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April 2000
Volume 18, Number 4

Tax Cutters at Work

by Gregory Bresiger

The Republican Congress, fearful of taking on a Democratic president who plays the class-warfare card, again has failed tens of millions of small American businesses and families: The death tax lives. And tens of thousands of small businesses are at risk as long as it survives.

A tax cut bill, which was measly to begin with and included an estate tax repeal plan, failed again. So the GOP was about as successful in ending this wretched tax as it was in ending the income tax or "privatizing" Social Security. So much for the revolution that was going to roll back Washington.

"Congress just didn't seem to have the stomach to push the issue once President Clinton said that he would veto its repeal," said Harold Apolinsky, a Birmingham, Alabama attorney, who is a leader of the "repeal the estate tax" movement. He said more Republicans than Democrats favored repeal of a bill that would have killed death levies over the next decade, but not enough members of Congress of either party were ready for a fight with the administration.

Without excusing GOP poltroonery in looking the other way while tens of thousands of American businesses remain at risk, Clinton's demagoging must be recognized as masterful. It was a tour de force that reminds one of Huey Long, "Tricky" Dick Nixon, or "Lying" Baines Johnson in their primes.

"Estate tax elimination," Clinton said in a threatened veto message that apparently put the tax cutters to flight, "provides large benefits to a few, just before Medicare is projected to become insolvent." (Ah, yes. The "we hate the rich" argument, an oldie, but goody. The problem is a lot of the rich are people who started with nothing, have worked hard and built up businesses. Many of the new rich are especially vulnerable to death duties.)

"Eliminating all estate tax revenues for 2009 would cut almost $36 billion, which would provide an average benefit of over $700,000 to the roughly 50,000 estates-less than two percent of all deaths-subject to taxes," Clinton continues. (Translation: the Treasury Department never met a tax it didn't like and by God it's not going to give up $36 billion that the government could play around with. And besides, jobs generated by the "rich" don't count.)

"At the same time, if no steps are taken, the Medicare trust will start to be depleted and will become insolvent in 2015," according to Clinton. (In other words, because of another failed government program, business people and their families-the 1999 American version of Kulaks-will just have to pay. And who better than those damn business people with all their billions? It's so easy to hate them. So let's make them pay! Maybe we can come up with a tax on diamond pinky rings! It's not as much fun or as profitable as suing cigarette companies or gun makers for ex-post facto crimes (which used to be prohibited by our now dead-letter Constitution), but it's still a great way to obtain more money for pols and their toadies). With the tax intact, Americans will pay.

Apolinsky's clients are family farmers, many of whom will not be able to pass their farms to the next generation because federal estate taxes of 55 percent or sometimes higher often destroy a business' working capital. Some businesses can take out life insurance to protect against these taxes. But many businesses-especially startups-don't have the capital for this kind of expensive insurance or don't realize the extent of their vulnerability. Other business people do understand the threat and sell their firms prematurely. Better to take your assets and move them to a trust or some other shelter that will protect you and yours from this business-killer tax, they think. So talented people remove their capital and talent from our economy. They quit.

Why do they sell their businesses prematurely? Because triggering this tax usually means the business has to be sold at fire-sale prices in order to pay the estate taxes, according to Apolinsky. Instead of a business staying within a family, which has a history of running it, the business must be sold. The value of the business declines because the family experience is lost. Much equity is lost because of Washington's avarice.

But who cares about the property of the rich? I'm not rich. Most of my neighbors aren't rich, or don't seem to be, so why should I care? The problem, of course, is how will the pols define "the rich" and how will they tax "the rich." And even those who are safe today should remember this: There are no guarantees when pols start thinking of new ways to "raise revenue." (One must remember that politicians never increase taxes! They raise revenues.)

Taxes, like government departments, have a predictable history. Start inconspicuously. Initially aim at hurting only a small, unpopular group. The vast majority of citizens, who won't think they're hurt by a new levy (which, of course, is not true), will care less when someone else's property is stolen by the state, especially if it is someone they don't like. Later, comes explosive expansion of the tax beyond the visions of even the most imaginative government bureaucrat.

With more Americans accumulating bigger estates (both in real and nominal terms), even the families of those who could never have imagined that they would pay estate taxes will be hurt. Some will become the American version of Thomas Mann's "Buddenbrooks." They will see the fortunes of their businesses decline. They will face economic disaster because of this destructive tax. Like landlords in rent-controlled New York City, some will give up as an insidious appropriation process destroys their property.

The estate tax begins at 37 percent and can grow to 55 percent and more. The tax begins with estates of only $650,000. Is an estate of $650,000 so outrageous, does it qualify one for Rockefeller status? Given the persistence of inflation, given the long-term effects of a depreciating currency, is $650,000 so unachievable for the average person who saves and invests? Take a middle-class person with a few investments or a small business; it is well within the realm of possibility that his estate will be hit with this tax. Many of those who hate the rich will end up hating themselves under our socialistic, "progressive" tax code.

The estate tax exclusion will increase over the next few years, Apolinsky says, but at not nearly the pace that is needed. Next year the exclusion will increase to $675,000. The exclusion will gradually rise to $700,000 in 2002, then jump to $850,000 in 2004. The exclusion is now slated to expand to $1,000,000 in 2006 unless Congress and the next president make some changes.

The rises in the estate tax exclusions are pathetically small, given economic growth and the tendencies of central banks to play currency games, using inflation to pay off political debts. In the meantime, only 30 percent of family businesses make it through the second generation and only 13 percent make it through the third generation, according to Apolinsky.

A study by Prince and Associates of 749 family businesses that failed within three years of the death of the founder concluded estate taxes were an important reason for the businesses dying. But the worst news of all is that this economic Frankenstein will continue to rip up businesses for at least another year or maybe more.

Meanwhile, while these third-rate George Washington Plunkitts on the Hill are taking care of themselves, many of their constituents are heading for economic disaster because of Washington's tax addiction. The federal estate tax, an impost so destructive that some 20 states have killed their versions of it, will likely continue at least into the year 2001 when a new Congress and new administration begin.

Is there hope for repealing the estate tax? Possibly. But if it happens, it won't be because Capitol Hill saw the light. It will be due to public pressure that will force Washington to keep their hands off our wealth. That pressure can't come soon enough, because the fate of thousands of businesses in the next few years will hinge on it.

Gregory Bresiger is a business writer and editor in New York City, working for "Financial Planning." Recommended Reading: Martin Gross, The Tax Racket, Government Extortion from A to Z (New York: Ballantine Books, 1995).

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