Taxes at Death: Anti-Small Business to the Core

By at 18 August, 2021, 2:11 pm

by Raymond J. Keating –

Ben Franklin once said, “Our new Constitution is now established, everything seems to promise it will be durable; but, in this world, nothing is certain except death and taxes.”

Unfortunately, various politicians missed the point of this quote, and decided that it would be a dandy idea to join together these two grim events, that is, dying and taxes. Hence, we have the death tax.

After paying myriad taxes over a lifetime, the death tax means that government shows up at death in order to impose a tax on total assets. This is a levy based on nothing more than envy and class warfare, given that a tax on total assets at death not only is glaringly unfair, but it:

● discourages investment

● shifts resources from the productive private sector to wasteful government

● undermines entrepreneurship

● takes a heavy toll on many family businesses, including some enterprises having to be sold or simply being closed up

● reduces economic growth and job creation

● fails to bring in any net revenues to the government.

The current death tax imposes a top rate of 40 percent with an exemption level of $11.7 million. This exemption will lapse in 2025, returning to a pre “Tax Cuts and Jobs Act” level of $5.49 million if not extended.

Capital gains earned on assets up to death are not subject to the capital gains tax, as asset values are stepped up in basis. Therefore, heirs only pay capital gains taxes on the gains earned while they actually own the asset and eventually sell it, as opposed to paying retroactive capital gains levies on unrealized gains.

The step-up basis avoids capital gains and death taxes being imposed at death.

President Biden and Democrats in Congress, however, are pushing to eliminate the step-up basis, and to increase the top capital gains tax rate. Call it a double death tax. The results would be ugly, as explained, for example, in two recent SBE Council briefs – here and here.

Small Business Owners Express Opposition and Harsh Impacts

Small business owners understand better than most that higher taxes at death – via the death tax, the elimination of the step-up basis and a higher capital gains tax – are negatives for entrepreneurship, investment, and economic, income and job growth. They also understand that carve-outs and picking winners and losers (as some have proposed) are inherently unfair and would add burdensome complexity to an already convoluted tax code.

As noted in SBE Council’s recent survey of small business owners, the following was reported:

Opposition to Tax Increases: “Proposals in Congress and the White House to double effective capital gains taxes from 23.8% to 43.4% on businesses and individuals does not find favor with many, with nearly 60% opposed. On the issue of applying a new effective and retroactive capital gains tax of 43.4% to the accumulated value of a business following an owner’s death as called for under the STEP Act, opposition among all respondents further increased to 70%.”

Impact “Crippling” for Small Businesses: “78% believe retroactive capital gains taxes on assets passed on to beneficiaries following a business owner’s death will have crippling consequences for small businesses, as well as their employees and the communities they call home.”

No Carve-outs or Exemptions: Nearly 70% of respondents do not believe politicians in Washington understand how private enterprises such as small and family businesses, farmers and ranchers are taxed on their income and assets, and a wide majority (64%) do not want politicians creating “carve outs” or exemptions in order to pick winners and losers.

Harsh Impact for Small Businesses and Local Economies: The outcome of imposing higher capital gains taxes and eliminating step-up basis was made clear by small business owners in the survey, as a large share of the respondents reported how eliminating step-up in basis would negatively impact the operation of the business both now and in the future. For example, if step-up in basis was eliminated:

● 50% of respondents said the proposal would hurt their ability to carry on the business

● 51% said it would hurt their ability to make capital investments in the business

● 42% said it would hurt their ability to secure loans or lines of credit

● 47% said it would hurt their ability to keep existing employees

● 49% said it would hurt their ability to support local charitable organizations

● 48% said it would hurt their ability to pay federal or state taxes

● 45% said it would hurt their ability to support the local economy

● 48% said it would hurt their ability to support their own family

Small business owners believe policy makers and politicians should take a much more supportive approach when it comes to tax policy. In fact, 83% believe elected officials should support tax policies that make it possible to pass on their family business

The message is clear from the small business community. That is, not only does opposition to higher taxes at death run strong, but imposing higher taxes would be devastating to many small businesses and local economies.

Of course, they are right.

No sound economic reasons exist for making death a taxable event, especially a significant taxable event. Entrepreneurship, investment and the economy would benefit if President Biden and Congress did more listening to small business owners on these tax issues, rather than trying to find new ways to raise taxes and inflict harm on small businesses.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.


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