The Estate Tax and Family Business

We recognize the importance of protecting America's small businesses, and the estate tax has special provisions that do so. But this concern — the rationale usually advanced for eliminating the estate tax — can be addressed by amending the existing estate tax system.

Only a tiny number of businesses are affected by the estate tax.
According to the IRS, of the 2.3 million people who died in 1998, only 780 left an estate with significant business assets. A Treasury Department analysis found that estates that included family businesses paid less than 1% of all estate taxes.

Proponents of estate tax repeal have rejected reforms that would have protected small businesses.
In 2001, the Senate rejected a Democratic reform proposal that would have tripled the family business exemption to $4 million for individuals, $8 million for couples. That reform would have exempted the vast majority of farms and small businesses that currently pay estate taxes.

In 2000, New York Times reporter David Cay Johnston interviewed six people named as "estate tax spokesmen" by the National Federation of Independent Business and the American Farm Bureau Federation. Only one of them was aware of the Senate proposal to triple the family business exemption.

There are already special estate tax rules for family businesses.

• Any taxes due can be paid over 14 years, at interest rates as low as 4 percent.
• Unlike most couples, family business couples can exempt up to $2.6 million from taxes.

But doesn't the estate tax force some businesses to close?
Very rarely. Family businesses are sold or closed for a variety of reasons, and the estate tax would rank near the bottom of the list. Often, other family members are not interested in running the business any longer. Because only a very small portion of small business and farms ever even pay estate taxes, it is unlikely that the estate tax has a very important impact on the proportion of businesses that make it to the second generation or beyond.

Overall, the estate tax is not killing family businesses.
The small business sector has never been healthier. Over the past 10 years, we have witnessed an incredible level of business startup activity. It’s hard to see how an estate tax levied on a fraction of the nation’s wealthiest households has affected entrepreneurship in the U.S.

The vitality of the small business sector can be traced in part to the enactment of the estate tax in 1916.
By preventing the accumulation of vast family dynasties over generations, the estate tax has leveled the playing field and allowed new small businesses to compete and succeed.

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