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Commentary: Death by taxation

Dan Murphy | Updated: 07/11/2012

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It must be acknowledged: The branding of the federal inheritance tax as the “Death Tax” is brilliant.

Death and taxes are the twin scourges of humanity, most people would agree. To combine them both into a death tax is to fashion a monster that connotes nothing positive at all. It’s an idea that can be easily and effectively demonized.

“They’re dead—and now you want to tax them from beyond the grave?” is a typical talking point, one that is skillfully deployed by the very small but very wealthy cadre of behind-the-scenes strategists working to repeal the estate tax.

In a more articulate fashion, it’s the argument offered by Glen Cope, a Missouri beef producer and committee member affiliated with the American Farm Bureau Federation, in a recent commentary on PorkNetwork.com titled, “Should death really be taxed?”

“Farmers are, as the old phrase goes, ‘asset rich and cash poor,’ ”Cope explained. “Unfortunately, when parents pass, the estate tax is triggered because of high land prices, a fact that most people in this country don’t understand.”

The first part of that statement is absolutely correct; the second, not so much.

The point is that the estate tax is not about taxing the dead, it’s about taxing the inherited wealth being passed on to one’s living heirs. Nothing unfair about that.

You earn an income, you get taxed. You claim investment dividends or business profits, you’re taxed on those earnings. You win the lottery, you pay taxes on the windfall. That’s the way the system works.

We can debate ad nauseum—and we no doubt will—the rates and schedules and exemptions built into the tax code. But conceptually, taxes are the price we pay for the services and security only government can provide to all citizens.

Thus, eliminating or circumventing an entire category of taxation, as is endlessly suggested by special interests lobbying to impose capital punishment on the death tax, is inherently unfair. It creates a few winners, while the rest of the population is forced to make up the lost revenue.

Despite its connection to feel-good family farming, anti-death tax arguments are no different than the ones offered in support of other tax-killing recommendations regarding capital gains, corporate profits or top marginal rates.

A trifecta of trouble

Despite Mr. Cope’s eloquence and passion in urging Congress to repeal the estate tax, there are three major problems with the argument:

First, even under the current rules, the estate tax only affects a small minority of farmers and producers. With an exemption of up to $10 million per couple for family-owned operations, the majority of people who inherit farms and ranches pay no federal estate tax at all.
Second, there are myriad ways to escape the tax bite, through the use of tax-free or tax-mitigated trusts and gifts and other vehicles that transfer value prior to one’s ultimate demise. If you’re the sole or joint owner of a farm or ranch large enough to be hit with a serious tax bill upon transfer of the property at death—and you’ve done nothing to prepare for that eventuality—your descendants deserve to fork over big time.
Finally, and this is the key argument that supports an inheritance tax, most opponents only talk about a single generation. They complain that after years of working hard, a farm or business gets severely taxed, and the (presumably young) new owners start out behind the eight ball, financially speaking. Such a scenario does seem skewed.

But if all inheritance taxes are rescinded, as anti-death tax proponents insist, then what happens to super-wealthy people who leave not a working farm or ranch to their heirs, but estates worth multi-millions or even billions in liquid assets? The heirs would get to keep every penny, invest those resources over a lifetime and end up being able to pass along even more millions and billions to their heirs—all tax-free.

That would create a kind of landed gentry blessed with the contemporary equivalent of divine right to their lands and wealth, while the rest of us continue to struggle to earn a paycheck and fork over our taxes.

Viewed from the perspective of a single generation, taxing an estate built with after-tax investments seems like overkill. But extend the absence of any inheritance tax over a couple more generations, and we will have anointed a modern-day nobility, precisely what our Founding Fathers feared.

That said, Cope’s argument that land-rich, cash-poor farms ought to be treated differently than an investment portfolio comprised of cash and securities makes sense—but not for the reasons he stated. We should support favored status for producers and farmers not because their sons and daughters would be forced in droves to sell off the family farm or ranch. That won’t happen unless there is a distinct lack of prior planning, or if the next generation decides that raising livestock or crops isn’t its idea of career fulfillment.

No, farms and ranches should qualify for special estate tax rules because they are critical to our domestic security. Along with national defense and energy procurement, food production is as vital as it gets in ensuring that our nation can provide the essentials necessary for the well-being of its residents.

Congress shouldn’t simply eliminate the estate tax, but producers and farmers should be taxed at lower rates, with higher exemptions and given extended time to pay, ideally with the help of a Small Business Administration-type loan program run through USDA.

To answer the pertinent question Cope poses at the end of his commentary, “Should we make it more difficult for our children to continue the family farm?” the obvious response is “Absolutely not!”

But we can reduce the threat to continued family ownership and operation of those farms without erasing a tax that delivers more than mere monetary benefits.

The opinions expressed in this commentary are solely those of Dan Murphy, a veteran food-industry journalist and commentator.

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