The House this week, perhaps as early as today, is expected to take up the issue of the federal estate tax. The tax (which currently has a top rate of 45 percent and an exemption of $3.5 million) is due to sunset at the end of the year, springing back in 2011 (with a top rate of 55 percent and an exemption of $1 million). The White House and the congressional leadership want the revenue the tax generates — about 1 percent of total federal revenue each year — so they are determined not to let the clock run out. But instead of keeping the tax alive for 2010, they should kill it altogether.
Often referred to as the death tax, the estate tax was established under the guise of ensuring “fairness.” Progressive reformers of the early 20th century thought a tax on lifetime earnings and savings would prevent “gross inequalities of wealth.” Instead, the estate tax destroys capital, the fuel that keeps the economy growing. When capital is difficult to acquire, some people are unable to start businesses, and some of those who already have businesses can’t expand them — resulting in fewer jobs for others.
Douglas Holtz-Eakin, former chairman of the Congressional Budget Office, has concluded that estate-tax repeal would significantly increase business investment and produce as many as 1.5 million new jobs. Let the White House focus on that at its upcoming jobs summit.
Family-owned companies are often asset rich, but cash poor. This means they have considerable wealth in “hard assets,” such as machinery, property, equipment, and inventory. But they don’t have lots of extra money in the bank. When a family that owns such a business faces estate taxes, the hard assets often must be sold to pay the tax. Selling these assets breaks apart the company and often leads to the loss of jobs. Some owners sell their entire businesses so their children don’t have to deal with estate taxes; the new owners often move these businesses out of state or even overseas.
There is no reasonable justification for the estate tax. The tax destroys capital and jobs. It encourages the wealthy to spend their money on themselves, rather than growing their businesses and creating opportunities for others. It raises relatively little revenue — and may in fact be a net revenue loser.
Washington has spent hundreds of billions of dollars to create jobs. But jobs are still disappearing. Abolishing the death tax would cost the Treasury little, but create jobs. It should be an easy choice.
– Dick Patten is president of the American Family Business Institute, an association of family business owners and farmers working for permanent repeal of the federal estate tax.