Thursday, May 07, 2009

So few...

That's how many farms are at risk from the imagined horrors of estate taxation.  I have heard from several "death tax" opponents who allude to sorry tales and anecdotal data about farms being auctioned off to pay onerous estate taxes.

Some responses:
  • Show me the numbers.
Here are mine:
[Click to enlarge]
Note that in 2009, some 2,500,000 Americans will die; about 16,000 will need to file estate tax returns, and a little over 6000 will pay some estate taxes.  Of them, farmers and small businessmen will number about 100.  
You read that right - we're screaming about fewer than several dozen estates.  One commenter pointed out that if farms were really big, they were lumped in with other "big businesses".  That is incorrect.  Farms file special estate tax return forms that identify farm assets.  So we know this:
  • Farms are not going to auction to pay estate taxes.  Period.

There is no evidence that the tiny number of small farms and business estates that owe any estate tax face liquidity constraints.

Proponents of repealing or eviscerating the estate tax often claim that it causes small businesses and farms to be liquidated.  This claim is groundless.
  • Opponents of the estate tax have not been able to produce a single case in which a family farm had to be sold to pay the tax.  In 2001, the American Farm Bureau Federation acknowledged to the New York Times that it could not cite a single example of a farm having to be sold to pay estate taxes, and this was before the estate tax exemption level was more than tripled and the top rate was reduced.[7]
  • Furthermore, a Congressional Budget Office study of the estate tax exploded the myth that small businesses and farms have to be liquidated to pay the tax.  CBO found that of the very few farms estates that would owe any tax under the 2009 parameters, all but a handful would have sufficient liquid assets on hand (such as bank accounts, stocks, and bonds) to pay the tax without having to touch the farm or business.[8]
  • CBO further noted that it may have overestimated the number of small businesses and farm estates with any seeming liquidity constraints, because CBO was unable to include certain assets held in trusts — such as life insurance trusts — in calculating the liquid assets available to estates to help pay the tax.[9]  And, those few small businesses and farm estates that might conceivably face a liquidity problem would have other options available to them — such as spreading their estate tax payments over a 14-year period — that would allow them to pay the tax without having to sell off any of the business or farm assets. (See box on page 4 below) [More]
To be fair, farmers are employing estate tax reduction strategies to make this number low.  Perhaps many farmers resent having to hire attorneys and accountants to transfer their wealth after they die. To begin with, maybe distributing much of it beforehand isn't a bad idea. I also think the value of the basis step-up more than compensates for this inconvenience, and the loss of $15B in tax revenue that farmers are not paying makes this a dead issue for me.

1 comment:

Anonymous said...

The majority of farmers were fools for giving up the basis step up in exchange for nothing they'll ever need. Yet, basis step up can still be achieved through honest and carefully planned gifting of assets before death.