pay the IRS within nine months of my death. Our yearly earnings would not cover the payment of such a high tax. I should know, I started my career as a CPA.... Fortunately, we now have an opportunity to get the 'legacy killer' out of our lives and future."

The purpose of the estate tax, or "death tax" as many call it, has evolved over time. It has been enacted four other times in our nation's history as a way to help fund wars -- the naval war with France in 1797, the Civil War in 1862, the Spanish-American War in 1898 and during World War I. Although it was repealed within six years in each of the first three instances, in 1916 the federal government put its hand in the pocket of Americans to fund the First World War and never took it out. Over time, the tax began to reflect political philosophy as liberal politicians sought to break up what they perceived to be the concentration of wealth in society by heavily taxing estates. It has become less of a tax on wealth, however, and more of a tax on the accumulation of wealth of those who are trying to get ahead and save for the future.

Harry Alford, president and CEO of the National Black Chamber of Commerce, understands this. "The total net worth of African-Americans is only 1.2 percent of the total -- versus 14 percent of the population. We have been stuck at that number since the end of the Civil War. Getting rid of the death tax will start to create a needed legacy and begin a cycle of wealth-building for blacks in this country. Eliminating the death tax will be a great start."

As Harris' story reveals, it is the small businesses and family farms that are particularly vulnerable to the death tax. Asset-rich and cash-poor, these enterprises do not have the liquid resources to settle a tax bill with the federal government of as much as 55 percent. Their only option is to sell some or all of the land or business, thereby diminishing the asset generating the wealth for that family.

Let me give you an example of how inheritance taxes can devastate someone who wants to preserve his or her family's lifetime investment. Helen Andersen of North Bend, Wash., lived on 50 acres that her parents bought when she was 3 years old. After Helen's parents died, the property was valued at $1 million. The only way she could pay the inheritance taxes was by logging 20 acres of land that had harvestable timber, which meant cutting down trees that were 60 years old. Helen did not want to cut those mature trees, but she needed the money to pay the government. She received $563,000 for the timber and paid 21 percent to the forester. After paying all of the taxes and her lawyers, virtually all of the money was gone. How in the world does this public policy reflect American values?

Today, less than half of all family-owned businesses survive the death of a founder and only about 5 percent survive to the third generation, according to the Life Insurance Marketing Research Association. Under current tax law, it is cheaper for an individual to sell the business prior to death and pay the individual capital-gains rate than pass it on to heirs. This is terrible public policy. More troubling, however, is the fact that the wealthier members of our society will see their effective death-tax rate reduced dramatically by stuffing money away here and there at the suggestion of high-priced attorneys and accountants. The Institute for Policy Innovation recently revealed evidence of this fact in a study showing that the effective tax rate on the most valuable estates actually was lower than that on medium-sized estates (see chart p. 24).