When the Two Certainties Collide: Death and Taxes

A family-owned farm in rural North Carolina (source)

In theory, the estate tax embodies the progressive aspects of the American tax code, as it taxes incredibly rich individuals’ assets upon their death in an attempt to prevent the intergenerational passage of accumulated wealth through redistribution via government spending. However, in practice, the estate tax produces nominal revenue at an incredibly inefficient rate, and impedes the growth of small businesses and family farms. Because the broad strokes of the death tax fail to holistically account for these two pillars of industry, I will focus on the adverse effects of the estate tax on small-businesses and farms.

Small businesses and farms undergird the massively productive American economy, providing goods and services at home and abroad. According to the United States Small Business Administration, small businesses employ 56.8 million Americans — 48% of the American workforce. Furthermore, 97% of US farms are family-owned, and collectively produce over $350 billion dollars of crops and livestock annually. As such, it is in the best interest of the American people to shelter the bedrock of American industry from undue pressures. The estate tax as it currently exists poses two main problems for small businesses and farms — it stagnates economic growth, and it does not sufficiently account for illiquid assets.

United States top estate tax rates over the past century (source)

Critics claim that the estate tax discourages saving money during one’s working life, leading to lower levels of capital available for investment, which, in turn, limits investment in machines and other technological advancements that make workers more productive. As a consequence of this phenomena, wages are impacted negatively. Similarly, the Congressional Budget Office (CBO) released a report that acknowledges the possibility for lower business investment and reduced hiring by farmers and small business owners as a result of the estate tax. Furthermore, the estate tax incurs incredibly high compliance costs for both those who are subject to the tax and those who are not. The estate tax requires 2.1 million hours of compliance time annually, incurring costs of over $100 million dollars. Wealthy estates can take advantage of loopholes through estate planning strategies to minimize losses from the death tax, but doing so is costly and wastes the economic potential of estates. In addition, estates that ultimately do not qualify for the estate tax are required to file complicated tax returns. The intended targets of the estate tax are well-equipped to avoid the tax, but small businesses and farms often do not employ these expensive, convoluted estate planning strategies, making estate tax revenues “penalties imposed on those who neglect to plan ahead” instead of a meaningful tax.

Despite the fact that farms and small businesses are less likely to have liquid assets, the estate tax fails to sufficiently address their particular status. The U.S. Department of Agriculture records that 91% of farm and ranch assets are illiquid, and compared to the average estate, family-owned businesses and farms were less likely to have sufficient liquid assets to pay the tax. However, since the estate tax is levied at the occurrence of death (a relatively random due date as compared to other taxes), without sufficient (and expensive) planning, descendants and their heirs can be forced to sell their companies or farms to large corporations.

It would be disingenuous to not acknowledge that the estate tax targets an incredibly small proportion of the U.S. population, but along with the negative effects stated above, my fundamental objection can be expressed in a singular question. Should we consider the death of an American citizen a taxable event?