Initial reactions can be harsh. Mine was on reading an interview with National Economic Council head Gary Cohn. In it he said, “The estate tax really hits farmers, and we don’t want to hit farmers. It hits small and medium-sized family-owned businesses.”
My initial angry response was, “Is this guy a crook or an idiot?” This assertion is just plain factually wrong. Farms and small businesses will be involved in perhaps 80 — total — estate tax returns this year, according to estimates by respected researchers and IRS historical statistics. Only a fraction of 1 percent of all estates ever owe any tax, and the proportion of farm and small-business related estates owing tax is a smaller fraction of 1 percent.
This has been true for decades. No reputable economist argues that what Cohn states is true. No recognized research institution, whether liberal or conservative, argues that it is true. It is just not an issue of dispute. So why would the U.S. president’s key economic adviser openly assert to national media something that is flat wrong? Is he a liar or is he just really ignorant?
If he is either, how did he become CEO of Goldman Sachs? Why is he often mentioned as a replacement for Federal Reserve Chair Janet Yellen? To name someone who thinks the estate tax primarily affects farms and small businesses to such an economic position would be like naming a quack who thinks cancer is caused by “bilious humors” to head the National Institutes of Health.
At this point, however, let’s note that few economists like the estate tax as structured; few would argue that it is a good tax. Most who nevertheless support it, as do I, do so on the basis that the U.S. economics remains more fair or more efficient with it than without. But it certainly has negative aspects.
One is that it has a high “excess burden.” That means the total cost to society, including the costs of avoiding paying it, are high relative to the revenue raised. This excess burden is proportionately higher than for the individual or corporate income taxes or FICA payroll taxes.
The reason is that while few farms or small businesses ever fall in estates that owe tax, some are big enough that the tax must be considered in the course of business planning to ensure that they will be exempt. So while only a few dozen such estates owe taxes in any one year, tens of thousands of farms and small businesses will have to hire an attorney or CPA to structure things to ensure that.
Among other measures, this often means making the enterprise a limited liability company and splitting ownership across multiple generations and perhaps several households. For farms, one can set up a “family land trust” to own the land or other business assets. Ownership of such trusts is flexible and can shift over time. The object is to never have one person holding net assets worth more than the $5.5 million at which one starts paying estate tax. For farms, fractionalizing the nominal holdings also may help in evading statutory per-person limits on federal crop subsidies.
So farms and small businesses usually can avoid paying estate taxes. But they do have to hire a lawyer. And the circuitous lengths to which they must go to avoid taxes may themselves result in resources being used inefficiently. These two factors combined would increase the “excess burden” of the estate tax.
Perhaps this is what Cohn meant to say. He would have been correct if he had said “Very few farms and small businesses pay any estate tax, but many must spend money to avoid this and it distorts the economy.” This argument — about the magnitude of these avoidance costs and the size of any economic inefficiency induced — would have been a legitimate.
The first question involves bread-and-butter work by farm and small-business lawyers and accountants. Most such estate plans can be set up for $1,000 or less. Periodic updates take a couple of billable hours. So the costs to the businesses are about the same as buying a computer or the fuel that a big tractor burns up in two days of tillage work. Larger farms, with land worth tens of millions of dollars, may require more complex arrangements. Non-farm businesses’ costs similarly vary with scale. Small retail and service businesses or professional practices are cheap. Larger manufacturing or service firms that still meet the meet the government’s criteria of “small” would have higher billings.
A key question, then, is whether such enterprises would go to this rigmarole if not for the estate tax. If we abolish it, will rural attorneys and accountants all be on food stamps?
Talk to them and one often hears that estate tax avoidance is an additional motive for farm and business owners to do what they ought to do anyway for pure business reasons. These often include complex family situations where owners wish to pass wealth fairly to all children and grandchildren without advantaging the one who stayed in the business while her or his siblings moved away.
So on the administrative burden of the tax, the idea that it drives huge outlays for businesses just doesn’t stand up. The separate question of whether tax avoidance motivates significantly inefficient use of resources by these businesses is less clear, but research indicates it is not large. So should we give Cohn the benefit of the doubt?
That is up to the reader. But a day after my initial outrage, I think that was correct. Cohn is not an ignoramus. He knows how easy it is for many enterprises to avoid the tax. Indeed, in September, he opined that one has to “be a moron” to pay it. He also knows that the vast bulk of the benefits from abolishing the tax will flow to the wealthiest few percent of U.S. households. So for him to assert to the national media that repeal is primarily about farms and small businesses is a despicable lie on his part. That he said: “Where we see the vast majority of people getting caught up in the estate tax are really farms, are small businesses” an indication of the loss of shame among U.S. public officials. Unashamedly telling a lie like this reveals a profound contempt for the American people.