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DEATH TAX DEVASTATION:
HORROR STORIES FROM MIDDLE-CLASS AMERICA
William W. Beach
Director, Center for Data Analysis
The Heritage Foundation
The death tax is the nightmare of the American dream, as these real-life
experiences from middle-class America will show.
Millions of Americans spend their adult lives working hard, sacrificing
and saving, obeying the law, and doing the countless other things that
official Washington has told them are the ingredients of a successful
life. They are encouraged as federal laws are passed that should expand
economic opportunity and guarantee that civil rights will be as much
as part of the marketplace as they are a part of community life and
education. Thousands of political speeches reinforce the impression
they have that Washington believes the United States really is a land
of opportunity and a place where the financial fruits of hard work can
be used to endow the next generation's economic struggle with greater
potential.
However, for those whose economic success also resulted in significant
assets (like a farm, a small business, a factory, or a trucking fleet),
what official Washington says is nothing less than a lie. At the end
of life, the federal death tax will sweep across the profits of family-owned
businesses and estates and leave in its wake millions of devastated
survivors, employees, and communities. Many people whose assets will
be depleted to pay the death tax unfortunately learn about estate and
gift taxes so late in life that they spend their last days as frequently
in the company of their tax lawyers and accountants as they do with
their families.
The federal government taxes the transfer of wealth between generations
at rates as high as 55 percent. At $30 billion dollars, the death tax
burden in the United States is the greatest in the world. Indeed, this
country owns the dubious distinction of holding the fruits of economic
success in lower regard than many of its ideological and economic adversaries.
The full case for repealing federal death taxes will involve more than
testimony from its victims. However, evidence of harm to the U.S. economy
and public finances pales in comparison to the stories of the men and
women whose economic virtues regrettably laid the basis for their own
and their offspring's financial devastation. The following sampling
of evidence from that anecdotal record has been compiled from testimony
before Congress, newspaper articles, and statements of family members
whose lives were changed by federal death taxes.
THE DEATH TAX HURTS FAMILY FARMS AND RANCHES
The death tax destroys family businesses and farms, and forces families
to spend their hard-earned money on lawyers, accountants, and life insurance
policies to deal with it. The Public Policy Institute of New York found
a negative relationship between anticipated death tax liability and
growth in employment, particularly for growing firms. Business owners
are afraid to hire new people and expand their businesses when they
face the death tax. The reason is simple: Hiring new people is optional;
paying taxes on the family estate is not.
Family Farm Horror Story #1
Tim Koopman's family has owned ranch property in California for most
of this century. His children would like to continue to run the ranch,
but the death tax may prevent this.
Since Tim's mother died four years ago, the Koopman's have paid about
$400,000 in death taxes. For three of those years, however, Tim has
been able only to pay the interest on the death tax bill, and soon he
will not be able to pay that without selling some or all of his land.
This is a decision that he does not want to face. This land is an important
part of his life.
The Koopman's faced the death tax once before. In 1973, Tim was forced
to sell one of the family's ranches to pay the $125,000 death tax bill
that he owed when his father died. Now the family faces the death tax
again. Tim wants to pass the ranch on to his children, but the hefty
death tax may leave little ranch for him to do so.
Family Farm Horror Story #2
Lee Ann's family owns a ranch in Idaho. They have lived there for three
generations, providing jobs for the local economy and helping to create
a strong community. The family did not acquire a lot of material wealth,
so it came as a great shock when the government hit them with a $3.3
million death tax bill after their father's death.
Although the death of Lee Ann's father was devastating, the death tax
bill made it worse. The family had no debts and owned their land outright;
they thought they had nothing to tax. However, their land had increased
in value enough to trigger the death tax. Lee Ann's mother, who has
been under tremendous strain since her husband's death, is haunted by
the realization that after she dies, her family may lose the ranch because
of this tax.
Another concern is who will buy the ranch if they are forced to sell.
Lee Ann worries that, as is the case with so many other properties,
the purchaser will not be another family rancher, but rather a wealthy
absentee owner who flies in once or twice a year for a vacation. This
has been happening more frequently in Idaho, and the sense of community
that Lee Ann enjoyed for most of her life is quickly being lost.
Family Farm Horror Story #3
Robert Sakata is a 42-year-old vegetable farmer from Brighton, Colorado.
Back in 1944, his father paid $6,000 for 40 acres of land to begin a
family farm. Six years later, he purchased additional land for $700
an acre. Today, the elder Sakata is 73 and owns 2,000 acres of farmland
near the Denver International AirportÑa piece of land worth nearly $380
million.
