Inheritance taxes reduce entrepreneurial activity

"Estate tax is something that effectively destroys family businesses. " Let us take a look at what often causes small businesses to fail [1]: Poor planning, Inadequate capital, No prior business experience, Ineffective marketing, Competition, Poor customer service, Poor record keeping and financial controls, Limited product - services and/or clients, Opportunistic marketing only, Poor time management, Poor quality, and Burnout. Note that what proposition seems to be driving at, that estate tax dangerously drains capital levels, is only one of 12 ways that a business would fail (by ensuring inadequate capital)). Let us examine how precisely this "family business" situation would pan out. Entrepreneur Bob would like to start his own family business. He doesn't have enough capital himself to carry start-up costs. Say someone in Bob's family dies and he is due inheritance. A: Bob has enough money from the inheritance (post-tax) to start up his business. His business can now start up, but can still fail any of 11 other ways. This occurs if there is no tax, or the sum of money inherited is so large that it covers all capital costs. Tax is percentage based, not lump sum, so if he inherits relatively little he wouldn't have enough capital anyway. Note that he could still fail in eleven other ways. B: Bob doesn't have enough money. The gross amount isn't enough, or, as prop would posit, the tax is usurious. Well... Let's look at who pay's estate tax. "The average estate that paid tax in 1997 was worth $2.3 million. It paid about $390,000 in estate taxes, or 17 percent of the estate’s value."[2] Unless Bob's family business has about 2 million dollars in startup costs, we can reasonably expect Bob to be fine for capital accumulation, even with the tax. But what if Bob is less well-off than the average taxpayer - don't these taxes persecute the poor? "The law allows the first $675,000 of an estate (twice that per couple) to be passed on to family members and others tax free, and because of special provisions for family-owned businesses, transfers to children through gifts and trusts, and charitable bequests, the government collects only a relatively small fraction of even large estates."[2] Essentially, those with relatively low-value estates pay no tax. It is only those with highly valuable estates that end up paying appreciable amounts of tax. Even then, that appreciable amount, after deductions, comes to a scant 17-19% of total value. On the estates that actually qualify to get taxed, there should be more than enough left over to start a business (let alone continue one!). But how much does it cost to start up a small business anyway? "Solo entrepreneurs expect median startup costs of $6,000, while the median cost expected by team ventures is $20,000. More than 80 percent of the entrepreneurs studied expected to cover their startup costs without bank loans, although on average they had saved only $2,000 towards that goal." [3] So, if you're in the lowest bracket for estates (675,000 or less) and tax free, you'll probably have more capital than you need in order to start your business unless your family has no estate, you don't inherit anything, or inherit very little. But in this case, your poverty has nothing to do with usurious taxes. It has everything to do with being poor. It is this sort of poverty that we want to combat with the funds from taxes, like estate tax, into social programs. We on side opposition believe that poverty is a far greater threat to the "entrepreneurial spirit" than estate tax. We would even go so far as to say that estate tax helps maintain this spirit by providing the capital for social programs that allow those less advantaged to become the entrepreneurs of the future, rather than allowing corporate dynasties to monopolize the market. Digression aside... Even if you're in the median bracket (paying 390,000 in tax), you have more capital than you would need to start your business. Even if the taxes were prohibitive (in the sense that you can't start a business on inheritance ALONE), which the are not as shown above, one can always take out a loan. This is not even a particularly risky investment, as earnings quickly outstrip upfront capital costs. "On average, solo entrepreneurs believe they will have business income of $90,000 in the fifth year of their venture." [3] Estate tax poses no credible threat to small business owners, or even to business owners in general. "Only 2% of the 2.4 million people who died in 2001, or fewer than 52,000 estates, left behind enough wealth to owe estate taxes, according to the Internal Revenue Service." "The estate-tax exemption limit has been raised substantially, starting at $1 million in 2002 and rising to $3.5 million for 2009." "Under Obama's plan, for example, 84% of the total taxes owed would be paid by estates worth more than $10 million" [4] Remember that even on these properties that ARE taxed, the net amount taken