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Exclusive: Down With the Death Tax

It kills family-owned small businesses

As the U.S. Senate prepares to vote on permanently repealing the death tax, we are hearing renewed accusations that repeal efforts are driven by the selfishness of super wealthy.

Eliminating the estate tax helps just “a handful of rich families” (Mark Weisbrot of the Center for Economic and Policy Research) and is pushed by “enormously powerful and wealthy people — billionaires and mega-millionaires” (Joan Claybrook of Public Citizen.)

Washington Post columnist Harold Meyerson claims that repeal is intended for the likes of Vice President Cheney, Defense Secretary Rumsfeld and Sam Walton’s children and calls it nonsense that repeal would hurt “countless hardworking families.”

Let me introduce these critics to Bob Jung, head of Trico Mfg. Corp. of Pewaukee, Wis., a manufacturer of lubrication equipment founded in 1917 by his grandfather, Oscar Jung. Bob’s grandmother, Belle, was the company’s majority stockholder when she died in 1983.

“She passed away thinking she had done everything right,” Bob recalls. “She saved so that her children would have something, she cared about the people in the company and hung on to the business she loved and that her family had a passion for.

“Little did she know that her entire savings plus another 20 percent of the company’s stockholders equity would be needed to pay the IRS so her stock certificate could move from her safe deposit box into my father’s.

“Fifty people and their families were in jeopardy of having their jobs shipped off to another competitor or suitor had we not been able to pay the death taxes.”

Does this sound like the selfish complaint of the super wealthy?

In 2001, Congress voted to gradually phase out the death tax, with repeal set for 2010. Unfortunately, the tax law changes are only temporary. Unless the tax cuts are made permanent, the death tax will be fully repealed for a single year — 2010. After that, the current estate tax system resurfaces, restoring all the problems currently faced by small-business owners.

Opponents of repealing the death propose various alternatives with different rates or increased exemptions, claiming these alternatives will spare all but the super wealthy from paying the tax.

The trouble is, family-owned small manufacturers often have millions tied up in equipment. This capital may look like available cash to the tax collector but is really the foundation of each company.

“In the printing industry, one piece of equipment can cost in excess of $1 million,” says Frank Goodnight, owner of Diversified Graphics, Inc., which employs 10 people in Salisbury, N.C. “Often we work for years to pay off the equipment and, the minute it is paid, it becomes susceptible to the grim reaper: estate taxes.”

To pay the tax after the owner dies, the heirs face a choice: sell the machinery and go out of business, or make all the other kinds of cost-cutting decisions — layoffs, deferring new investment — that hurt the company’s competitiveness.

Business owners, of course, take steps to avoid the most drastic outcomes by spending tens of thousands of dollars annually on estate planning, lawyers and insurance — again, diverting dollars from productive investment.

Uncertainty in the current law makes this estate planning even more complicated and expensive. The House voted for permanent repeal in 2005, and a Senate vote is expected soon. We need 60 votes to overcome a filibuster.

As it stands now, how can small-business owners plan? Should they count on permanent repeal, or perhaps a different, politically brokered compromise in a future Congress? Or should they simply make sure they pass away before 2011, when the death tax kicks back in?

One cannot fairly dismiss these considerations as the selfish concerns of the rich and super-rich. To the contrary, they are the hard decisions today facing family-owned small businesses and manufacturers. They are, indeed, the countless hardworking families who make the products and pay the wages that keep the U.S. economy growing.

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Written By

Mr. Engler is president of the National Association of Manufacturers.

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