Death Taxes Clobber the Middle Class, Not the Wealthy
by Jerome F. Winzig
In 1997, John Sengestacke, publisher of the Chicago Daily Defender, one of the nation's oldest black newspapers, died at age 84. His uncle, Robert Sengestacke Abbott, had founded the renowned paper in 1905. By 1997, Sengestacke Enterprises, Inc. also owned three black weeklies, the Tri-State Defender in Memphis, the Pittsburgh Courier, and the Michigan Chronicle in Detroit.
During the first half of the 20th century, the Chicago Daily Defender was a prominent voice for African-American concerns. Pullman car porters carried bundles of the paper on train trips in the south, bringing the paper's pro-North editorials to Southern blacks and helping to foment the Great Migration. But by the time of Sengestacke's death in 1997, some thought it had "lost its mission." Its circulation had dwindled to about 20,000 and it was in serious need of revamping.
Sengestacke's 26-year-old granddaughter, Myiti Sengestacke, wanted to "save the paper" by revamping it. She had worked in the accounting and business department of the family-owned Michigan Chronicle and tried to put together a $10 million recapitalization plan and recruit new investors. However, since Sengestacke's wife was already dead, his estate faced $3 million in estate taxes. The recapitalization plan fell through and the Chicago Daily Defender and its sister papers were put up for auction earlier this year.
Sadly, the sale of small businesses after the owner's death is a common event across America. According to the Small Business Administration, 33 percent of the grieving heirs of small business people have to sell part or all of the family business in order to pay the estate tax. Fully 90 percent of family-owned businesses fail shortly after the death of the founder.
The federal "death tax" is payable in cash nine months after the date of death. It taxes the proceeds from life insurance policies and even taxes certain properties that might have been transferred to the heirs during the last three years of the deceased person's life. In 2000, up to $675,000 of a family-owned business can be deducted. Estate values over $3 million are taxed at 55 percent. That adds up to an effective rate of 44 percent, the highest in the world.
The main federal death tax form--IRS Form 706--by itself is 44 pages long, plus a separate 26-page instruction booklet. The IRS' own estimate for completing the necessary record keeping, learning about the law and the forms, preparing the forms, and copying, assembling, and sending all 25 schedules and forms to the IRS is an incredible 39 hours. (They don't list the grand total; you have to add up four columns of hours and minutes to come up with it.)
The death tax was first instituted in 1916 to help fund World War I. As with other such war taxes, it has lasted long after the war. (The Federal Telephone Excise Tax, which Congress may finally repeal this year, was first levied in 1898 as a temporary tax to finance the Spanish-American War.) The World War I death tax was also retained, ostensibly to help prevent the enormous concentration of wealth in the hands of a few.
In actuality, the death tax does the opposite. It does not seem to prevent the extremely wealthy, who have access to extensive legal advice, from passing their huge estates on to their heirs. But it clearly clobbers the middle class. Eighty-nine percent of all taxable estates filed in 1995 were $2.5 million or less in size, and 54 percent of all estate taxes paid came from estates with a net taxable worth of $5 million or less. It almost seems as thought the tax were designed to prevent middle class families from ever amassing enough wealth to challenge the power of the truly wealthy.
The tax penalizes those who are frugal and save money for their retirement or their children. It also penalizes the self-employed, who have no pensions and must therefore save for their own retirement. Consider these two hypothetical examples.
A retired construction worker and his wife, a schoolteacher, have led relatively frugal lives. They have raised four children, own a boat but no cabin, have always bought used cars, and have lived in the same house for fifty years. They used some of their savings to invest in two apartment buildings that they have maintained themselves. Today, their two apartment buildings are worth $1.6 million, their other investments are worth $200,000, their house is worth $200,000, their life insurance policies will pay a total of $100,000, and their two cars are worth $12,000. If they die this year at age 66, the federal government will collect $525,000 in death taxes and their home state will collect $64,000. In addition, of course, the federal government will not have to pay any more social security benefits, even though the construction worker and his wife have paid social security taxes for fifty years.
A retired pastor and his wife, an accountant, have saved for their retirement for years, since they were both self-employed. They have raised three children and have tithed all their lives. For the first time in their lives, they own a home. Their goal was to save $2,000,000 by retirement in order to fund decent retirement annuities. Today, the cash value of their annuities is $1,750,000, their home is worth $150,000, they have $50,000 in bank CDs, their life insurance policies total $150,000, and their car is worth $10,000. If they die this year at age 68, the federal government will collect $463,000 in death taxes and their home state will collect $54,000. And they too will forfeit any future social security benefits.
Such confiscatory taxation has three sinister results. First, by penalizing people who invest, it encourages others to be spendthrifts, relying instead on the government to bail them out if they run out of money during retirement. Second, it makes very difficult for small business people to pass on their businesses to their children, thereby giving entrepreneurs just one generation to grow their small business into a major corporation. Third, by punishing investments, it discourages self-employment.
The end result is that power is increasingly concentrated in a narrow oligarchy of powerful government officials and corporate executives. Is that really what the rest of us want? If not, then it's time for Congress to abolish the death tax.