Re: The new death penalty

Dave Long (dl@silcom.com)
Thu, 05 Aug 1999 21:14:30 -0700


[note - since the "death penalty" was supposed to be in analogy to
the "marriage penalty", you may be interested in a paper at:
<http://www.irs.gov/plain/tax_stats/soi/osoi_pap.html> which seems
to indicate that, except for AGI's under $10K, "single" filers are
facing higher tax rates]

> Okay, looking up the references. You are leaving one major component
> out of your equation/arguement: small businesses. One of the single
> biggest reasons estate taxes are so evil is that in order for the heirs
> to pay the taxes, many of the small businesses have to be broken up.

I believe family businesses actually have their very own loophole in
the tax code, for the reasons you describe. [section 2057]
Check form 706, schedule T.

However, it also seems that few small businesses should have any
problem squeezing under the unified tax credit:

> >From "Family Finances in the US: Recent Evidence from the Survey of
> Consumer Finances", Federal Reserve Bulletin, vol 83 (Jan 97)
> pp. 1-24: <http://www.bog.frb.fed.us/pubs/bulletin/1997/0197lead.pdf>

Median Value of Business: 1995 ($, thousands) (% holding)
-----------------------------------------------------
all families . . . . . . 41.0 . . . . . 11.0
income >$100,000 . . . 300.0 . . . . . 32.1
age of head 65-74 . . 100.0 . . . . . 7.9
age of head 75+ . . . . 30.0 . . . . . 3.8

Note the large decline with advancing age in businesses held and
valuation of remaining holdings. It may be that prudent businessfolk
take the care to transfer their interests[1], so the business isn't
jeopardized by an odd failure to anticipate either death or taxes.

-Dave

I failed to include percentages with the previous median net worths,
so here's that table again, expanded:

Median Family Net Worth: 1995 ($, thousands) (% of families)
--------------------------------------------------------
all families . . . . . . 56.4 . . . . . 100
income >$100,000 . . . 485.9 . . . . . . 6.1
age of head 65-74 . . 104.1 . . . . . 11.9
age of head 75+ . . . . 95.0 . . . . . . 9.8

[1] Meir Kohn, <http://www.darthmouth.edu/~mkohn/>, has some papers,
notably "Finance Before the Industrial Revolution: An Introduction",
and "The Capital Market Before 1600" that state that even prior to
the 17th century, merchants tended to prefer to shift their assets
away from working capital as they grew older.