This might seem like a wonderful situation for the Sakata family, yet
the family owns no other investments; after the elder Sakata and his
wife pass away, Robert will face a tax bill of over $200 million. Robert
has admitted that he would have to sell off half the farm and lay off
many of his 350 workers "who are like family." "We don't live like millionaires,"
Robert has stated. "We're just trying to sustain a family business."
They will have a difficult time. The death tax will force them to lay
off workers and sell land that has been part of the family for more
than five decades. This treatment of hardworking successful citizens
is hardly the story line for an American dream.
THE DEATH TAX THREAT TO FAMILY BUSINESSES
The Center for the Study of Taxation found that three out of four families
faced with liquidating all or part of their business to pay the death
tax would have to cut their payroll in the process. Moreover, studies
by the Institute for Policy Innovation (IPI) and Congress's own Joint
Economic Committee have found that the death tax costs communities more
in lost jobs and lower economic growth than it raises for the U.S. Treasury.
Family Business Horror Story #1
After her father's death from cancer, Terry Deeny, like many Americans,
could not reflect on her personal loss, spend time with her family,
and build family cohesion. Instead, death taxes forced Terry to concern
herself with her family's survival. As Chairman and CEO of Deeny Construction
Co., Terry watched as payment of the death taxes drove her company deeply
into debt. She had no choice but to lay workers off, sell much of the
company machinery, and stop many business transactions that had kept
the business alive. "We barely survived. It was not an American dream;
it was an American nightmare."
It is hard for people like Terry to find justification for the federal
government to force Americans to scrounge for money in order to pay
a tax that puts many into debt, especially when the money otherwise
could be used to help create jobs and enable even more citizens to achieve
the American dream. Family Business Horror Story #2
Barry, an entrepreneur in Kentucky, likens the death tax to the old
saying about sheep: Slaughter your sheep and you will get dinner for
a night. Shear it and you will get a lifetime of wool. By endangering
the future of his family's business, the death tax is threatening his
employees' livelihoods as well as costing the government future revenue.
For three generations, Barry's family ran their own businesses in Kentucky.
Today, they own 20 gas stations and convenience stores and employ about
100 people. However, Barry's father is growing older and would like
to pass on the business.
According to Barry, the family has spent a significant amount of money
on accountants and attorneys in preparation for shifting ownership of
the businesses from his father to Barry's generation and the grandchildren.
Family members have purchased insurance and have gone through rewriting
several wills and trusts. "It's something you continually update," Barry
says; "every time a new grandchild is born, we have to revise the will
and trusts."
The death tax also affects the ability of Barry's businesses to grow.
New opportunities take time to develop, but between worrying about how
to pay the death tax and meet other federal regulations, Barry finds
it is harder to pursue new opportunities. In the end, the businesses
and their communities suffer.
Family Business Horror Story #3
Clarence owns a farming and lumber business in North Carolina. He provides
jobs to 70 people in the community who work on his three small farms,
in his fertilizer and tobacco warehouse, and at a small lumber mill.
His family has worked hard for four generations to build the business.
However, all this may be lost when Clarence dies and his family is faced
with the enormous death tax bill.
Clarence has tried to reduce the burden of the death tax. He has intentionally
slowed the growth of his business, hired lawyers, purchased life insurance,
and established trustsÑall to create a plan that he hopes will enable
his children to keep the family business when he dies.
But all that work and planning may not be enough. Clarence figures that
his son will owe the federal government about $1.5 million upon his
deathÑa difficult sum for most people to raise, but especially so for
a man who makes $31,000 a year. It will be impossible for his son to
pay that much, so he may have to sell all or part of the business. It
would be the fourth time that Clarence's family will have had to pay
the death tax. The federal government, in the end, will have destroyed
the work of four generations.
Family Business Horror Story #4
Everett has been in the newspaper business for 30 years. His company
publishes six weekly papers in northern California and the telephone
directory for two counties. He employs 97 people. From his first small
weekly paper, Everett has built his company into a $3 million business.
Nevertheless, all the hard work may be for naught. Everett's wife died
two years ago, and he placed her share of the corporate stock in a trust
for their daughter. His daughter and her husband, who is the publisher
for all the business's publications, will still face a hefty death tax
that may cause them to lose the business when Everett dies.
For years, the number of small, family-owned weeklies has been declining
in northern California. The people who work for the weeklies and the
small towns that depend on these newspapers for information and entertainment
will suffer when these businesses shut down. Abolishing the death tax
would help preserve the legacy of hard work and dedication that thousands
of families like Everett's have given to their communities.
