Estate Taxes, The Messiness of Real Life, Economics, and Catholic Social Thought

On the question of the elimination of the federal estate tax, as with most issues of economic and government welfare policy, the implications of Catholic Social Thought depend on how one sees and judges the underlying practical realities. Once pat-answers and bumper-sticker slogans are left behind, the exploration of such matters necessarily—and quite appropriately—turns on how things look on the ground, where the rubber meets the road. Catholic teaching helps us formulate the questions and rules some motivations in and out of bounds. But we are not spared the hard work of grappling with complex sociological factors, understanding statistics, evaluating economic models, trying to anticipate secondary effects, in other words, all the messiness of real life. As a consequence, prudence often leaves us in a position where reasonable people with full fidelity to the precepts of Catholic Social Thought come to different conclusions.

For many people, proposals for elimination of the federal estate tax evoke images of fabulously wealthy trust fund babies living the playboy life off the income generated from inherited assets of a prior generation. If this is all that were at stake in the estate tax issue, then the only question for Catholic thinkers would be whether a proposal to tax this transfer of wealth were motivated by a legitimate sense of equity and securing revenues to advance the common good or instead by envy and, as Rick Garnett puts it, a “soak the rich” attitude.

Instead, it is significant that the most vocal supporters of the proposal to eliminate the estate tax are the various associations and federations of small business people and family farmers. When the owner of a small business or farm dies, the estate tax requires that the entity be valued according to its going value were it to be sold, that is, were the business to be transferred by sale to a new owner and were the farm-land to be sold. If an estate tax is then pressed against that value, the effect then could be to force the sale of the business or farm land to pay the tax, thus preventing transfer of the family business or family farm to the next generation.

When thinking about the estate tax and the implications for Catholic Social Thought, consider these words of the David McClure, president of Montana Farm Bureau Association:

“When the average person sees the figure of $2 million as the current exemption, or even $3.2 million, which is the exemption in 2009, it sounds like a lot of money. However, when you look at how land prices in Montana are currently skyrocketing, it doesn’t take a whole lot of land to exceed that value. Farm operations are capital-intensive businesses whose assets are not easily converted to cash. Add your farm equipment—a combine can be worth well into six figures—barns and sheds, and you’re usually well over that amount.”

As bad as would be the loss of the family farm itself, the implications for Catholic Social Thought do not end there. As Mr. McClure notes, if the family farm is subject to forcible sale to cover the estate tax, there could be a cascade effect on the rest of the rural community, with respect to agriculturally-related small business that support the family farm, social structures behind family farms, etc. In addition, urban sprawl and loss of agricultural land is advanced by the state tax. To again quote Mr. McClure: “The irony is that many who are opposed to death taxes elimination are the ones who are vocal about expanding high-density subdivision development, urban sprawl and loss of aesthetically attractive ag land open space; yet the underlying driver of these very problems is often an estate tax bill that the heirs can’t pay."

Consider further the case of family-owned businesses, including those that began small but have grown beyond the size of the classic Main Street merchant. A family that has built a business over time and now have a number of stores or locations could easily have built something now valued at several million dollars, although that value is mostly sunk into the capital assets of the business. The imposition of the estate tax upon such a family businesses could well force the enterprise to be put up for sale or converted into a publicly-held corporation. The estate tax thus contributes to the decline of family-owned businesses, with the loss of the social benefits that we all obtain from having our local retailers and service-providers owned and operated by individuals who are personally invested to the community.

It is striking that those who bewail the rise of Walmart and other mega-corporate retailers are also likely to support a robust imposition of estate taxes that undermine the family-owned businesses that compete against the Walmarts of the world. Moreover, the estate tax essentially discriminates against the family-owned businesses and in favor of the Walmarts and other publicly-held corporations. While the large corporate entities pay taxes on profits only once, the family-owned business may be taxed on the same profits twice, once when initially earned and then again, upon the death of the original family owner, when the estate tax is imposed against the business assets which were acquired by investing those profits back into the family business.

Might an alternative estate tax regime be created that avoided these effects, that is, allowed for a transfer of family businesses and family farms, thus being imposed only in the context of the stereotypical extremely wealth trust fund babies? Perhaps. But it would be a different system than is presently in place and if calibrated to avoid destroying family-owned businesses that have a paper value of fairly large size would generate a very small revenue for the federal government. Nor would secondary economic impacts thereby be avoided, as we still would experience the effect of removing those investments from the private economy; effectively encouraging resort to various means by which to avoid estate tax implications, whether those are economically productive and socially desirable or not; and the continued expenses of tax-planning paid to lawyers, especially by those family-owned businesses and farms that we want to exempt if they are able to structure arrangements appropriately. Is it really worth the candle? And, by this point, is really a matter with deep implications for Catholic Social Thought and worthy of attention among the other pressing issues in this society?

Greg Sisk