Small Businesses and the Estate Tax

In a weblog comment opposing the repeal of the federal estate tax, Matt Yglesias argues that:

[t]he government ought, perhaps, to facilitate some kind of lending arrangement so that people who prefer to keep the store and pay the tax down over time out of operating revenues can do so.

Note to Matt: The tax code already has such a provision. Specifically, Section 6166 of the Internal Revenue Code allows the estate to elect to pay the estate tax attributable to an interest in a closely held business in installments over, at most, a 14-year period. If the election is made, the estate pays only interest for the first four years, followed by up to ten annual installments of principal and interest. Even better, a reduced interest rate of 2% per annum applies to the amount of deferred estate tax attributable to the first $1,000,000 in value (adjusted for inflation) of the closely held business. Even above that amount, the rate is fairly low: 45% of the annual rate applicable to underpayment of taxes. (The annual rate applicable to underpayment of taxes is currently 6%. That's right, even above the $1M threshold, the rate is only 45% of 6%, or 2.7%. Not a bad deal.)

Of course, the benefits of Section 6166 are not available to all estates. The value of the business must exceed 35% of the adjusted gross estate. By the way, farms can consitute a qualifying business.

This provision gives lie to the contention that the estate tax is devastating to small businesses. The fact that it is not widely publicized in policy debates in the mass media is due less to any political bias of the media than it is to the unfortunate tendency of the media to avoid examining technically complex issues. Stated another way, Section 6166 cannot be easily explained in a sound bite.