In an earlier posting, I discussed the deceptive tactics used by some of the country's wealthiest and most powerful families to push for estate tax relieft for their heirs. See here. The Washington Post's Jeffrey H. Birnbaum had an interesting article on May 15 about one businessman's individual push to get estate taxes repealed. See In Estate-Tax Battle, One Man Does What He Can (May 15, 2006).
Fitzgerald owns a thriving auto business, including a chair of dealerships in Maryland, Pennsylvania and Florida--30 auto franchises, 14 locations, and "hundreds of millions of dollars of revenue each year." Id. Birnbaum claims that his business is "too large for him to pass easily to his heirs without their being crushed by the estate tax." Id. What he means, of course, is that he is too wealthy for his estate to avoid the estate tax under the generous $2 million current exemption and it might be necessary for some of the agglomeration of assets to be sold to pay the estate tax before passing along the rest to his heirs (the article doesn't say how many of those there are). As a result, he is lobbying for estate tax relief in the form of a "pay-before-you-go" surtax calculated to replace the revenue lost through estate tax repeal.
While acknowledging that only the minute number of estates worth more than $2 million would benefit from repeal of the estate tax (citing the Tax Policy Center's conclusion that only the richest 1.2% of estates, or 28,600 out of 2.4 million, were liable for any tax at all in 2003), Birnbaum's article still claims that Fitgerald has "a compelling case against the estate tax on policy grounds" because the estate tax forces owners of businesses like his, which "are the nation's most effective engines for economic growth and job creation," to sell to corporate giants that "stifle[] innovation, expansion and good feelings between workers and their bosses." Id. Fitzgerald understands that ordinary Americans are not likely to empathize with wealthy businessmen who want to pass their wealth-generating businesses to their heirs without paying a tax burden, and he knows that he could "protect his family financially without a problem" by merely selling his business. Id. So he is lobbying for repeal on the basis that he doesn't want to sell because he wants to protect his employees, who are "important" to him, "like an extended family."
This article induced me to speculate about this particular situation and whether there was much substance to Fitzgerald's arguments or information left out of Birnbaum's article that might affect the weight of those arguments. Perhaps the most obvious omission from the article is the consideration of employee stock ownership plans. That is, if Fitzgerald is really concerned about his employees, he could stop being paternalistic and get beyond the idea that he or his estate's beneficiaries need to own the business in order to protect his employees. Instead, he could expend his efforts (and invest in his employees' health and retirement plans the likely considerable sums he will otherwise expend in lobbying) to ensure that his employees acquire a substantial ownership interest in the business before he dies and also reduce the burden of the estate tax. See Bernard Garbo's letter to the editor of May 20, 2006.
Furthermore, the use of the term "crushed by the estate tax" is mere hyperbole. That phrase disregards the fact that Fitzgerald's heirs, in any case, will receive a substantial amount of assets (and the influence that goes along with them) tax free--an amount that ordinary Americans have no opportunity to receive without hard work and taxes paid on those hard-earned wages. Even if Fitzgerald has engaged in none of the estate planning techniques that substantially reduce the impact of the estate tax, no beneficiary of his estate will be "crushed" by an estate tax. At the least, the beneficiaries will inherit money or assets worth the $2 million exemption without any tax whatsoever. They'll be significantly better off than they were before and significantly better off than the millions who receive completely tax-exempt estates worth mere pittances in comparison.
As for the paternalistic impulse to keep the business in the family to protect the employees, just what assurance is there that Fitzgerald's heirs will protect them better than any third party buyer? We're not told just how many heirs he has, or whether they are all deeply involved in the business currently, or whether they are all expected to agree with Fitzgerald's projections for the business into the future. In many cases, those who inherit are much less interested in the business, and less capable to run it, than the deceased founder. In other words, while privately owned businesses may be the heart of our economy, those who take the reins but who haven't had much to do with the business before they inherit are not so likely to maintain the business as an effective engine for economic growth and job creation. If they are merely passive owners of the business, it is even less likely that they will care about how it is run or work to ensure that current employees stay on. Or they may become addicted to the power of ownership, resulting in relationship problems with one or more of the non-owner managers they inherited along with the business. And if there are multiple heirs, odds are that they will end up splitting up the business between them or selling off parts of it to liquidate the interest of one or more of them anyway. In other words, Fitzgerald's heirs may be less interested in continuing the relationship with his employees than he is (or purports to be), and much more interested in cashing out their inheritance without having to pay any estate tax whatsoever, like the other wealthy families supporting estate tax repeal.
