Monday, August 15, 2005

Effects of the Federal Estate Tax on Farms and Small Businesses - Congressional Budget Office Paper

Category: Estate and Inheritance Tax,

The Congressional Budget Office (the "CBO") is a non-partisan entity charged with providing Congress with objective analyses needed for economic and budget decisions and with the information and estimates required for the Congressional budget process.

The CBO has just issued a new paper, Effects of the Federal Estate Tax on Farms and Small Businesses (a .pdf link). As a non-partisan entity, the CBO does not make recommendations; instead, in analysis actual information, sans spin.

Whether you support or oppose the repeal of the federal estate tax, I find it interesting that the claim that "the death tax is killing America's small businesses and farms" is so widespread, when the actual impact of the estate tax on those same small businesses and farms is so minimal (e.g.: between 1999 and 2000 a TOTAL of 302 actually could have been negatively impacted by the claim that the "death tax kills small business".)

Some facts culled from the paper:

  • "In recent years, fewer than 2 percent of all estates have
    had to pay estate taxes.

    "CBO's analysis examined data from estate tax returns filed in 1999 and 2000
    (the most recent data available when the analysis was conducted). Determining from tax returns what constitutes a family farm or small business is difficult, however...For lack of better identifiers, this analysis considered the estates of farmers to be those reporting an occupation of either farmer or farm worker (about 4,500 estates per year) and the estates of small business owners to be those claiming the QFOBI deduction (about 1,500 per year)." [Note: So, the total persons possibly impacted by the estate tax out of the entire United States population in this two year period is 6000.]

  • "The vast majority of estates, including those of farmers and small-business owners, had enough liquid assets to pay the estate taxes they owed. However, estates involving farms or small businesses were less likely than the average estate to have sufficient liquid assets to cover their estate taxes. In 2000, about 8 percent (or 138) of the estates of farmers who left enough assets to owe estate taxes faced a tax payment that exceeded their liquid assets, compared with about 5 percent of all estates that owed taxes. For estates claiming the QFOBI deduction, the corresponding figure was about 34 percent (or 164 estates). Those numbers are upper bounds, however, because the definition of liquid assets used on estate tax returns excludes
    some money held in trusts, which could also be used to pay estate taxes.: [Note: So the maximum number of people who possibly could have had to sell the family business to pay taxes is 302.]

    "For returns filed in 2000, the threshold for filing was gross assets worth at least $650,000 or $675,000, depending on the year of death—less than half the 2005 level of $1.5 million. Had the current filing threshold been in effect in 2000, far fewer estates, especially those of farmers, would have had to file estate tax returns."

The balance of the paper is an excellent summary of the history of the estate tax, a numerical analysis of its impact on the 302 families described above, as well as analysis of the impact of repealing the tax versus raising exemptions. While it is fair to note that much of the study is by nature subjective (does the existence of an estate tax suppress entrepreneurialship?), the balance of the study definitely suggests that the public belief that the "death tax kills small business" is blown way out of proportion.


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