Thoughts from
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More on the Federal Estate Tax
By Gail Heriot

My friend and former student John Wallner is unimpressed with Irwin Stelzer's efforts to refute the arguments against the Federal Estate Tax:

"...Irwin Stelzer [stated]:

'* Inheritance taxes force the sale of small businesses or farms. No. Any such entity surely has borrowing power in excess of the amounts required to meet the taxman's demands, and can therefore raise any needed cash. Besides, a study for the National Bureau of Economic Research by Thomas Dunn and Douglas Holtz-Eakin (the latter is now director of the Congressional Budget Office) suggests that an entrepreneur's "propensity to become self-employed" is affected far more by the human capital he or she inherits than by inherited financial assets. So inheritors of businesses, and of that "self-employed propensity," are not likely to sell out and join the ranks of wage earners merely because the value of the enterprise they inherit is taxed.'

This may be a theoretical issue to Mr. Stelzer, but it is not for me. The margins on agriculture and cattle (I am a cattleman) are very small -- having to get a huge loan to continue owning the family farm will kill that farm for the low-end producers (which family farms normally are.) Larger farms are corporations, and do not have this problem.

Why does Mr. Stelzer not tell us why family owned farms should be heavily (and I believe unfairly) taxed every generation, but not their largest competitors (corporate farms)? A one-sentence "No" is hardly an argument.

Also, heavy leverage is common in agriculture, and small farms are already heavily in debt. It is not the case that 'Any such entity surely has borrowing power in excess of the amounts required to meet the taxman's demands.' He offers no evidence for this claim, except to assure us 'surely'. I find it unlikely. "

John certainly has a point that estate taxes will sometimes be enough to put businesses over the edge and Stelzer is certainly wrong to suggest that any business "surely" has the borrowing power it needs to get past the tax man. Some won't. But I'm not sure that's enough to cause me to want to abolish the tax. All taxes have the capability of putting low-margin enterprises out of business--certainly property taxes and sales taxes do, but sometimes even income taxes do. You can be like my fellow RCer Tom and talk about abolishing all sorts of taxes, but if we start with the premise that there are going to be taxes, then the question is not whether the estate tax will drive some low-margin enterprises out of business, but whether the estate tax is more painful or less painful method of taxation than the alternatives. In general, I would guess it to be less painful (and if it isn't it less painful, I would guess that it can be made less painful by employing methods like those suggested by my fellow RCer Mike). The nice thing about an estate tax is that usually the guy who had been enjoying the wealth is too dead to miss it and his heirs have not yet put themselves in a position where they just can't afford to part with any of it. I certainly don't advocate onerous taxes on estates, but modest ones might be a good idea.

((As for corporate farms vs. family farms, aren't both subject to estate tax in the sense that if Grandpa owned stock in a corporate farm, that stock is subject to estate tax upon his death and it may be sold to pay the tax? The heirs who thought that they were going to be stockholders of a corporate farm may thus find that they are not. Somebody else now owns the stock. In that respect at least, the situation is like that of the family farm. If the farm, is sold to pay the tax, the heirs who expected to own the farm find that somebody else does instead.))
posted by Gail at 5/09/2005 03:20:00 PM