Family Business Horror Story #5
Wayne Williams' family has owned a telecommunications and video communications
business in WashingtonTkstate since 1982. The family's philosophy is
that it is important to reinvest profits in employees, new products,
and expanding opportunities. The company has maintained a commitment
to improving the local community and tied most of its financial worth
up in the business. That means Wayne does not have the cash on hand
to pay the death tax when his parents die.
So Wayne has had to take other measures to save his family from the
devastation of the death tax, including scheduling gifts, buying life
insurance, and slowing reinvestment in the firm. This last action does
not mesh well with the family's philosophy of reinvesting profits, but
the death tax makes it necessary.
The fact that thousands of family businesses are in the same fix explains
why eliminating the death tax is the number one priority of so many
owners of small businesses. It also could explain why a majority of
Americans agree that the death tax is simply unfair and should be eliminated.
Family Business Horror Story #6
David Pankonin, whose story first appeared in The Wall Street Journal,
is the fourth-generation owner of Pankonin's, Inc., in Nebraska. David's
great-grandfather established this retail farm equipment company in
1883 in Louisville, Nebraska. The business has been handed down three
times through the family, and David hopes that some day he will be able
to hand it down to his own son. He worries because the oddsÑand the
estate tax lawsÑare against him. Only 30 percent of businesses survive
a first intergenerational transfer. Only 4 percent survive to the next
generation. A third transferÑthe transfer that put Pankonin's in David's
handsÑusually has survival odds of less than 1 percent. Now David wonders
if the business can survive another transfer. In his words, "Will I
be able to pass the company inherited from my father along to my son
or, in spite of what my will might say, am I just working hard to pay
an heir called Uncle Sam?"
Family Business Horror Story #7
Hard work should have at least some recompense, even if small. Chester
Thigpen, the grandson of a former slave, has spent his life building
a small 850-acre tree farm in rural Montrose, Mississippi. It does not
create a great amount of income, but the money Chester has earned enabled
his five children to graduate from college and gave him a tremendous
amount of self-pride. Now, he wants to pass his achievement on to his
children.
Chester and his family are among the nation's most successful foresters;
he has twice received the award as Tree Farmer of the Year. Yet when
he dies, the federal government will demand such hefty taxes that Chester's
offspring will be forced to devastate the tree farm just to pay the
tax.
"We are not rich people," says Thigpen's son. "My father and I do almost
all of the work on our land ourselves. My father and I planted some
more trees not long ago. He knows he will not likely be here to see
them mature. But he hopes that his grandchildren and great-grandchildren
will be able to watch those trees grow on the Thigpen Tree Farm." Sadly,
members of a socioeconomic group that the estate tax was designed to
help could be laid low by this onerous tax policy.
Family Business Horror Story #8
In Atlanta, the estate tax threatens an African-American publisher's
hopes of revitalizing her family's newspaper and ensuring its success.
Fifty-year-old Alexis Scott publishes the Atlanta Daily World, a biweekly
paper her grandfather started in 1928 with funds he had saved from his
work on the railroad. When he died six years later, he left the paper
to his children. About 10 years ago, the business began to falter, prompting
Scott to assume the reins. She hopes that the Atlanta Daily World will
remain in the family. However, Scott sees the estate tax as a threat
to her hard work. "It may have a good intention," she said, "[but] if
you are working to build a business in one generation, it gets cut out
from under you in the next. You lose either wayÉIt just doesn't seem
to make sense."
Family Business Horror Story #9
Kennard Campbell owns a small septic tank company in Virginia. He began
his business in 1963, and today employs 15 people, including his son
and daughter who have worked with him since they were teenagers. His
son takes home about $30,000 a yearÑhardly enough to pay the $2 million
tax bill the government will hand him when his father dies.
In order to reduce the death tax bill, Campbell has stopped expanding
his businesses and is considering transferring shares to his children
now, rather than wait until he dies. He would like to invest in insurance
and put some of his money back into the business, but it just does not
make sense when his family will have to pay excessive taxes on any new
appreciation. In fact, Campbell's children may have to liquidate one
or two of his businesses in order to pay the death tax on the remaining
businesses.
He is not alone. There are thousands of hardworking men and women who
are forced to sell their family's small businesses, farms, or ranches
because of the death tax. By eliminating this onerous tax, Congress
can help these American families continue to expand their businesses
and remain integral parts of their communities.
Family Business Horror Story #10
Brad Eiffert is a middle-class business owner from Columbia, Missouri.
Even though he is not rich, he pays $36,000 a year in life insurance
to protect his family from death taxes. But he would rather invest this
money in his business and hire another full-time employee. Despite the
life insurance policy, Eiffert may still have to sell his lumberyard,
which would also mean the end of future tax revenues from that business.
