Last week, an op-ed in The Hill titled “Time to fix tax loophole rigged in favor of the wealthy,” missed the mark on the real world effects of raising taxes on “Wall Street”. The policies advocated by the self-styled “Patriotic Millionaires” seem altruistic, but the policies the article pushes for would be devastating to start-ups and family business across the country.
According to their statement of principles, the Patriotic Millionaires hope to increase estate taxes under the banner of forcing the wealthy into paying their fair share. In the real world, the estate tax (death tax) discourages family owned businesses from expanding and hurts working class employees.
{mosads}When a business does not have enough cash on hand to pay a 40 percent death tax, they must sell off land, equipment, fire workers, or close the business altogether. Small businesses must also spend massive amounts every year in compliance costs to plan for passing on a business. Economists on both sides of the aisle have weighed in.
A recent report by the Tax Foundation found that repealing the estate tax would create nearly 160,000 jobs and increase wages. Lawrence Summers, former Secretary of the Treasury under President Clinton; Alicia Munell, member of President Clinton’s Council of Economic Advisors; Joseph Stiglitz, a Nobel laureate for economics; and Douglas Holtz-Eakin, former CBO Director have all published work on the estate tax’s stifling effect on job growth and the economy as a whole.
Congress has voted several times on a bipartisan basis to repeal or reform the estate but the Treasury Department has released recent rules which push the laws in the opposite direction, effectively subjecting more family businesses to death taxes.
For nearly two decades, family businesses have been able to take circumstances like specifics of the market, the type of business, and restrictions on the business into account to more fairly value their businesses at death. But in mid-August of this year while Congress was on recess, the Treasury Department proposed changing the rules of the game for businesses.
Business owners must now run a fire drill with their accountants in order to reorganize their succession plans — just one more inconvenience out of DC. To make things worse, the comment period closes November 2nd giving family owned businesses little time to educate themselves before commenting to the Treasury Department.
Upon hearing of the rules, Congressman Warren Davidson (R-Ohio) and Senator Marco Rubio (R-Florida) quickly teamed up to offer The Protect Family Farms and Businesses Act which nullifies the new Treasury rules through the appropriations process. Last April, the House passed Ways and Means Chairman Kevin Brady’s Death Tax Repeal Act 240-179 on a bi-partisan basis to protect future generations from potentially losing their businesses.
Another ill-advised tax policy the Patriotic Millionaires group recommends is taxing carried interest capital gains as ordinary income. This “loophole,” as the recent article calls it, is anything but for thousands of start-ups across the country who have built their business through sweat equity and investment.
Arbitrarily raising the tax rate on this type of capital gain would dramatically change how family businesses receive investment. Some of the fastest growing companies today would have had a hard, if not impossible, time finding investors without a competitive capital gains tax rate to encourage investment. Even some main street businesses that were built from the ground up through sweat equity would see their tax bill nearly doubled by what these “Patriotic Millionaires” propose.
Family businesses look at their employees like family members and want to provide them with opportunity to be successful, but hiking the death tax and carried interest makes it harder for companies to keep their workers employed, all while raising less than 1% of tax revenues — a total amount which is spent in about 48 hours by the federal government.
For millionaires or billionaires who have the extra cash on hand, there is a simple alternative: instead of advocating taking more money from start-ups and small businesses, any patriotic millionaire can write an extra check to the Bureau of the Fiscal Service or elect send more in on their own tax return.
The changes advocated in “Time to fix tax loophole rigged in favor of the wealthy” will likely not hurt the ultra-wealthy who use foundations and trusts to protect their fortunes, but would have a detrimental affect on the people that are working to build companies like theirs (i.e., future competitors).
When wealthy titans call for targeting “Wall Street” with more taxes, Main Street businesses always end up as collateral damage. Congress and the next President need to be careful when changing tax laws not to hurt the country’s main job creators. According to the Harvard Business Review, family-owned or controlled businesses in the U.S. employ 60 percent of workers and create 78 percent of new jobs.
Elected officials should look past political arguments and focus on growing the economy for Main Street and start-up businesses.
Schoening is Chairman of the Family Business Coalition, a collection of small business associations and organizations united to protect family owned and operated businesses across the country.
The views of Contributors are their own and are not the views of The Hill