by the government rarely exceeds 17 per cent. In 84% of cases, you could reasonably expect your inheritance to be more than 8 million dollars. It is hard to see how losing 17 percent of 10 million impacts an individual more than new educational resources or hospital beds influence the lives of others. But what about the disincentive to invest? It turns out this too, is a bogeyman. ""Essentially, the property and most investments in an estate get a new value for tax purposes when someone dies... For the vast majority of people, that means the increase in value of their estates never gets taxed, either when they die or when the property they bequeath to others is ultimately sold." [4] Estate tax is not usurious, unfair, or unjustified. It is not a threat to entrepreneurship. Quite the opposite. It provides capital for the funding of social programs, which in turn creates a new generation of fresh entrepreneurs by providing opportunities that would not otherwise be granted. We believe that this is not only morally but economically beneficial, as it keeps the market competitive and prevents the centralization and monopolization of wealth by those fortunate enough to have "earned" it in advance. -------------------------------- In response to the work of Holtz-Eakin, opposition has several things to say: Firstly, that we question the validity these findings. The sourced article has no empirical data to back this up. Holtz and Eakin do not describe the econometric methods they used to come to this conclusion, indeed if they used any at all. If this sounds trivial, it is not. The primary assumptions one uses for the calculations of a economic model have fundamental impacts on the conclusions reached by that model. Holtz Eakin do nothing more than refer to tables, which often they themselves created. This should instantaneously make any discerning reader suspicious of the conclusions of such an article. We can infer from the results of the Holtz-Eakin model (whatever it is) that they believe in some form of "trickle-down" economics, wherein giving capital to the rich results in ancillary benefits for the rest as the rich are prompted to "reinvest" in the economy by having all that extra money. This is where, we presume, Holtz-Eakin get their positive social benefits from. The trouble with this is that "trickle-down" is just an assumption, and a shaky one at that. Assuming that giving a wealth person more money means that they are more likely to hire another worker intuitively sounds naive. It also doesn't add up historically. The last 20 years have been tremendous in terms of growth (recession aside) for the West. Yet the income gaps in Canada [5], the United States [6], and the UK [7] are widening, in some cases worse than ever. Clearly the rich are not opening up their pockets. Perhaps the most extreme example is the great depression. The set of financial laws prior to WW1 were fare more libertarian, the results of which can be seen in the "U-shaped" income dispairty curve from 1913-1998. This is a result of a shift from laissez-faire to Kenysian policy, and then a gradual shift back towards neoliberalism (present day). Note that this preWW1 disparity took the form of a few lucky individuals amassing incredible fortunes. What happened was not an increase in wages, employment, and social good, but quite the opposite [8]. It was not until the government stepped in, and used taxpayer dollars to restimulate the economy, that the situation stabilized. To place this information in the context of "the worst economic downturn since the Depression" and steady approach of income disparity to pre-WW1 levels, we can see a connection between laissez faire economic policy and eventual economic collapse. Those who have money tend to hoard, not to spend. This has been the historical trend, and we have every reason to believe it will continue. Holtz-Eakin, other than their unexplained findings, give us no reason to believe any differently. We dispute the validity of their findings, and the philosophical basis of their model. Even if Holtz-Eakin are not laissez-faire proponents, the analysis here further strengthens oppositions' case that monetary policy that favors redistributive justice is preferable to a laissez-faire system in which we rely on the altruism of the very wealthy to keep our society functioning. 1) http://www.evancarmichael.com/Business-Coach/223/Twelve-Causes-For-Small-Business-Failures-According-To-Your-Strategic-Thinking-Business-Coach.html 2) http://www.centuryinstitute.org/list.asp?type=PB&pubid=242 3) http://www.sba.gov/advo/press/03-49.html 4) http://articles.moneycentral.msn.com/RetirementandWills/PlanYourEstate/5-estate-tax-myths-that-wont-die.aspx 5) http://www.growinggap.ca/node/183 6) http://www.nytimes.com/2007/03/29/business/29tax.html?ex=1332820800&en=fb472e72466c34c8&ei=5088&partner=rssnyt&emc=rss 7) http://www.guardian.co.uk/society/2009/may/08/poverty-equality-britain-incomes-poor 8) http://www.nber.org/papers/w8467