"Our business, like any business, is a tax machine!" says Brad. "We
generate corporate taxes, sales taxes, payroll taxes, personal taxes,
property taxes . . . I can't believe the government would give all that
for this one-shot tax at the time of death. It is absurd."
The death tax was created in 1916 as part of the new income tax. Since
its enactment, the death tax has done more harm to family businesses
and farms than it has raised revenue for the government.
Family Business Horror Story #11
Skylar Thompson's family began its grocery business with one small food
store back in 1962. Since then, the business has expanded to 32 grocery
stores in Texas and Louisiana.
Thompson has worked in the grocery business for 37 years. He started
working to earn money in college and is now the president and chief
operating officer. His business has competed successfully against national
chains for years, but this may not last long. His years of hard work
may be lost with the death of his parents. When this happens, Thompson
will face death tax bills of up to 55 percent of the company's assets.
These excess rates would force him to liquidate his assets, halt the
future growth of the company, and risk the employment of his loyal,
hard-working staff.
Family Business Horror Story #12
Thirty-four years ago Art turned his living room into an office and
began selling traffic lights and related equipment. With hard work and
luck, Art has turned that home-based business into a $5 million enterprise
in central Florida. He would like to pass it on to his children. The
death tax, however, stands in his way. "People do not build up their
business just to sell it," said Bruce, Art's son and president of the
company. "Many are thinking, ÔWhat about my family?'" Art's family will
face a death tax bill of up to 55 percent of his estate, which primarily
consists of the business and the property on which it stands. Without
relief from the death tax, Art's family will be forced to close the
business, sell the property, and pay millions to the federal government
in the death tax.
THE DEATH TAX THREAT TO THE ENVIRONMENT
When people think about the death tax, they tend to focus on its devastating
effect on family businesses and farms. However, the death tax also hurts
the environment. Many landowners, especially those in rural areas, are
"land rich, but cash poor." If the owner of a family business dies,
the heirs often will have to sell their assets because they do not have
enough money to pay the death tax. Since land is valued at its "highest
and best use," they must sell to developers in order to raise the necessary
cash. Dennis "Duke" Hammond, a biological scientist with the Florida
Game and Fresh Water Fish Commission, concludes that "if death taxes
were not assessed by the government, thousands of privately owned acres
of land would be protected from development."Fncite Impact on the Environment
Case #1
The Hilliard family is a good example of how the death tax hurts the
environment. The family was forced to sell 17,000 acres of land in southern
Florida to developers to pay its death tax bills. So far, 12,000 acres
have been developed; the rest will soon follow. The family did not intend
to sell the land before the death tax bill and had not made plans to
develop it.
The Hilliard's land is in the heart of the Florida panther's habitat.
The panther, is an endangered species, that requires a large amount
of land to survive. The death tax indirectly threatens the panther's
habitat every time it forces local Florida landowners to sell their
land to real estate developers.
Today, over 75 percent of species listed under the Endangered Species
Act rely on privately owned land for some or all of their habitat. The
death tax creates a huge burden for those that wish to keep their land
undeveloped.
TAX AVOIDANCE
Historically, the death tax brings in only about 1 percent of total
federal revenues. Yet, the costs to administer and collect the death
tax, including litigation, as well as the costs of its economic effects
can add up to 65 cents on every dollar collected. That means net revenue
collected from this onerous tax is just nearly one-third of the total
tax collected.[OK?].
According to the Institute for Policy Innovation, the death tax costs
the economy almost as much as it raises for the federal government.
This is because the death tax harms the most potent engine of growth
in the economyÑAmerica's small businesses and their employees. The IPI
study found that if Congress repealed the death tax today, the increase
in economic growth that resulted from this reform would replace any
loss to the U.S. Treasury by the year 2010.
A 1996 Heritage Foundation analysis of death taxes using the WEFA Group
U.S. Macroeconomic Model and the Washington University Macro Model found
that, if the estate tax had been repealed in 1996, then over the next
nine years:
· The U.S. economy would average as much as $11 billion per year in
extra output;
· An average of 145,000 additional job could be created each year;
· Personal income could rise by an average of $8 billion per year above
the current projections; and
· The extra revenue generated by the additional growth in the economy
would more than compensate for the meager revenue losses stemming from
the death tax's repeal.
Wasted Resources Case #1
Robert, an entrepreneur, began investing in Northern California real
estate early in life, making large profits from the resale of his land.
He used the profits to invest in a vineyard in Napa Valley that now
has a fair market value of $20 million.
Robert planned on leaving the vineyard to his children. Two of his three
children work on the vineyard already and they would like to continue
to do so. However, Robert is afraid that when he dies he is going to
have to leave all that he has worked hard to build to the federal government,
rather than to his children. To make sure that his legacy lives on,
Robert has spent approximately $50,000 on legal, accounting, and appraisal
bills.
