Paul Ryan is making noises about repealing the estate tax. This particular campaign is always waged under the banner of the family-owned small business or, better yet, the family farm, which is supposedly threatened with extinction by a tax that only affects households with more than $10.8 million in assets at death. I decided to write the obligatory takedown, but found that Josh Hoxie at The Hill has already done most of the work, so I’ll just add a few thoughts.
The mainstream argument for repealing the estate tax is that a “small” family-owned business — say, one worth “only” $20 million —would have to be sold or liquidated to pay the estate tax. At a 40% rate, the tax on such a business would be about $4.5 million. It’s theoretically possible, though not particularly plausible, that an estate including such a business might not have $4.5 million in additional assets to pay the tax, and not be able to borrow $4.5 million against the value of the business, and not be able to sell a $4.5 million stake to other family members. Even then, you have to ask what the real harm is. Where does it say that the ultra-wealthy — $20 million puts you in the 0.1% — have a right to pass their businesses on to their children, as opposed to just their wealth?
There are also some simple things that the theoretical business owner can do to avoid this theoretical situation. The simplest is to buy $4.5 million of life insurance. Sure, that can be expensive. But the mainstream argument against the estate tax is an argument about liquidity, not about money in itself; if it’s the latter, you’d have to make the argument on behalf of all rich people, which is much more dicey from a political perspective. And life insurance is an easy solution to the liquidity problem — there’s a big, liquid market with reasonably fair prices for you.
But the kicker is that this theoretical business owner is almost purely theoretical. Hoxie points out some of the sources, like David Cay Johnston’s fruitless search for a family farm that was actually sold because of the estate tax — back in 2001, when the tax applied to estates beginning at $1.3 million (again, for a two-adult household). The CBO analyzed this question several years ago and found that, back in 2000, if the exemption had been $3.5 million (per person, so $7 million for a couple), only 41 family-owned business estates would have not had enough liquid assets to pay their taxes — only 13 of which were estates of farmers.
That figure is too high for two reasons. First, the exemption amount today is $5.4 million per person ($10.8 million per couple), which is more than $3.5 million in 2000, even after adjusting for inflation. Second, the CBO estimate only counted cash, securities, and insurance as liquid assets, ignoring the possibility of borrowing against estates, or of selling only part of a business (remember, this is an argument about liquidity). As Johnston found, the true number of family-owned businesses that must be sold or liquidated because of the estate tax could very well be zero.
Behind those (possibly, theoretically) 41 family-owned small businesses, however, stand thousands of wealthy families whose assets are in stocks, bonds, real estate, hedge funds, private equity funds, artwork, and everything else that can be owned — people who made their money as corporate executives, fund managers, bankers, technology entrepreneurs, or real estate developers (or just inherited it). That’s where the real money is, not in the vanishing family farm. And that’s what’s at stake with the estate tax.