Economics

Death and Taxes

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Los Angeles is reeling as its beloved Dodgers–the last family-owned team in the big leagues–are put up for sale. Patriarch Peter O'Malley blames estate taxes, which would hit a Dodger-sized estate at 55 percent, meaning the family would have to come up with cash worth 55 percent of the team's value to pony over to the IRS.

Even before this potential tragedy for L.A.–who knows if a new corporate owner will remain true to the city?–California Republican Rep. Christopher Cox was pushing legislation to repeal the estate tax, and he has 97 Republicans and even five Democrats as co-sponsors. Gutting the estate tax, political columnist David Schribman wrote in the November 11 issue of Fortune, could be "a surprisingly prominent element in Republican legislative priorities" this year.

The tax might seem to pound only the plutocrats. It also might seem, because of the high rates, to be a big money maker for the feds. But the estate tax's effect is both bigger and smaller than you might think, according to a new paper from the Center for the Study of Taxation in Costa Mesa, California.

The tax hits mostly family-owned businesses, 87 percent of which don't survive to a third generation. (Nearly 90 percent of estate taxes are paid on estates worth less than $2.5 million.) The Small Business Survival Committee estimates that 90 percent of family businesses that fail right after the founder dies do so because the business doesn't have enough liquid cash to pay the estate taxes. In a 1993 study, Richard Wagner, chairman of George Mason University's economics department, estimated that estate taxes have cost 262,000 jobs since 1971.

Which means that even the feds aren't getting their money's worth from estate taxes–which amount to less than 1 percent of the budget, generally less than $15 billion a year. With the income taxes lost due to stifled job creation and money spent on estate planning, plus enforcement and compliance costs that can be higher than 50 cents on the dollar, even that small federal benefit might be an exaggeration.

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