Even if we credit Fitzgerald's concern for his employees and assume arguendo that his heirs would continue that same concern but for the fact that the estate would require liquidation of the business to pay the estate taxes due, it is not clear that employees would necessarily suffer on a liquidation of the estate. The dealerships might well not be sold to a single corporate conglomerate that "stifles innovation, expansion and good feelings." Instead, the dealerships might be sold to a single corporate conglomerate that actually cares about good business practices and merely wants to continue the successful business patterns already in place. (This could be especially likely if the heirs were to instruct the trustee to seek a buyer who wants to continue the business with the current employees because they really do care about the employees.) The dealerships might well be split up, on the idea that the parts are worth more than the whole, and sold to people (themselves likely heads of families, on a smaller scale) in the different localities interested in restoring local ownership of car dealerships. Either way, some of the headquarters staff might be affected by the change, but they'd likely still be able to find a role in the new business.
Surely, then, the merit of this argument for estate tax repeal is at best limited, since employees would be better off because of estate tax repeal only under some of the many different circumstances that might apply, and worse off in some cases.
If Fitzgerald is able to pass his dealerships along to his heirs without a tax, it is perhaps somewhat more likely that the dealerships will be held as a group than broken up. Yet if we want new generations to think about innovative business ideas to meet current needs, routine liquidation of businesses might be preferable. It would provide generous sums of ready cash to a new generation, who could themselves become that generation's entrepreneurial "Bill Gates" or at least passively invest their new money, sponsoring another entrepreneurial genius.
What about Fitzgerald's surtax proposal for prepayment of estate taxes? First, the proposal for prepayment provides just one more piece of evidence that this Administration's super-tax-cuts-for-the-highest-income-taxpayers binge has overfilled the coffers of the rich. High income taxpayers, who have had their taxes reduced dramatically by the 2001-2006 tax cuts while seeing their incomes increase starkly in comparison to the declines of incomes for those in the lower 80 percentile of the income distribution chart, have undoubtedly been able to accumulate even more cash reserves with which to pay their estate taxes. All that means is that if Fitzgerald has enough income to volunteer to pay more taxes now for estate tax relief later, he should probably be paying more regular income taxes now. (Then, too, if Fitzgerald has enough income to volunteer to prepay the estate tax, he also has enough income to ensure that part of his estate includes sufficient cash so that no liquidation of business assets would be necessary to pay the estate tax when he dies, thus further eviscerating his "crushed by the estate tax" and "protection of employees" arguments.)
Second, any proposal for prepayment of estate taxes through a surcharge on taxable income would rest on assumptions about the amount of an estate that should be taxed, the rate at which it should be taxed, and the relationship between taxable income and taxable estates. The current estate tax is by any means a model system: for example, various estate discount valuation methodologies and planning techniques should be eliminated. However, an income tax surcharge as surrogate for the estate tax would be especially susceptible to corruption through the political process. The power of the special interest groups pushing for repeal (including the various car dealers' groups mentioned in the article) and the ability of staffers to devise formulas that tend to conceal the actual workings of a statute suggest that any prepayment of "estate taxes" through an income tax surcharge would actually be used to significantly reduce the estate tax (along the lines of Senator Kyl's proposal for a much larger exemption and miniscule estate tax rate), mismeasure estates and/or underestimate a reasonable income tax surrogate for the estate tax.
But the proposal also falls short because it does not satisfy the redistributive goal of estate taxation--to reduce the advantages of inherited wealth or its expressive goal--to bring to the attention of all Americans the importance of leveling the playing field through the estate tax. If there is no estate tax due on Fitzgerald's death, the heirs will inherit the business intact and have the potential of stepping into Fitzgerald's shoes in other ways--exercising considerable influence on the local, state and national level and holding significant sway in their local communities. The same groups that lobby for estate tax repeal today will lobby for surcharge repeal tomorrow. Without the visibility of the estate tax to highlight as an important component of our progressive view of taxation, it will be easier for interest groups to "pick off" the surrogate surcharge in a few years and eliminate the "equivalent" of estate taxation altogether.
Thus, the article's implied conclusion--that Fitzgerald's proposal for collecting revenue while keeping the business together would be a "good deed"--is questionable. Collecting the revenue is something we must do, if there is to be any hope of reducing the fiscal hole the U.S. has climbed into with tax cuts predominately aimed at the wealthy coupled with whopping increases in military and security spending. Keeping intact business conglomerates that reach across community and state lines is not necessarily an inherent good--break ups may lead to more innovative use of resources, greater economic growth, and job creation. Preventing the development of oligarchic families who control significant wealth from generation to generation is something that we should do, if we care about a democratic polity that allows for mobility across class structure. The estate tax provides a workable way to do this, and the surcharge proposal likely does not. Let's keep the estate tax, and reform it so that it accomplishes its goals more readily--providing a reasonable, not-too-generous exemption ($2 million is more than enough), taxing at a somewhat redistributive rate (45% may be reasonable), and eliminating many of the ways wealthy taxpayers have found, with the aid of eager advisers, to eliminate estate tax liabilities.
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