The estate tax raises a tiny portion of overall federal revenues but exacts a heavy toll on families who often must sell the family farm or business in order to pay it.
The loss of farmland to nonagricultural uses is a trend that dates back two centuries or more. One big reason for it is the natural growth in productivity: With today’s yields, we would be drowning in foodstuffs if almost all of our people were farmers, as was the case when the Constitution was signed and Michigan was still a territory. When farmland loss results not from natural market forces but from bad public policy, however, it ought to become everybody’s concern.
A prime example of such bad policy is the estate tax, or "death tax" as it is commonly known. It is a tax paid on a person’s entire estate at the time of death. And it is onerous enough that it often forces a family to sell its farm just to pay the tax bill.
The current estate tax system is complex and has evolved over time. In 1916 the first federal estate tax was implemented for estates larger than $9 million in today’s dollars, with a 10 percent top rate. Many people gave away their estates, but government interpreted generosity as evasion, and the estate tax was augmented with a gift tax in 1924. In 1976 the two tax systems, estate and gift taxes, were combined into one unified tax. The rates begin at 18 percent on taxable estates of less than $10,000 and go as high as 55 percent on taxable estates over $3 million.
In a typical recent year, a little over half of the federal government’s estate tax revenue came from estates under $5 million. To Washington, the tax doesn’t mean much because it generates less than $15 billion yearly, or about one percent of total revenues. But to farmers, the self-employed, and small and medium-sized businesses that are often owned by minorities and women, it can hit hard. An estate worth $400,000 in 1997, for example, faced a liability of $121,800, or more than 30 percent.
Farmers are hurt because, theirs being a very land- and capital-intensive industry, they typically reinvest most of their earnings in good years into the farm, quickly increasing the worth of the estate. In 1992 the average Saginaw County farm was worth $286,000; by 1997, the average farm’s value had reached $459,000, nearly a 62 percent increase in five years. Oakland County farm values nearly doubled to $486,000 or $5,645 per acre. Washtenaw County’s average farm value was $500,000 in 1997, or $2,892 per acre.
Multiple studies have concluded that the estate tax is inefficient. Total compliance costs may be as high as 65 cents for every one dollar collected.
Finally, the estate tax is harmful because it encourages spending, not saving. It sends a powerful signal that the accumulation of even modest wealth will lead to heavy taxes. When an owner realizes that the estate will take a large tax hit, he or she may spend down the estate or remove the business from the family. Economist William Beach of The Heritage Foundation says that "it makes sense to buy vacations in Aspen, Colorado, or a painting by Rubens instead of investing in new productive equipment or expanding a business."
Beach and his fellow economists used two of the nation’s best statistical models to forecast what would happen if the death tax were repealed. They found numerous benefits that would likely flow from the increased incentives to save and invest.
Gary and Aldona Robbins, economists at the Institute for Policy Innovation, agree. They assert that over time, eliminating the estate tax would actually increase federal revenues above current levels.
But whether or not repealing the estate tax would produce more economic growth and boost federal revenues is not the highest consideration. The moral case for repealing the tax is paramount. Any policy that harshly penalizes hard work, thrift and good husbandry of property is fundamentally immoral. Selling the family farm or a small business just to pay sky-high taxes because a loved one died is a tragic practice that has no place in a free society.
America’s founding fathers protested British policy with the cry, "No taxation without representation!" The modern equivalent as it relates to the onerous death tax ought to be, "No taxation without respiration!"
(Dr. Jefferson G. Edgens, formerly of Michigan, is a policy specialist in the University of Kentucky's Department of Forestry and an adjunct scholar with the Mackinac Center for Public Policy headquartered in Midland, Michigan. More information on tax policy is available at www.mackinac.org. Permission to reprint in whole or in part is hereby granted, provided the author and his affiliations are cited.)