Elizabeth Brown Makes the Case for the Estate Tax Under Catholic Social Thought

My University of St. Thomas colleague, Elizabeth Brown, offers the following thoughts in response to the various posts on the estate tax question:

"I have been reading the estate tax postings with interest. When comparing the points made in favor of repeal with the other evidence that I have seen, I am not convinced that repeal of these federal estate tax can be justified either from a Catholic Social Teachings perspective or from a more utilitarian cost-benefit analysis.

1. Rationale for Estate Tax: In the posts favoring repeal, there were extensive descriptions regarding the sterling character of the owners of small businesses and family farms. Certainly, most of them probably are as virtuous as he describes. From his description, however, one might get the impression that the reason that the estate tax exists is to punish the rich for being "evil." So it would follow that if small farmers or small business owners are not evil, then the estate tax ought to be abolished.

Taxes, including the estate tax, are usually not imposed to punish people. (Obviously, the "sin" taxes on alcohol and tobacco products are an exception to this general rule.) As Oliver Wendell Holmes Jr. noted, "Taxes are the price we pay for civilization."

Since taxes must be imposed in some manner so that government can deliver those goods and services deemed necessary for the common good, the question arises as to what types of taxes to impose and on whom should they be imposed.

Catholic Social Thought supports the concept of progressive taxation. As Pope John XXIII stated in Mater et Magistra, "In a system of taxation based on justice and equity it is fundamental that the burdens be proportionate to the capacity of the people contributing."

The estate tax is an example of this sort of progressive taxation. Everyone who is subject to estate taxes, which includes some small business owners and family farmers, are being taxed because they have a greater capacity to contribute, not as a punishment for being the "evil" rich.

I think that it is worth noting that family farms and small businesses in the U.S. receive billions of dollars annually in agricultural subsidies, subsidized loans, technical assistance and regulatory relief. For example, the amount that just the U.S. Small Business Administration provided in assistance to small businesses in 2005 can be found here. It seems to me that these groups (small businesses and family farms) to which so much has been given, should not find it surprising that society might require them to give back something to the common good through the estate tax. As Christ stated in Luke 12:48: "From everyone who has been given much, much will be demanded; and from the one who has been entrusted with much, much more will be asked."

2. Costs of Estate Tax Planning: The discussion in favor of repeal also talked about the onerous burdens that the estate taxes imposes on small business owners and family farmers because they have to spend time and resources planning how to reduce or eliminate the burdens of estate taxes with their accountants, lawyers, bankers and other advisers. This raises two points.

First, many small business owners and family farmers will still have to engage all of these advisors to help them deal with the estate taxes imposed by states, even if the federal estate tax cuts are made permanent. Right now the only proposal on the table is to make the Bush estate tax cuts permanent. Those cuts only apply to federal estate taxes. Most states also impose estate taxes and not all of these are going to go away if the federal government decides to eliminate its estate tax.

States cannot as easily afford to eliminate estate taxes as the federal government can because 49 of the 50 states are required to balance their budgets. If the states eliminated their estate taxes, they would either have to cut programs or raise additional taxes in some other manner. If they raised the additional taxes by increasing regressive taxes, like the sales tax, then such moves would be at odds with Catholic Social Teachings. If they cut assistance programs for the poor and disadvantaged, they may also be at odds with Catholic Social Teachings. In fact, it was concerns about such cuts that led the Catholic Conference of Kentucky, which has the bishops in Kentucky as its board of directors, to issue a statement urging Catholics in Kentucky to support efforts to decouple the Kentucky estate tax from the federal estate tax.

Second, even if both federal and state estate taxes are repealed, taxes are only one part of the estate planning for small businesses and family farmers. Small businesses and family farms will still have to engage in extensive estate planning regarding concerns about whether the children want to run the business, which of the children should run the business, what to do if some children want to run the business and others don't, etc. It is not clear to me that the marginal additional costs of dealing with the issues raised by the estate tax on top of these other estate questions are as significant as some who favor repeal seem to believe. What is clear is that eliminating the estate tax would not eliminate the need of small business owners and family farmers to discuss estate issues with their lawyers, accountants, and other advisers.

3. Estate Tax Does Not Harm the Most Successful Family Businesses and Family Farms: One proponent of repeal stated that the estate tax would harm the most successful family businesses. The assumption seems to be that all family businesses and family farms are small and thus, easily put at risk by the estate tax. That isn't true. For example, SC Johnson, which is a large, progressive corporation, is a family business and it is hardly small. While only about 7% of family farms are large farming operations, these farms account for over 59% of all U.S. farm production. The large family farms have on average a 14% profit margin annually, which is better than the average profit margin for U.S. industries in general (which was 7.7% in 2005). See report done by oil industry comparing its profits to the profits of other industries in US. These farms, which are the most successful of the family farms, are not in danger of going under due to the estate tax.

According to the Congressional Budget Office, the 15 farms that would have to sell some assets (but not necessarily the entire farm) to pay the estate tax would have to do so because they had insufficient "liquid assets" to pay the tax. In other words, these farms were asset rich but cash poor, which means that they were probably making little or no profit on an annual basis. Over 57% of all farms in the US are small farms that earn less than $10,000 annually in income. In addition, o ver 35% of all US farms are not profitable.

So how do the large numbers of family farms that operate at a loss continue to operate? Very often it is because the owners receive a substantial portion or a majority of their income from nonfarm sources.

Why do these farms continue to operate if they are not profitable? In some cases, their owners are using them as tax shelters. For example, in the case of the residential/lifestyle small family farmers, many of them appear to operate the farm at a loss in order to use these losses against the taxes that they owe from their substantial off-farm earned income. About 42% of residential/lifestyle farms operate at a loss and the average operating loss for residential/lifestyle farms was about 49%. Residential/lifestyle farms comprise 892,602 of the farms, or 42% of the total farms in the US. Farming can be a great tax shelter!

So I am not sure why people who may have avoided taxes by using their farms as a tax shelter should get to additional tax breaks by having the federal estate tax repealed.

4. Cost-Benefit Analysis Does Not Support Repeal: There are about 2.1 million farms in the U.S. While farm numbers declined in the 1980s, these declines virtually stopped in the 1990s. So the estate tax does not seem to have been having a measurable effect on the farm population prior to the implementation of the Bush tax cut. In addition, the 123 farms subject to the estate tax in 2000 represented only 0.0059% of the farms in the US. So it is hard to see how something that has a minimal impact on even those farms (only about 12% of even those farms would have to sell some assets, not necessarily the entire farm, to pay the estate tax) would have a significant impact on the U.S. economy or even the economies of rural areas. On the other hand, as Rob noted, it would cost the federal government over $1 trillion over 10 years if the estate tax was permanently repealled. If all of the states eliminated their estate taxes as well, the costs were be significantly higher. It is hard for me to see from a cost-benefit analysis perspective how repeal of the estate tax can be justified.

For a complete description of the finances of farms in the U.S., see the report that the USDA compiled a report in 2005."