The Daily Hatch

There are few people that benefit from the estate tax, but insurance companies and lawyers probably are on the top of the list. Many times results of government actions do not match the original intentions of the lawmakers. This is the case with the estate tax.

Milton Friedman noted:

“One of the great mistakes is to judge policies and programs by their intentions rather than their results…Almost all government programs are started with good intentions, but when you look at what they actually achieve, there is a general rule. Almost every such program has results that are the opposite of the intentions of the well-meaning people who originally backed it.”

In this series on the Estate Tax I will be quoting portions of the article “The Economic Case Against the Death Tax,”(Heritage Foundation, July 20, 2010) by Curtis S. Dubay. Dubay is a Senior Analyst in Tax Policy in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.

Who Benefits from the Death Tax?

Despite its devastating impact on the economy, jobs, and wages, the death tax has persisted for more than 90 years in its modern form and could well survive this year’s moratorium unless Congress acts soon. An entrenched group of special interests that benefit from the death tax and hold large sway with Congress are the reason for the resilience of the death tax:

• · Estate tax lawyers and planners. Even though they face large death tax bills, estates from wealthy families pay considerably lower taxes than they otherwise would—because of estate tax lawyers and planners. Wealthy families hire expensive estate lawyers to arrange their affairs in a legal manner to minimize the impact of the death tax on their estates, or in some cases escape liability all together. Estate tax lawyers and planners have an obvious vested interest in seeing the death tax remain in place. As long as it does, they can continue to collect lucrative fees for arranging estates to minimize death tax liability. The fees paid by families to minimize their death tax liability are a drag on economic growth. The families could invest the resources they use to protect their estates so businesses and entrepreneurs could create new jobs; instead the money is diverted to protect the estate from the death tax.
• · Life insurance companies. As long as the death tax remains in place, life insurance companies will continue to collect premiums from family businesses that cannot afford estate lawyers and planners but want to protect their businesses. In order to protect their assets from being liquidated when they die, these families purchase life insurance policies that will pay the living members of the family enough to cover the death tax liability when a family member passes away. The life insurance policies are expensive, but not as expensive as estate tax lawyers and planners. The life insurance companies enjoy increased profitability while they continue to collect premiums for policies to protect against the death tax year after year. The premiums families pay to insurance companies siphon off limited resources that the families could use to expand their businesses and add new workers.
• · Large businesses. The death tax is an impediment for family-owned businesses that could expand to compete with larger businesses because it creates a large disincentive for the family businesses to expand. If a family-owned business grows large enough, it will push the value of the family’s estate over the death tax’s exemption level and the family will owe a hefty amount when the current owner dies. Faced with endangering the life of the business because of the death tax, many families choose to keep their businesses smaller than they otherwise would have. This prevents them from competing more forcefully against larger businesses that are not family-owned and do not have to worry about the death tax.Large businesses also benefit from the death tax in another more direct way. Even though some family businesses choose to remain small to keep the death tax at bay, others take the risk and grow as large as possible. When a family member passes away these family-owned businesses often lack the necessary cash to pay the death tax, as explained above. If the family cannot raise the cash necessary to pay the death tax from selling certain assets, it is forced to sell the entire business. Larger businesses can then buy these competitors and acquire a larger share of the market in the process. These transactions sometimes occur before a death occurs so the family does not have to go through a difficult and complicated transaction during a period of mourning.