AS THE old saying goes, the only things certain in life are death and taxes. Pretty much everything is taxed these days, starting from before you are even born with prenatal care, and believe it or not, the government has even found a way to get you after you die. Yes, the estate tax, more commonly known as the "death tax," could require your heirs to pay up to forty-seven percent of the value of your life's work and earnings to the government after you pass away -- up to eighty percent if you skip a generation -- depending, of course, on how large of an estate you leave. Not only does this affect previously taxed savings, income and investments, but it also can apply to property or businesses you may own, damaging small business and farms across the nation. Every year this immoral tax affects more and more hardworking citizens, while providing comparatively little revenue to the federal government.
The mechanics of this tax are fairly simple: When you die, your heirs pay up to forty-seven percent of the value of your estate exceeding $1.5 million. Now, this may seem like a lot of money, especially to college students, and indeed it is. But consider the fact that an estate is the accumulated life savings, work and investments of a person or family. Now it does not seem quite so large. Consider, too, the recent housing boom in the United States and the ever-growing value of houses. Finally, consider the thousands of small businesses and farms throughout the United States and how much it actually takes to construct and run them. Now even $1.5 million does not seem very big at all.
Created in 1916 as a method of financing World War I, the death tax has remained as a minor revenue gathering method with devastating consequences. As Jonathan Alder of the Competitive Enterprise Institute writes, "While the death tax is a small source of federal revenue -- it accounts for less than two percent of tax receipts on an annual basis -- it is a leading cause of destroying small, family-owned businesses." In fact, a Center for the Study of Taxation report found that "77 percent of failed family businesses entering bankruptcy became bankrupt after the unexpected death of the founder."
These families are not the ultra-wealthy whom many death tax advocates claim to be the only people affected. According to the Seattle Times-operated Web site DeathTax.com, "89 percent of all taxable estates filed in 1995 were $2.5 million or less in size."Think about your local laundromat, restaurant, gas station and even branches of large brand-name companies, all of which are privately owned small businesses -- which in fact make up approximately ninety-one percent of all businesses in the United States. All of these farms and businesses involve land, buildings, infrastructure, employees and resources that can easily make them worth several million dollars in the government's eyes -- even if the annual profits of the owners put them in far lower tax brackets. Nonetheless, when the owner dies, it is that overall value which is assessed and taxed.
In addition to the death tax's effect on small business is its equally important effect on investment. When a person dies, his or her family often wishes to hold on to what has become an old family home or business, which has significant meaning far beyond its intrinsic value. In order to do this, however, the family is often forced to sell some assets or to dip into savings and investments. This, in turn, severely impacts their available cash and instead shifts them to long-term, difficult-to-liquidate resources. According to the Center for the Study of Taxation, "to match the disincentive effect of the Estate Tax, Income Taxes would have to be raised to roughly 70 percent or almost twice the current top marginal Income-Tax rate of 39.6 percent." Thus, overall, the American financial system is greatly handicapped, because it is investment which drives economic progress and which promotes prosperity for everyone.
The death tax is without a doubt one of the most fundamentally unjust taxes in United States history. By demanding a huge percentage of the value of a deceased person's estate, the federal government is placing an enormous burden on small businesses and farms across the country and on the families dependent on them. What's more, the tax provides only a tiny portion of federal revenues while greatly damaging investment and thus general economic prosperity. The repeal of this tax would therefore benefit all Americans, and fortunately there are numerous grassroots campaigns pushing for that very goal.
Allan Cruickshanks' column appears Fridays in The Cavalier Daily. He can be reached at acruickshanks@cavalierdaily.com.
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