Yes, Still More on the Estate Tax and Catholic Social Thought

Breaking my vow that I would post no more on the estate tax (and thus having now far exceeded my annual quota of comments on tax-related issues), I simply have to respond to Tom Berg’s suggestion that the owners of family businesses and family farms have been “worked up” about the effects of the estate tax by listening to misleading political advertisements.

Before I respond, however, I want to pause to emphasize how much I appreciate this expansion of this discussion beyond the narrow paradigm that often constrains Catholic Social Thought discussions. Too frequently, Catholic Social Thought appears to function in a two-dimensional world of (1) the deserving and oppressed poor and working class making claims against (2) the greedy and callous rich (and their compatriots in large unfeeling corporations). Especially when we are offered proposals for more governmental intervention to rearrange society in a preferred and assertedly more just direction, the multi-dimensional nature of these issues must be acknowledged, the law of unintended consequences must be seriously considered, and additional voices (such as those of the middle class, here in the form of owners of family enterprises) should be welcomed to the debate.

I’m also obliged to acknowledge again that I speak here only as a reasonably well-informed citizen. I claim no expertise in economic policy, small business finances, agricultural economics, or taxation. But then neither, I suspect, do my most of my interlocutors, and yet none of us are holding back from offering opinions (isn't the blogosphere grand!). Moreover, as a naturally risk-averse person, I confess that I opted for the comfortable (but not luxurious, as no one becomes a professor to get rich) life of the academic, isolated from commercial realities, sheltered from the ebbs and flows of the economy, immune (by freedom of speech and academic freedom) from most regulation of my activities, and never having to worry about making the payroll this week. In sum, I don’t have any personal stake in the estate tax question. Again, I think it fair to say that my interlocutors are in much the same position.

But those who have contributed their time, talents, life savings, and sweat-equity to build family businesses and maintain family farms do have such a stake. And, in my experience, they are not the kind of nervous, financially ignorant, and gullible folks who could be easily-excited by the feverish imagations of a political advertisement. The Small Business Administration reports that half of new small businesses fail in the first year and 95 percent fail within five years. Not surprisingly, then, those who do succeed invariably are steady, clear-eyed, practical, and canny folks who respond calmly and confidently to challenges and who plan wisely for the future.

Spend some time talking with the owners of family businesses and family farms. Their concerns about the estate tax are grounded in their personal experiences and the practical (and negative) impact that it has on their lives (not to mention their deaths). They worry about being unable to transfer the family business to the next generation, not because they’ve been taken in by political hucksters, but because they’ve spent valuable time and money sitting down with their accountants and their estate-planning lawyers. Having examined their financial records, thoughtfully projected the likely trends for the future, and been advised by the experts about the tax consequences, they come to their keen unhappiness with the estate tax quite honestly and realistically.

To be sure, as I said previously, only a handful of family-owned businesses and farms will face the estate tax collector as a financial Grim Reaper. While Tom quibbles about the actual numbers of family enterprises that may have to be dissolved to satisfy the estate tax bill, he acknowledges there will be some and seems content to dismiss them as a “small tail wagging a very big dog of repeal.” He could be right, both about the small numbers and the worthiness of the sacrifice to fill the government tax coffers. I'm just not ready to follow him to that conclusion just yet.

Those few family businesses that would be destroyed to benefit the common ground would, of course, be the most successful of these enterprises, having grown through the efforts of the owners to a size that by their deaths exceeds the estate tax exemptions. Thus, the estate tax effectively punishes those family businesses that are most creative and effective in providing goods and services. And when those fairly sizeable family businesses are sold off to pay the tax bill, they undoubtedly will be submerged into large corporate entities, probably those already operating in the same economic sector, thus decreasing competition and removing one more locally-centered enterprise. But, hey, I guess we’re supposed to say (perhaps with a little tear of regret), that’s just the cost of keeping money flowing into the federal treasury.

The vast majority of family businesses and family farms will not come under the axe of the estate tax. Tom Berg and Rob Vischer, and the studies they cite, continue to place the greatest emphasis upon this fact, that most of these businesses will survive. And with that conclusion they dismiss any further concern about the tax and its effects. But, as I said earlier, that most businesses will survive hardly makes the continued presence of the estate tax inconsequential.

Again, spend some time talking with the owners of family businesses and family farms. Hear them explain how they have to employ lawyers and accountants, reframe transactions, create artificial structures, distribute ownership shares at earlier stages, etc., in order to avoid the estate tax and thereby allow transfer of the business to the next generation. For many such businesses, the estate tax hovers over every decision made, such as whether to rent facilities or buy real estate (as the latter adds to the capital, non-liquid assets of the business); whether to divert scarce resources to purchase insurance so as to create liquid assets to pay any estate tax burdens; whether to contract an element of the business out or instead add new employees (which again may affect the size of the business and the estate tax consequences upon the death of the owner), etc. And throughout they must compete with the large corporate entities for which the estate tax has no implications.

Most owners of even substantial family businesses and farms will tell you that they are fairly confident they can arrange things so as to avoid the estate tax. But they are resentful about this governmental intrusion. They’ll tell you that they have sacrificed their time and talents, invested their life savings, worked very long hours, built a business that serves needs in the community, created jobs and thereby supported families, participated in community improvements, etc. Then the federal government through the estate tax (and in other ways) imposes itself as an adversary, threatening to take away what they have built from their children.

Even the person who is able to evade the noose at the last minute is still unlikely to walk away with warm feelings for the hang-man.

Greg Sisk