The Death Tax is fundamentally unjust. It is a form of double taxation that taxes assets which have already been subject to the federal payroll, income and/or capital gains taxes. Further, the burden of the tax falls solely on those who successfully build and maintain wealth (rather than spending it away).
For instance, consider two grandfathers, each of whom has $5 million dollars to leave to their grandchildren. One spends away the majority of his income by throwing expensive parties, purchasing flat screen televisions and other entertainment merchandise, and going on lavish vacations. In so doing, he spends away most of his $5 million, so that no death tax is owed upon his death.
The other grandfather practices frugality and delayed gratification throughout his life. He continues to invest his wealth so that it grows even larger to $7 million. During this time, he pays capital gains taxes on the returns of his investment. When he dies, a Death Tax of 45% is levied on $ 5 million ($7 million - $2 million standard exemption), resulting in $2,250,000 of his hard-earned money being confiscated by the government.
Hence, though the second grandfather practiced virtuous behavior, paid taxes (35% capital gains) and set a better example for his children and grandchildren, he is the one who is punished with the punitive Death Tax. The other grandfather – a modern-day prodigal son – is rewarded for engaging in irresponsible consumerism.
The Death Tax Harms Family-Owned Businesses
The Death Tax falls hardest on those who maintain a family business. Family businesses are made up of “illiquid assets” (property, machinery, inventory, vehicles, etc) which cannot be easily split apart to pay the Death Tax.
Family-business owners and farmers may have considerable capital assets in the form of property, business equipment, productive land and livestock, but often have little or no cash. This means that their “wealth” (on-paper) may be very large, making them liable for a hefty death tax bill. However, without cash, they are forced to sell some of their property to pay the tax. For many family-business owners and farmers, selling even a fraction of their business or farm makes it less competitive and unprofitable, forcing the ultimate sale of the entire operation.
In our death tax testimonies, we document multiple instances of this tragedy. Consider Victor Mavar of Louisiana, who sold his seafood processing and pet-food manufacturing business due to death tax payments. Another is farmer Gary McCall of Iowa, who nearly lost his farm when his father died, and who is unsure as to how he can save it for his son. These stories give just a glimpse of the social and economic havoc of the death tax on family owned businesses.
Family businesses – and the men and women who lead them – are responsible for over half of all jobs in America. Further, family-owned businesses are often pillars in small communities throughout the country. The owners and managers have personal ties the community and a direct stake in its existence. It is in the interest of small communities for family-businesses to thrive and grow.
The Death Tax Destroys Jobs and Economic Growth
Economically, the Death Tax has the reputation for being a job-killer. Researchers at the Heritage Foundation have calculated that 240,000 jobs are lost annually due to the death tax.1 This is due to the Death Tax’s destructive effect on capital – the wealth by which businesses open new operations and create jobs. When businesses have trouble accessing capital, they become less competitive and must cut existing operations. The employees are the first to feel this cut.
A leading economist, Alicia Munnell, has stated that the compliance costs (such as paying for an accountant or attorney) of the death tax is nearly the same as the federal revenue it raises – an amount equal to roughly $28 billion annually. This makes the death tax the most costly tax in existence.
The Death Tax Handicapps America
Imposing such an expensive tax on America’s most productive citizen’s has a direct impact on national economic competitiveness. At 45%, the U.S. has the second highest death tax in the world.
While countries such as Singapore have eliminated their death tax and others such as France, Finland, Hungary, and Jamaica are considering repeal or significant reduction, the U.S. death tax is set to climb to 55% - the highest death tax in the world – in 2011. Allowing this to happen is bad for American competitiveness and bad for America’s family business owners.
Are you confused by arguments against repeal? See our "Common Misconceptions" page for a concise, layman's refutation to the most common misconceptions about the Death Tax.
