Friday, December 31, 2010
With family businesses and farms accounting for a significant percentage of the “wealth” of elderly Americans (those 65 years of age or older), the return of the estate tax starting on January 1st will force many families to divert resources into measures to minimize the tax, rather than grow their businesses, according to a new report released today and authored by Duquesne University Economist Antony Davies.
Published by the American Family Business Foundation (AFBF), the report finds that up to 67% of estates subject to the estate tax in 2011 would own small business assets, with more than 22,000 farms, 29,000 private corporations and 14,000 real estate partnerships likely to be affected if the owner dies.
Under the “compromise” tax plan signed into law just before Christmas, the estate tax will be reinstated next year at a rate of 35%, with a $5 million exemption.
“The more assets small business owners need to redirect toward preparing for the impact of the estate tax,” Davies stressed, “the fewer assets they have to create jobs.”
Indeed, he said, the historical data show that the size of small businesses increases as the size of the estate tax exemption increases – meaning that “higher exemptions encourage entrepreneurs to shift assets into small businesses rather than reserving the assets to protect against estate tax liabilities.”
While nearly 200,000 total U.S. households’ net wealth will exceed the $ 5 million threshold and could pay if the owner dies, Davies predicts that nearly 10,000 households will actually pay estate taxes in 2011, based on age and assuming a 5% mortality rate.
Antony Davies (Duquesne University, Donahue Graduate School of Business), The Effect of Estate, Inheritance, and Gift Taxes on the Survival of Small Businesses: A Panel Data Analaysis:
Proponents of estate, inheritance, and gift (EIG) taxes claim that the taxes prevent wealth from becoming concentrated in the hands of “generational dynasties” and so help to promote economic equality. This paper presents evidence that EIG taxes can have the reverse effect – encouraging the concentration of wealth – via a greater propensity for small (versus large) businesses to be liquidated for the purpose of paying the EIG tax. This study examines business census data for 50 states over the period 1988 through 2006. Applying generalized method of moments estimation in a panel data framework, the study finds a significant negative relationship between EIG taxes and the number of small firms. The relationship steadily declines as firm size increases such that the relationship becomes positive for the largest firms.