It’s certainly nice for you to decide that people should have ‘no problem’ paying off a loan the 55% of the size of the entire net worth of the company over 15 years, but in my experience there are a hell of a lot of companies that could not survive that. What evidence do you have that this kind of burden is ‘no problem’?
In my experience, most small businesses operate on tiny profit margins and are usually cash-strapped and under-capitalized. I’m not nearly as sanguine as you about the ability of those businesses to absorb the kind of bill you’re talking about while maintaining their viability - especially when the owner and manager of the business has just died and the people taking it over are on a learning curve and a man short.
Two words: Local Knowledge. As in, the knowledge locked up in the owner’s head and passed down to his children in the family business. You have no appreciation for how important this is - and neither do a lot of people who buy businesses. Best practices, customer ties, knowledge of how to make finicky old machinery work properly, knowledge of the local market and the value of various advertisements, which products sell and which don’t in the local region, etc.
In short, when a business changes hands (especially when it’s forced to change hands), there’s a definite hit to productivity and efficiency. Often so much that the new owners simply fail and destroy a business that may have been operating at a profit for decades.
You might want to read this paper put out by the Tax Foundation, a non-profit, non-partisan think tank. Their conclusion:
One of the reasons the estate tax is so inefficient and so readily leads to tax avoidance is because it’s a deferred tax that you can see coming from a long, long way away. If you have a business worth $3.5 million, and that’s the exemption on the estate tax, then every dollar you grow your business after that point has a 55% marginal tax rate.
If you hit the $3.5 million mark when you’re 50, that may lead you to stop investing in the business early, or it may even cause you to retire early, divest the business, and start sheltering the money elsewhere. Perhaps you’ll start gifting your relatives in small amounts to wind down the estate while they pay tax only at the their marginal rate. Perhaps you’ll sell off the business and put the money in a trust. Or maybe you’ll just stop saving and start blowing the money on hookers and blow. Whatever. The point is that you have years or decades to plan your avoidance strategy for the estate tax.
The ultimate effect is that the estate tax hurts job creation and the economy as a whole, making it less progressive than you’d think. The Tax Foundation says that studies show that when you add all these effects up, the estate tax actually costs the economy $60 billion per year net.
I can tell you that from personal experience, the only reason I would have for building up a large estate would be so I could give the money to my daughter. If I can’t do that, I’m not working my ass off 16 hours a day to build a business. And if I was 55, and I had $10 million in the bank, I’d stop working and I’d start taking my daughter on trips, or I’d buy a house for her, or whatever. I’d do whatever I could to make sure she got maximum benefit from my work, and that the government got as little as possible.
That may mean that even though the economics my business would be improved through additional investment, I’m not going to do it. Even if it made sense to hire 10 people to expand my business, I won’t do it. 10 people means more work and more risk. I’m not about to do that work and take that risk so the government can take it all when I die.
This is why Canada’s system is so much better than yours. By taxing estates at the normal marginal tax rate for individuals, there’s no incentive to liquidate businesses or avoid tax. I will pay the same in tax if I spend my estate today than if I leave it to my daughter. It makes our tax more efficient. There’s no estate tax - there’s just tax on income and capital gains. The only difference is when you die your capital gains have to be realized and the estate has to pay for them.
What I found out is that the only country with a tax rate higher than 55% is Japan, at 70%.
Canada, Australia, New Zealand, China, and India have no estate tax. The OECD average estate tax is something like 25%. If the U.S. estate tax is 45%, it will be higher than all countries except for Taiwan and Japan.
I assume you guys wanted to let the estate tax go back to its 2001 level of 55% with an exemption of 1 million. That would make the U.S. estate tax the second-highest in the world - and Japan’s a special case anyway because its society is structured very differently. But it would put the U.S. at a capital disadvantage with every other country in the OECD, and at a huge disadvantage with its neighbors, since neither Canada or Mexico have estate taxes.
I say that there is good evidence that the estate tax is one of the worst taxes in this regard, because you have such a long time to plan to avoid it, and because it is aimed squarely at the most productive members of society. There is plenty of evidence that the societal cost of the tax exceeds the revenue collected from it - follow some of the cites in the tax foundation paper if you’d like.
In addition, the compliance cost for the estate tax is high because the rates change so much, meaning that people with large estates have to re-plan constantly.