Dealing with the Death Tax

Ed Feulner
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Posted: Aug 10, 2016 12:01 AM
Dealing with the Death Tax

“In this world, nothing can be said to be certain except death and taxes,” Benjamin Franklin once wrote. One can only imagine what he might’ve said about the modern-day meeting of the two: the estate, or “death” tax.

The death tax -- the penalty families have to pay when a loved one dies and leaves them significant assets -- is back in the news, thanks to the IRS. The agency recently proposed new rules that would extend the reach of the tax. Business owners are alarmed -- as well they should be.

Wait, some may say, doesn’t that just affect the super-rich? Hardly.

The tax has destroyed countless family-owned businesses over the years. And now? According to Ashlea Ebeling of Forbes, “The proposed regulations would mean increased estate taxes on the death of owners of family businesses, possibly causing them to liquidate the business or sell big pieces to outsiders.”

Congress has been all over the map on this issue during the last decade or so. In 2001, lawmakers passed a law that gradually phased out the levy, which then stood at 55 percent (for those in the top tax bracket). It actually disappeared altogether in 2010 -- a good year to die if you wanted to leave your business to your family and not your greedy Uncle Sam.

But like a killer in a cheap horror film, the death tax came back.

Now the IRS, via its proposed rules, is taking aim at something known as “valuation discounts.” In plain English, you get at least a temporary break from the tax if you inherit something that, however valuable it may be, is not something you can readily turn into cash to pay the tax (or do anything else).

“The logic behind valuation discounts,” writes Ebeling, “is that if you give a 10 percent interest in your $100 million business to your child, you’re not giving away $10 million because your child can’t turn around and sell the interest for $10 million.”

Naturally, the thought that valuation discounts may go the way of the dodo is causing a lot of concern among businesses that may be affected. But we need to look at the bigger picture. Even if the proposed rules come to naught, the death tax is already causing enough trouble. It’s an economic poison pill.

The death tax is a job killer. It encourages wealthy Americans to spend their money today rather than invest it in growing a business. After all, we’re all going to die. What’s the point of building a bigger nest egg if Washington is just going to take a third of it, a half of it, or even more?

Because the estate tax discourages investment, it also holds down wage growth. Since businesses have less funding, they’re less able to purchase new tools and equipment. So workers are less productive and suffer slower wage and salary growth.

The death tax also hammers some Americans more than others, since it especially targets landowners. Millions of farmers, ranchers and homeowners have improved their land. Yet when they die, the federal government punishes their heirs.

“The family could have used the cash that goes to pay the death tax to add new workers, pay higher wages, or increase benefits,” writes tax expert Curtis Dubay.

Who benefits from the death tax? Estate tax lawyers. Life insurance companies. Large businesses -- and, of course, big government. Outside of these groups, there’s no justification for it. It was created a century ago to help fund World War I and as a way to prevent the build-up of wealth in a small number of families. “The death tax serves neither of these purposes today,” Dubay writes.

We don’t need a stronger death tax. It’s time to drive a stake through its heart -- and let the economy benefit from its demise.