More on the Estate Tax, Family Enterprises, and Catholic Social Thought

My colleague Rob Vischer accepts my challenge to ground the discussion about the elimination of the estate tax on the facts, agreeing that economic analysis is a crucial dimension to an informed debate about the implications of Catholic Social Thought on this issue. Rob points to a study suggesting that under a certain exemption level retroactively applied to a single tax year in the past (2000), very few family farms would have owed the estate tax in that particular year and even fewer farm estates would have lacked liquid assets by which to pay such taxes. Based upon this hypothetical scenario translated from a single past tax year, Rob offers his “impression is that the case for elimination is grounded more in rhetoric than in fact-based concern for the common good.”

I am not nearly so sanguine about the supposed negligible effects of this tax on family-owned businesses in the modern economy. Nor am I ready to dismiss the strongly-stated and widely-held concerns of those who actually face this question as other than an academic exercise or a political campaign issue. If the case for elimination of the estate tax truly is grounded in little more than exaggerated rhetoric, the multitude of associations, federations, and other organizations representing small businesses and family farmers—a surprising consensus among a diverse group of merchants and agricultural enterprises—presumably would not be so committed to that legislative goal. Because these groups are hearing directly from the grass-roots, that is, from family business and family farm owners who have put two-and-two together as they plan for the future and consider the eventual effect of such a tax, they just may know something of what they speak.

To begin with, the question before us apparently is not whether family enterprises would be destroyed, but how many. No firm conclusions could be reached without a longitudinal study of a series of tax years and even that study would be misleading without adjusting for future anticipated trends in real estate prices, etc. But, for the sake of argument, let’s assume that the narrow slice of statistics cited by Rob can be extrapolated over time. Even under that assumption, while the number of family farms that would be destroyed by the estate tax apparently would be few in number, there indeed would be such losses. Apparently at least 15 family farms each year would immediately have to be sold to come up with assets to pay the taxes. And even under those cited statistics, the eventual mortality rate would be higher. Even if a family farm estate had some liquid assets, the diversion of those funds to taxes means that the next generation assumes the business capital assets on a tighter margin and without operating funds. When forced to compete with large corporate entities not subject to the death tax, the competitive atmosphere is darker for the ongoing family enterprise. The advocates of preserving the estate tax have not yet told us how many family farms may acceptably be sacrificed, in keeping with Catholic Social Thought, for the supposed greater good of enhancing accumulation of revenue by the federal government.

Likewise, as borne out by both the statistics cited and confirmed by stories shared with me by some of those responding to my earlier posting, it is clear that some non-agricultural family businesses already have been broken up or sold to larger corporate entities in order to finance the estate tax. Even if these numbers are but a handful in any single year, we again would have to decide what is the cumulative level of fatalities to family enterprises that we deem morally acceptable.

Moreover, the cited study fails to give the full flavor of the collateral effects of the death tax, in terms the requisite tax and estate-planning arrangements (setting up trusts, distributing assets prior to death, creating shares of ownership in children or others, etc.) and legal expenses that are incurred by the owners of family businesses and farms as they struggle to find a way to transfer the family enterprise to the next generation. Given that these costs are not borne by large corporate commercial entities, which of course pay no estate tax, the competitive disadvantage to family-owned businesses, which often are operating on the margins of profitability, remains unaddressed. Nor can the estate tax issue be considered in isolation, for it is just one of the many ways in which tax policies, employment rules, business regulations, etc. fall more heavily upon small businesses than upon the large corporate entities that can more easily adjust and accommodate to government intervention.

Most importantly, looking at hypothetical statistics about what a particular estate tax exemption rate would have meant in a past tax year is peculiarly uninformative when talking about the death tax. By the very nature of the animal, the crucial question facing any family business is what the estate tax will mean in the future when the contingency upon which it is based, the death of the business owner, is realized. Because the future is always uncertain, because trends in real estate prices, retail sales, etc. are hard to predict, the very existence of an estate tax requires the present expenditure of valuable time and money, not to mention some anxiety, by family business owners to be ready for all possible future permutations. Because planning for such future contingencies has to begin immediately, family business owners find themselves having to consider artificial structures or transfers and distributions that otherwise would be premature or unadvisable, all because of the estate tax cloud looming over and potentially threatening the survival of the family enterprise into the next generation.

Let me close, however, with this significant qualification on everything that I’ve said here and before about the estate tax: the analysis presented above is that of a reasonably well-informed citizen, not of an expert in small business and farm economies or the economic effects of taxation. I'm not even a tax-law expert. In teaching about litigation with the federal government, I carefully avoid tax matters and tax jurisdiction. Which leads me to this final point, that we who think about Catholic Social Teaching and its implications for public policy also must have the humility to recognize our own limitations and to appreciate what is to be gained from the expertise and wisdom found in other disciplines. Prudence requires not only that we appreciate limits on use of law and government as a tool of social justice, as well as the secondary effects of policies, but that we also recognize and appropriately defer to the greater expertise of those who are trained in the disciplines that shed greater light on the question of the moment. (And for that reason, and undoubtedly to the relief of those who dread any discussion of taxes and tax law, I'll not post further on the subject.)

Greg Sisk