The Milner family started their farm-equipment business in Kern County, California, in 1950, and after 30 years it had grown to 20 locations and employed 300 employees. Mr. Milner was an excellent businessman who had developed a very successful operation through careful planning. Being aware that

upon his death his estate would be hit with a 55-percent death tax on the full value of his assets, he realized the best course of action for his heirs would be to sell out early and pay a 20-percent capital-gains tax instead of the 55-percent federal death tax. However, his decision also meant that his family would no longer have a family business, and his children would not have an opportunity to work in the family business. The buyer was a large foreign public company that, shortly after purchase, radically changed the operation. The jobs of most of the 20-year veteran employees were terminated by the new foreign owners.

According to the Policy and Taxation Group, which monitors such activities, this is not an unusual story. Many family businesses sell out early to reduce the horrendous burden of the estate tax. This means that families lose their businesses and livelihoods, and jobs are lost in the community. Much of the job loss is a result of who buys the businesses: large public companies and foreign business interests, which are not subject to the estate tax, buy up the small-and medium-sized family businesses.

Under current law, the "Federal Estate Tax" (death tax) will decline over time and be totally repealed in 2010--heirs will pay zero dollars in federal inheritance tax--but then in 2011, the tax will be reimposed at a top rate of 55 percent and an exemption of $1 million. If you are in poor health in 2010 and own substantial business or personal assets, your heirs might pray for your prompt departure into the hereafter. Hopefully, they won't "prey" on you and ensure your departure.

In 2011, if an owner of a small business, farm, or ranch with assets of $2 million were to pass away, the heirs of the estate would have to pay federal estate taxes of about $550,000! This tax doesn't only apply to children who inherit: when one spouse dies, the survivor must pay out for "inherited assets." Oftentimes the heirs of such property inherit very little cash with the property, so the heirs are forced to sell the business or part of the farm or ranch to raise enough cash to nay the tax collector, who may be knocking on the door before the funeral is over.

A permanent repeal of the federal estate tax would avoid many tax-planning headaches and unpleasant family situations. In South Dakota, the owner of a farm, in an attempt to lessen the devastation of the federal death tax, began gifting several acres of the farm to his son each year. After many years almost all of the farm was vested in the son. Then the son was tragically killed in an accident. Since the lather then inherited the farm, the father had to sell almost all of the land to pay the federal death tax. He was only able to keep the home and the barn. Then he had to lease the acreage from the new owner in order to continue working the farm.

Jennylynne and her family live in Lone Jack, Missouri. Jennylynne's parents had been in the electrical construction business for over 20 years, and Jennylynne learned the business working with her parents. When her parents started talking about retirement and turning the business over to Jennylynne, the parents became aware of the estate tax and gift tax that would have to be paid at their death. The family considered borrowing against the assets to pay the tax, but the business could not support the debt at the interest rates that would have to be paid. After 20 years in the business, the company's assets were sold to outsiders, who then terminated many of the employees. Sadly, the sale of the assets so devastated Jennylynne's father that he died 14 months later. Her father could not understand why he could not pass his business to his daughter who had worked by his side for years.

Remember, all of the assets, whether cash, equipment, or land, have already been fully taxed when the assets were acquired. They were subject to the income tax, payroll tax, sales tax, and capital-gains tax. Then, just because there is a death in the family, all of those inherited assets are heavily taxed again. It appears to be closer to confiscation than merely taxation, doesn't it?

Society's Seed Money

People of a socialist bent criticize families who try to maintain their assets and then pass them on to their heirs, saying they are selfish and their money would be better used serving the public good. The big-government crowd has even introduced a phrase called "The Tax Expenditure," based on their fallacy that all money and wealth belongs to government, and that any reduction in revenue to any level of government would therefore be a "tax expenditure." Coincidentally, the "abolition of all rights of inheritance" is the third of 10 planks of the Communist Manifesto, which was written by Karl Marx and Friedrich Engels to explain how to transform an indutrialized country into a socialist/communist country. Yet it is the preservation and accumulation of capital that fuels economic growth and creates more real jobs.

The estate tax hurts the economy by suppressing investment and causing unproductive tax-avoidance activity. According to an article by the Tax History Project entitled "A Century of Soaking the Rich," this negative impact was foreseen. When passage of the estate tax was being debated before its inception in 1916, Rep. Edward Cooper (R) "insisted that all efforts to soak the rich and spare the poor were doomed to failure. 'No taxation, whether direct or indirect, can in the end be levied which will not be a burden on the whole people.'" Hindsight shows that Cooper was a very smart man. Because of the estate tax, the poor find fewer job opportunities (their "burden" from the tax). The reason behind this truth is because people naturally try to avoid being taxed, or if they can't avoid it, they plan for it.

