Responding to Elizabeth Brown: Family Businesses and the Estate Tax

I appreciate my colleague Elizabeth Brown’s thoughtful, informative, and well-researched contribution to the ongoing thread about the estate tax. I’ve enjoyed and learned much from the give-and-take on this issue, as well as the messages and interesting stories I’ve received from Mirror of Justice readers.

As I’ve stressed before in this thread, we as Catholic thinkers can only be enriched by broadening the discussion and being willing to consider other perspectives, other dimensions of social issues in a complex world, and other members of our larger community, even if we ultimately reject a particular argument based upon our appraisal of the evidence. Catholic Social Thought provides a means of evaluating the evidence but should not constrain what evidence is to be considered. This expansion of the dialogue, together with a resistance of the sometimes too-narrow class-warfare style and government-centric approach that may be uncritically adopted in such discussions, is of greater importance to me than any particular policy outcome.

Elizabeth questions what she calls my “assumption” “that all family businesses and family farms are small and thus, easily put at risk by the estate tax.” As a counter-example, she then describes one family enterprise that is anything but small. While I’ve never said that all family businesses are small, I stand firmly by my declaration that “small” indeed is the apt description for the overwhelming majority of family businesses in this country. According to the Small Business Administration (SBA), in 2003, 65 percent of all firms (small, large, family-owned, publicly-held) in this country brought in under $500,000 in receipts each year (not profits but gross revenues), and 79 percent of all firms employed fewer than ten employees. As these SBA figures encompassed all businesses, including major industries, but excluded those without employees, the percentage of family-owned businesses in this country that are small is even larger than revealed by these SBA statistics. Indeed, the Census Bureau reports that non-employer firms, which by definition are family-owned as the owner is also the only worker, account for three-quarters of all businesses. In sum, without question, the vast, vast majority of family-owned businesses in this country are neither large in size nor rich in profits.

As I’ve acknowledged in past posts, a handful of family-owned businesses have grown over time to a more considerable size, thus making the original owner modestly wealthy (although typically not among the fabulously rich). (Elizabeth indicates that this is even more true of family farms – which were not included in the SBA statistics I cited above – although the extensive real estate holdings and equipment purchases, etc., involving in farming together with the unusual seasonal and other vagaries make comparison more difficult and easy judgments suspect.) At least when it comes to these more substantial family-owned businesses, Elizabeth, joined by Tom Berg and Rob Vischer, appear sanguine about imposing the estate tax, whatever may come. I confess to being more concerned about the collateral consequences of the estate tax on the much more numerous and more typical small family enterprises than about shielding these larger family firms from the estate tax. At the same time, I have yet to hear a good argument why we as a society would want to place those larger family enterprises, which of course are among the most successful as evidenced by their very growth, at greater risk of being dissolved and sold off to large corporate entities upon the death of the original owners. My friends argue that few even of these substantial enterprises will actually be so liquidated, but they don’t deny that some have been and more will be if the estate tax is retained.

Should it be our public policy that family-owned businesses face a government-imposed ceiling on size (through the exemption rate for the estate tax), beyond which they grow at their peril? Is there a good policy reason for framing the tax system so that there is a greater risk of tax-death for family-owned businesses based entirely on size, thus focusing more punitively on the most successful in providing services and contributing to economic progress and creation of jobs? Is it fair and equitable for a family-owned business to be taxed once on the profits earned each year and then be taxed a second time on the same profits that were invested back into the business upon the death of the owner, while corporations are taxed only once on corporate profits? Is not tax equity a legitimate question for Catholic Social Thought?

Should we use tax policy to effectively create a preference in favor of large corporations as the favored entities in many sectors of the economy? Is the common good promoted when a family-owned business, of whatever size, is placed at a distinct tax disadvantage compared to publicly-held corporations? Is such a policy healthy for society, for enhanced competition in the economy, for fair pricing of goods and services? Is a policy that favors corporate giants over family-owned businesses consistent with Catholic Social Teaching as it pertains to the family and community?

Even assuming that the moral and socially-responsible approach to wealth accumulated through entrepreneurial activity and dedicated to ongoing production is to transfer that wealth out of the private economy and into the federal treasury, might it not be more equitable to construct a means of taxing wealth incrementally as it is created rather than dropping the tax boom upon a person’s death? As long as death is fixed as the taxable event, the estate tax will be foreboding, be seen as intruding upon families at a particularly difficult time, and be uniquely disruptive to any ongoing enterprise. Are not these factors, which implicate human dignity and the relationship between people and their government, also vital to Catholic Social Thought? To be sure, I imagine any alternative tax scheme would be just as complicated, as unsettling in other ways, and as likely to create collateral damage, suggesting any tax on the mere presence of wealth (regardless of how it is being applied) rather than on income earned is simply a misguided approach to revenue-generation.

More importantly, and returning to the central subject of smaller family businesses (which as outlined above are far more typical), the pre-death consequences of the estate tax remain deeply troubling to me and others who (unlike me) face the problem. This is where the unfairness of the tax becomes most poignant. Elizabeth suggests that the additional planning required by the federal estate tax should not onerous because business owners still would need to retain accountants and lawyers for estate planning purposes anyway and perhaps even to address the identical problem in the similar context of (typically much lower) state death taxes. But the fact that a person has to go to the doctor because of one ailment hardly means that he or she welcomes yet another illness that requires a second and longer visit. Moreover, as I’ve emphasized, the problem here is not only the drain on time and money in visiting lawyers and accountants, but that business owners are forced to consider and adopt artificial structures and make decisions at awkward times or for reasons other than business and personal judgment by reason of the looming presence of the estate tax.

Before speculating that the burden is light, that the effects are "marginal," and that the concerns are the misguided fears of over-excited people, we ought to listen to the voices of those who own family businesses and farms. In response to my posts, I’ve received private messages in which people describe the businesses their families or friends have built and their resentment of the perverse effects of the estate tax. I speak also based upon the experiences of those in my own family and among my personal acquaintances who have maintained farming operations and established family businesses, and who confirm that the prospect of the estate tax can weigh heavily.

But don’t take my word for it. Spend some time talking with people who own family businesses and farms. Although no group is monolithic in thought and supporters of the estate tax will be found even here, I’d be surprised if you don’t come across quite a few more who are troubled by the estate tax than those who are not. Perhaps then you’ll better understand their genuine bewilderment when they find the government, rather than thanking them for what they’ve contributed to the prosperity and health of their communities, instead appearing as a jackal greedily lying in wait for their deaths.

Finally, I can’t help but observe the schizophrenic nature of the arguments made in favor of retention of the estate tax. On the one hand, we’re assured that the estate tax will have, in Elizabeth’s words, a “minimal impact” on family businesses and no “significant impact on the U.S. economy or even the economies of rural areas.” On the other hand, Elizabeth and Rob tell us that repeal of the estate tax would have catastrophic effects on the federal budget, costing as much as a trillion dollars in tax revenues. You can’t have it both ways. If this tax is big enough to produce a flood of revenues for the government treasury, then it necessarily will tear a correspondingly large bite out of the economy. And some portion of that bite inevitably will be taken out of the hide of family-owned businesses and farms.

Greg Sisk