The Wall Street Journal had a very good editorial yesterday on the estate tax. Basically, like Hobbs, they debunked the theory by liberal tax and spenders that only folks like Paris Hilton will benefit.

The article serves as a great primer for those who don't understand that most small businesses are rich in assets but cash poor. Heavy estate taxes only force small businesses to shut down and sell off in order to pay the tax man.

Of course, I give liberals marks for consistency for once. The estate tax is in keeping with the liberal strategy, ie less business, more dependence on a remote, elite bureaucracy. Marx would be proud.

Let's see...If I have a business that's valued at $10 million at my death, that means that people would be willing to pay $10 million for it, with the cost of capital. Instead, I leave it to my kid, who would have to pay about $4 million estate tax on it at the highest the estate tax has been. Maybe she would have to borrow that $4 million, and that interest is her cost of capital for the business. But still, she is getting the business for 60% off. If she cannot make a go of the business at a 60% reduced price, she shouldn't be running the business!

Now, "Bleep the small businessman" is an awful way to put it. But "The small businessman argument is a canard" is valid.

Ed, your comments assume the business is already debt-free. But small businesses, typically, are leveraged.

What if the business is worth $10 million, but has $6 million in liabilities - a mortgage on its building and real estate, equipment purchased on payments or leased, etc., long-term supplier contracts, etc.

What if the business generates enough gross sales to cover its oeprating costs and debt payments, and to provide a little profit for the owner.

But then the owner dies and the estate tax, as you outlined it, slaps another $4 million in debt onto the new owner.

In that case, the inheritor winds up with a business that is $10 million in debt, and isn't generating the cash flow to cover the debt much less make it worth having the business.

The only choice then is to sell the business, often in pieces, in order to pay the taxes. Businesses are destroyed, people's jobs are lost, suppliers lose a customer, and a family watches decades of hard work auctioned off to satisfy the insatiable federal government.

The estate tax is a short-sighted tax. The long-term view recognizes that businesses, especially small businesses, are better for the economy - and for the government's tax revenue - if they are thriving and employing people rather than being carved up and sold off.

The estate tax also hurts landowners, particularly larger pieces of land that may have been in a family for generations. The land often has to be sold simply to pay the tax. I know of a family farm in Indiana which will certainly be split soon because of this.

The estate tax could be reasonable if it were adjusted for inflation. $600K (the amount that is "deductible" was worth far, far more nearly 100 years ago when the estate tax came about. That we're still using the same figure now is a travesty. The men who made the law never intended for it to be used as it is now with small businesses- it was meant for the Paris Hiltons of the world, not the farmers.

Repealing it completely makes sense, but raising the deductible with an inflation clause also works. I'd still rather see it go away completely.

"liberal tax and spenders"

Wake up America. What party has blown a whole as large as the Grand Canyon into our federal Budget? Your own Grand ole Party!

And now you defend the rights of millionaires to coddle their lazy progeny. And leave the budget mess to be paid for by the middle class.

Long live Economic Democracy! Down with Hiltonomics!

What Matt Yglesias forgets is that he hasn't the slightest idea how a small business or any business runs for that matter. He also seems to forget that the "worker" would have no job if it were not for those evil businesses. The estate tax has affected many people both big and small to the detriment. I have seen many a small farm go away because of it and small business. It has also happened to Sports teams where the children of the father who passed away had to sell the team because they in no way could afford the tax implication.

Who in their right mind would justify making tax $'s off the death of an individual who wants to give their hard work they have accomplished over a lifetime to their heirs? The same people who think SS OK that people pay in to a program and if they die before the age of 65 see nothing.

The estate tax was nothing more than Government Organized crime coming in and taking protection money.

I read that article this morning by Mathew and was absolutely incensed. Here is my reply,

http://www.scaredmonkeys.com/?p=474

Your answer is more polite than mine, but take a guy from Manhattan and send him to Harvard, and he has no clue on what happens on Main Street America.

Great Post Bill, and we will see you at BlogNashville.

Small business??? Get your heads out of the sand! Use your brains, not made up stories to make yourself feel happy and comfortable. From your own Wall Street Journal, WSJ.com:

"Before another round in this debate begins, pause to consider the facts -- and the unusual politics that have made a populist issue out of repealing a tax that hits only the best-off Americans... fall[s] on those who leave assets of more than $1.5 million. That is about 18,800 of the 2.5 million people expected to die this year.... The tax will bring in about $18 billion this year, enough to fund the National Aeronautics and Space Administration, with a few billion dollars left over."... and

"All this has Michael Graetz, a Yale Law School professor and the top Treasury tax official in the first Bush administration, wondering: 'How could a tax that applies only to the richest 2% of the American public become anathema to 70% of the population and be repealed by bipartisan votes in both the House and the Senate?' "

So this is a tax that affects your everyday small businessperson? Think again? Get your facts straight! Who will make up this revenue when its gone? You and me.

Vote your self interest!

On whose 1040 does the tax appear--that of the deceased or that of the heir?

Bob is a big fan of punctuation!!

Bill:

If my business valued at $10 million (debt free) had $6 million in liabilities, then its value would only be $4 million, and my kid would pay only about $1 million in taxes, in effect getting the business for a 75% discount. So I repeat my point: If she cannot make a go of the business with a cost of capital 75% less than what other people think they can make a go of it with (what it means for the business to have a value), then she shouldn't be running the business. Everyone would be much better off if the business were sold to someone who could run it competently (and she'd still pocket $3 million).

The types of businesses that couldn't support some extra debt load have no real value, and wouldn't be subject to the estate tax anyway.

Now there is the case that the underlying assets are worth more broken up than they are being used for the business, but since the whole point of business is to employ assets to create something of greater value than those assets, then once again everyone would be better off if those assets were sold to people who could put them to better use.

Bob,

You say vote your self interests. Well, we are. What makes America great is hope. We are not France, self flagilating ourselves over inequities. We are AMERICA. We all have hope that we will hit it big. It is also true that most don't, but the hope of success is what drives most of us.
The rest hide under their bed and vote for liberals to do their thinking for them.

Tom

Why don't the pro-death taxers just admit that they favor the socialist ideal. How else do you justify punishing hard work, savings, frugality, and investment in the community as well as future. After all, it's not as if these folks didn't spend a lifetime paying a list of various taxes.

The reward for daddy dying is the IRS gets money so that Harold Ford Jr. can appropriate it to teach kids how to put condoms on cucumbers. What an incentive to save!

How about a compromise: we only have death taxes for those businesses which have sucked off the poor taxpayers in the first place by means of unfair--and in my view---unconstitutional tax incentives. Since they get breaks to create their wealth, they can pay it back posthumously.

But that's another argument. Really, those still marching for the death tax don't like wealth period. Unless, of course it's unearned wealth--like POWERBALL!!

If a debt-free small business is worth $10M then one that's "leveraged" isn't worth $10M. The estate would be smaller and creditors would own a chunk. Circular logic for the win.

Family farms and other small business should plan ahead with some appropriate estate planning. Specifically you should try not to leave your heirs asset rich but cash poor.