He is also making annual $10,000 gifts to his children and has given
away 45 percent of his winery to his children. He has changed his company
from a sole proprietorship to a limited liability company, and has formed
a family limited partnership for the vineyards.
Wasted Resources Case #2
Richard Forrestel, Jr., of Akron, New York, has spent a substantial
amount of time and effort to avoid the devastation wrought by the death
tax. Forrestel's father founded Cold Spring Construction Company. Forrestel
stated that, "My family's construction company has already wasted over
$4 million since 1980 in insurance purchases and stock redemptions solely
in order to be able to pay the death tax." "I wish death tax proponents
would tell the truthÑthey simply want to redistribute wealth," continues
Forrestel. "The American dream of my father should not be broken up
and sent to Washington when he dies."
Each day, hundreds of Americans spend more and more money in an attempt
to shelter as much of their estate as possible from taxation after they
pass away, so that their offspring can benefit from their years of hard
work. This money could have been reinvested into the company, creating
more jobs and helping more Americans in their daily lives, but the death
tax makes this almost impossible.
Wasted Resources Case #3
Ronald works at a steel manufacturing plant his father started in Philadelphia
in 1952. Its stainless steel plate products are sold to other manufacturers
for various uses. Ronald and his brother have been working with their
father to develop an estate plan to smooth the transition of ownership
from the second generation to the third.
However, this task has been difficult. Ronald does not have 55 percent
of his business assets in cash so that he can pay off the death tax
bill when his father dies. So, he has to spend his precious time and
money on lawyers and insurance agents. He has to stop the growth of
his plant to ensure he can pay the tax bill. The death tax means that
Ronald cannot buy a new piece of equipment or hire a new employee because
he must spend his extra money on lawyer's fees.
Wasted Resources Case #4
Helen and her husband dreamed of owning a community newspaper. After
years of planning, they finally realized their dream in 1965 and bought
a small, struggling weekly paper in northern Georgia. They invested
all their savings and have turned that small paper into a $2 million
business that publishes three other weeklies as well.
Helen is worried that all of their hard work will go to waste when she
and her husband die. She would like to pass the business on to her sons,
but she may not be able to if the government hands her a 55 percent
death tax bill. Her family has spent thousands of dollars already in
legal fees to ensure she can pass her business on as she and her husband
hope, but this still may not happen. The 55 percent death tax will be
levied on the family estate despite all the corporate and personal taxes
they have paid through the years.
Wasted Resources Case #5
The family business of Michael Coyne has lasted through three generations
across 67 years. What started as a small New Jersey lumber company in
1932 has grown into three home improvement stores and a separate kitchen
and bath store. However, the same business that made it through the
ravages of the Great Depression and the shortages of World War II may
not survive the death tax.
Michael's experience with death taxes began 10 years ago when his grandfather
passed away. The majority of the estate was left to his grandmother;
though they obtained appropriate legal representation and death tax
planning, it became clear that the business would not survive after
his grandmother's death.
Michael and his family have contributed more than just stability to
their community for generations. They employ 70 people, and they have
paid all their taxes. Yet for the past 10 years, they have been forced
to spend over $1 million on life insurance policies, lawyers, accountants,
and other efforts to protect the business from the death tax. Despite
these efforts, the family faces a death tax bill in the millions of
dollars. The business might not survive.
CONCLUSION
Even though many countries such as Australia and Canada do not have
a death tax, the United States continues to reserve its highest marginal
tax rate of 55 percent for estates that involve family farms and businesses.
The lowest rate imposed by Washington (37 percent) is nearly twice the
average death tax rate of 21.6 percent in 24 other countries that do
impose death taxes. And while most countries impose a top rate on estates
of $4 million or more, the top death tax rate in this country is imposed
on estates valued $3 million or more. This policy is wrong in a country
that built its future on the idea that with enough hard work and determination
anyone could move up the economic ladder.
By eliminating the death tax, Congress could put more money in the pockets
of Americans who would, in turn, would give more to their favorite charities
and to their communities during their lifetimes as well as after death.
While the death tax was supposed to be a tax on the rich, American families
who work hard to build a family business or farm and their employees
of are the ones most often left paying the bill. The mathematics are
simple: The tax rate on a worker who loses his or her job as a result
of the death tax is 100 percent. Clearly, with estimates of the federal
budget surplus now exceeding $1.87 trillion over the next ten years,
it's time to do away with this faulty tax policy.
--William W. Beach is Director of the Center for Data Analysis at
The Heritage Foundation.
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