For North Carolina small-business owner Clarence Tart, leaving the family business to his son is one of the hardest things he's ever had to do. Because when he dies, his son will owe the federal government $1.5 million plus in death taxes. And it won't be easy to make payments on $1.5 million when the son's annual salary is $31,000. These taxes are known by many as ``estate'' taxes or ``inheritance'' taxes—pseudonyms for what is really a death tax. What else could you call a tax that is levied on a business for no reason except that a member of the family has died? There is no worse time for the government to step into a business than when the family is mourning the death of a parent or some other loved one.
For example, when Clarence Tart dies, his family will be punished by the Internal Revenue Service for the fourth time. The family's mistake: Tart & Tart Inc. has been successful.
For nearly four generations, the Tart family has worked hard and expanded their business. They provide jobs to 70 people and contribute to North Carolina's economy with three small farms, a fertilizer and tobacco warehouse business, and a small lumber mill.
The current death tax applies to a family business owner whose estate has a gross value of $600,000 or more. Keep in mind that the gross value includes the property and the equipment (the computers, the tractors or the kitchen appliances in a restaurant as well as all personal assets like the family's home and car). A small-business owner who makes a middle-class salary can be considered a millionaire.
The National Federation of Independent Business has long championed eliminating the death tax because it kills family businesses and is an obstacle to entrepreneurship and job creation. At about 1 percent of all federal revenues, the death tax generates more ruin than government funds. Those heirs who cannot pay the death tax are forced to either sell the business, break it up or liquidate the assets. Any of these options is devastating to a community, the business' employees and the surviving owners.
Even if heirs prepare for death taxes, the costs are staggering. Clarence Tart has not been able to expand his business or create any new jobs in the past few years because he has had to pull capital from his operations to cover legal fees, insurance costs, and trustee costs—all in hopes of putting together a plan that will offset the death taxes his son will eventually have to pay. There are years when the profits of Tart & Tart are less than the cost of this protection.
One way or another, death taxes must be paid, whether the business is mortgaged up front in life insurance and other fees, mortgaged after death in loan payments, or liquidated entirely.
The death tax was established in 1916 to redistribute wealth to prevent certain families from amassing the majority of the nation's riches. But, as is the case with most tax schemes aimed at the rich, the extremely wealthy find a way to stay extremely wealthy in spite of the tax, and the small-business owners, the Clarence Tarts and their employees, are the ones to struggle.
For a tax that generates so little in government revenues, it's not worth the devastation it causes to family businesses, entrepreneurship and our nation's international competitiveness. As Clarence Tart puts it, the solution is simple: ``eliminate the death tax.''
Jack Faris is President of the National Federation of Independent Business, representing 600,000 small-business men and women.