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Estate Tax Malarkey

Misleading ads exaggerate what the tax costs farmers, small businesses and "your family."

June 6, 2005

Modified: June 6, 2005

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Summary

 

In TV and radio ads two conservative groups greatly overstate the burden that the federal estate tax puts on heirs to a family farm or business.

One ad claims the federal estate tax "can bury your family in crippling tax bills," which is untrue for nearly all of those who will see the ad, including the large majority of farm and business owners. Both ads claim the estate tax is a "double tax," which is only partly true, and mostly false when it comes to very wealthy families.

We take no position on whether the estate tax should or should not be repealed permanently. The claims made in these one-sided ads, however, present a misleading picture of who is actually affected by the tax.

Analysis

 

The American Family Business Institute and Free Enterprise Fund launched a TV and radio ad campaign May 10 that targets potential swing votes in the Senate for full repeal of the estate tax. The group said it will run different versions of the 30-second and 60-second ads in Montana, South Dakota, North Dakota, Maine, Arkansas, Louisiana, Nevada and New York as part of a $15 million campaign leading up to a Senate vote expected before the August recess.

 American Family Business Institute Radio Ad "Nightmare"

Announcer: You work hard all your life. You pay your taxes and play by the rules, and, yeah, you're proud of what you've accomplished. You'd like to leave your family farm or business to your kids. It's a legacy, something they can hold onto. It's the American dream, right? But the IRS death tax can turn that dream into a nightmare. When you die, the IRS can bury your family in crippling tax bills. It can cost them everything. What's worse, the death tax is a double tax on all you've worked to build. The death tax is wrong. It's unfair. And this year, Montana's family business owners and farmers have joined together to kill this unjust tax, before it destroys one more family legacy. It's time for Sen. Max Baucus to stand with Montana family businesses and farms and vote to end the death tax.

"Your Family"?

Contrary to ad's claim that "your family" might be crippled, the vast majority of  families actually are not affected by the estate tax. In fact, less than 3 percent of deceased adults in 2002 had estates subject to the tax, according to the nonpartisan Urban-Brookings Tax Policy Center and figures from the IRS.

And though the ad focuses on family farms and businesses, the truth is that very few actually pay the estate tax. The Tax Policy Center projects that roughly 440 taxable estates were primarily made up of farm and business assets in 2004.

And even considering estates for which farming or business was a sideline, the Center found only 7,090 taxable estates for 2004 that included any farm or business income. That's still just 38 percent of all taxable estates. The fact is that repealing the estate tax entirely, as the ad advocates, would benefit mostly non-farmers and non-business-owners.

The ad would have been accurate had it said that "some families" are affected.

"Cost Them Everything?"

Far from imposing tax bills on farms and businesses that "cost them everything," the average estate tax paid by all farm and business estates in 2004 was just under 20 percent of the value of the estate, according to calculations by the Tax Policy Center.

The effective rate was far less for smaller estates. Of the 440 taxable family farm and business estates in 2004, two out of five paid an average rate of only 1.6 percent. These were taxable estates valued at less than $2 million.Very large estates valued at over $20 million paid at an average effective rate of just over 22 percent, a hefty tax bite but well short of "everything."

These effective rates are not to be confused with the top rate, which is currently 47 percent. But that marginal rate applies only to what is taxed, and currently the first $1.5 million of an estate is exempt. The Tax Policy Center's figures are an average effective rate on the entire estate, including any proceeds of life insurance. The taxable portion is often reduced further through charitable contributions or special provisions that allow most farms to reduce the taxable value of their real property by 40 to 70 percent of market value.

The following table shows how many taxable farm or business estates fell into various size categories, the average amount of tax and the effective tax rate they paid, according to the center's calculations: 

Taxable Farm or Business Estates, 2004

Number of Returns

Average Tax (thousands)

Average Rate

 
Under $1 million 0 $0 0.0%
$1 - $2 million 190 $26 1.6%
$2 - $3.5 million 60 $190 7.5%
$3.5 - $5 million 40 $449 12.0%
$5 - $10 million 80 $1,322 19.3%
$10 - $20 million 50 $2,832 22.9%
More than $20 million 30 $23,442 22.2%
All 440 $2,238 19.9%

Source: Tax Policy Center, Table T04-0163
Note: Number of returns rounded to nearest multiple of ten.

These 440 taxable estates are those for which farm or business assets made up at least half the total value of the estate. They represent only 2 percent of all 18,800 taxable estates in 2004.