In trying to escape taxes, research done by the CONSAD Research Corporation in 2003 shows that at about age 75, people begin to lock in the assets that they have accrued. Productive owners decide to slow down, reduce their investment, and increase their consumption as they age. Taxlaw professor Edward McCaffery says "the death tax discourages savings and rewards a selfish 'die-broke' ethic." Owners stop reinvesting their money because they understand that most of what they make will go to the government anyway. By doing so, they deprive the economy of seed money to begin or expand businesses. (They also deprive the government of money in the way of additional capital-gains taxes.)

Alternately, when businesses try to plan for the death tax, "Resources are diverted from the operation of their business to procure estate-planning services and to set aside reserves or purchase life insurance in anticipation of the eventual payment of the estate tax. If the estate tax were eliminated, these resources would become available for business purposes," said CONSAD. Karen Oman of Minneapolis told the Policy and Taxation Group about her family's experience in this area: "We just recently learned that we would not have the cash to pay estate taxes if we were to die. The company would be liquidated. Life insurance would cost up to $45,000 per year for $2,000,000 in coverage, which would still not cover all estate taxes. We're in limbo on what to do."

CONSAD's computer modeling demonstrated that if the estate tax were repealed in 2003 and a very slight modification of capital-gains taxes were implemented, there would be "a cumulative net increase in government tax revenues equal to $38.0 billion over the period from 2003 to 2012. That net increase will consist of $231.2 billion in additional revenues from the capital-gains tax and personal income tax, which will more than offset the foregone $193.0 billion in estate-tax revenues." A study done by Carnegie Mellon University in Pittsburgh last year also concluded that repealing the death tax would generate more revenues for government.

In fact, the net increase to the government would likely be much greater than $38 billion because the estate tax is probably the most inefficient tax of all. It is very difficult for the government to administer and enforce. There is an overflow of high-paid lawyers and accountants doing litigation, asset appraisals, and paperwork. And as Alicia Munnell, a member of President Bill Clinton's Council of Economic Advisers, estimated: "The resources spent on avoiding estate taxes may be as large as the amount that the tax collects."

To support the concept that average workers would gain from repeal of the estate tax, Greg Mankiw, former chairman of President George W. Bush's Council of Economic Advisers, noted that as a tax on capital, the estate tax reduces U.S. productivity and wages. He concluded that "repeal of the estate tax would stimulate growth and raise incomes for everyone." Also, President George W. Bush has been very consistent in asking for the complete repeal of the federal estate tax as an important part of his proposed tax reduction package.

Starved Into Submission

Many countries, including India, New Zealand, Sweden, Switzerland, and Thailand, have decided that they do not want an estate tax, and these countries have benefited by not placing this burden on their economieS. The two countries with the highest "death tax" rate are Japan (70 percent) and the United States (still 45 percent, it's being phased out, reaching its previous high of 55 percent in 2011). Japan, the world's second-biggest economy, has been mired in a slow-motion deflation since the early 1990s. Whole sections of Japan's construction and financial sectors continue to stagnate. Their high "death tax" rate is not the only reason for this stagnation, but is certainly a strong contributing factor.

But even if getting rid of the death tax were to result in an overall reduction in federal revenues, that would be a good thing? With our expanding population, under the present taxing system, the United States collects more than enough money to fund all of our constitutionally authorized government programs, including a strong military.

As a senator in the state of California, I was convinced that the only way to slow the growth and power of government on every level is to give them less money at every opportunity. This means not supporting any proposed tax increase, fee increase, assessment increase, or any bonds, and only electing candidates who share this belief. The only way to keep government under any semblance of control is to starve it into submission. This is not only good for businesses competing in a global economy; it's in the best interests of individuals, no matter what their income level.

The best solution to the "death tax" abomination is to permanently bury it. Any compromise, such as reducing the percentage rate or increasing the exemption level, will leave the door open for future spendthrift Congresses and administrations to merely reinstate higher and higher rates and lower exemption levels. Just get rid of it.

Tale of the tape: The graph shows the amount of an estate excluded from taxation since the enactment in 2001 of a law leading to the temporary repeal of the estate tax. Also shown is the extent to which Americans were penalized by the estate tax prior to the change in law.

Don Rogers is a former California state senator.

Slowly erasing estate taxes
A 2001 law gradually increased the amount of an estate excluded
from taxation, while also gradually decreasing the top tax rate on
estates. It will return to 2001 levels in 2011 without action by
Congress.

YEAR   EXEMPTION   TOP RATE

2001     $675,000     55%
2002   $1,000,000     50
2003   $1,000,000     49
2004   $1,500,000     48
2005   $1,500,000     47
2006   $2,000,000     46
2007   $2,000,000     45
2008   $2,000,000     45
2009   $3,500,000     45
2010     repealed
2011     $675,000     55

SOURCES: Internal Revenue Service; CCH Inc.