Worth noting is that family-owned farms and closely held businesses already receive special treatment under current law. Heirs who agree to keep the farm or business assets within the family for 10 years after death can reduce the taxable amount of the estate by 40 percent to 70 percent. And if the farm or business is at least 35 percent of the gross value of the estate, payments can be spread out over 14 years.

 AFBI TV Ad "Generations"

Announcer: They freed the world from tyranny, then came home to build family businesses and farms. Heroes in war and peace. They paid taxes all their lives, but not the IRS hits this "Greatest Generation" with an unjust double tax, the death tax.

Don Malarkey (WWII Vet): In war and peace, my generation stood up for what's right. Join us now and help us end the unfair death tax.

Announcer: Tell Max Baucus to side with family business, not the IRS.

"Double Tax?"

Both the radio and TV ads call the estate tax a "double tax," which is only partly accurate. It is true that some portion of a taxable estate might be made up of cash that was taxed before, when it was earned as income. But many estates are made up of stocks, bonds, real estate or other holdings that have appreciated greatly in value over the lifetime of the person who owned them. The owner didn't pay taxes on that profit during his or her lifetime because they weren't sold and the profits weren't turned into cash, or "realized." Furthermore, heirs who inherit such appreciated assets won't have to pay tax on that unrealized profit either. The estate tax is the only tax that applies to such unrealized capital gains.
Furthermore, such unrealized, untaxed capital gains make up more than one-third of the average estate, according to a study by economists James Poterba of the Massachusetts Institute of Technology and James Weisbenner, who was on the staff of the Federal Reserve Board when the study was published in 2000. Weisbenner is currently at the University of Illinois at Urbana-Champaign .
Their study estimated that unrealized capital gains made up 36.3 percent of the value of all estates in 1998. That would make the "double tax" claim 63.7 percent true, and just over one-third false.
For very large estates it is mostly false. The study also found that estates worth more than $10 million were 56.4 percent made up of unrealized, untaxed capital gains.
The Poterba-Weisbenner study was first released as a working paper  by the National Bureau of Economic Research, a nonpartisan organization of mostly academic economists, and later published by the Brookings Institution. We have found no study disputing these findings. In fact, they may be understated. For one thing the authors couldn't find any way to estimate the unrealized capital gains on art work or other collectibles, which can make up a sizeable part of some estates. More importantly, the very richest Americans aren't covered by this study, because the Federal Reserve Board survey on which the study is based doesn't include them. It is quite likely the averages are even higher for billionaires, whose fortunes are often built on appreciated stock or real estate that would go untaxed at their death but for the estate tax.
Emotional Appeals
The ads make some emotional appeals worth noting. The TV ad feature World War II veterans from the popular HBO series “Band of Brothers,” while an announcer tells viewers that these men “paid taxes all their lives” and are now being subjected to a "nightmare" tax. Actually, of course, WWII vets are no more likely than anyone else to be subject to the estate tax when they die. The estates of veterans and non-veterans alike owe tax only on amounts exceeding $1.5 million. That goes up to $2 million next year.
The radio ad also characterizes the tax as the "IRS death tax." Opponents of the estate tax have long used the term "death tax" even though it is wealth, and not death, that is being taxed. Adding "IRS" to the mix makes it sound as though the unpopular tax collectors were responsible for enacting it, and not elected members of Congress.

Sources

 

Leonard Burman, William Gale, and Jeffrey Rohaly, "Options to Reform the Estate Tax," Urban-Brookings Tax Policy Center, Tax Policy Issues and Options No. 10, March 2005.

Tax Policy Center, Table T04-0164, "Current-Law Distribution of Gross Estate and Net Estate Tax By Size of Gross Estate, 2004: Returns With Any Farm or Business Assets."

Tax Policy Center, Table T04-0163 , "Current-Law Distribution of Gross Estate and Net Estate Tax By Size of Gross Estate, 2004: Farms and Businesses."

Leonard Burman and William Gale, "The Estate Tax is Down, But Not Out." Urban-Brookings Tax Policy Center, Tax Policy Issues and Options No. 2, December 2001.

Scott Weisbenner and James Poterba, “The Distributional Burden of Taxing Estates and Unrealized Capital Gains at Death,” Rethinking Estate and Gift Taxation, eds. W.G. Gale, J.R. Hines, and J. Slemrod (Washington: Brookings Institution, 2001) 422-449.