Knave Watch: The American Family Business Institute

I subscribe to the Kleinrock tax service. I find it easy to use, fairly comprehensive, and cost effective, because it contains a minimum of editorial content and a maximum of source material.

Part of my morning ritual when coming into the office is to go online to Kleinrock's Daily Federal Tax Bulletin and review new tax developments. Recently, Kleinrock has been attempting to cover legislative developments at an early stage, picking up press releases about various lobbying efforts on Capitol Hill. They should stick to their basic franchise, providing comprehensive source material, because they're simply too credulous when reporting on lobbying efforts. A case in point is the report today on the lobbying efforts of the so-called American Family Business Institute.

Kleinrock reports that:

As of June 27, the anti-estate tax lobbying group, the American Family Business Institute, is awaiting word from congressional Republicans on when to release an advertising campaign that highlights the benefits [sic] of repealing the tax. The ad is expected to play in several Democratic districts where members are on record in support of full repeal. Airing the commercial would happen just before the Senate votes on permanently repealing the estate tax, which is expected to happen next month.

What Kleinrock's editors did not realize is that the American Family Business Institute is an example of knavery in its purest form. In an ad campaign that features two of the individuals who were depicted in the HBO series Band of Brothers, the AFBI will press its contention that:

The [Gift and Estate Tax which the AFBI refers to as the "Death Tax"] is a cruel and unfair burden on grieving American families and the time has come to bury it deep in the ground where it belongs. . . . It taxes Americans on already-taxed assets and it wreaks havoc on families and family-run businesses. The [Estate Tax] is now aimed squarely at our nation's 'greatest generation' and we are proud that two of that generation's most celebrated figures will be leading the charge in this campaign.

The non-partisan organization FactCheck.org has this to say about the ad campaign in a posting entitled Estate Tax Malarkey (one member of the "Band of Brothers" featured in the campaign is Donald G. Malarkey):

Contrary to ad's claim that "your family" might be crippled, the vast majority of families actually are not affected by the estate tax. In fact, less than 3 percent of deceased adults in 2002 had estates subject to the tax, according to the nonpartisan Urban-Brookings Tax Policy Center and figures from the IRS.

And though the ad focuses on family farms and businesses, the truth is that very few actually pay the estate tax. The Tax Policy Center projects that roughly 440 taxable estates were primarily made up of farm and business assets in 2004.

And even considering estates for which farming or business was a sideline, the Center found only 7,090 taxable estates for 2004 that included any farm or business income. That's still just 38 percent of all taxable estates. The fact is that repealing the estate tax entirely, as the ad advocates, would benefit mostly non-farmers and non-business-owners.

The ad would have been accurate had it said that "some families" are affected.

Far from imposing tax bills on farms and businesses that "cost them everything," the average estate tax paid by all farm and business estates in 2004 was just under 20 percent of the value of the estate, according to calculations by the Tax Policy Center.

The effective rate was far less for smaller estates. Of the 440 taxable family farm and business estates in 2004, two out of five paid an average rate of only 1.6 percent. These were taxable estates valued at less than $2 million.Very large estates valued at over $20 million paid at an average effective rate of just over 22 percent, a hefty tax bite but well short of "everything."

But what's most interesting about the AFBI is that it can't even get any good horror stories to post on its website to support its position that that Estate Tax in its current form forces families to sell their closely-held businesses or farms.

None.

In a page on their website called Death Tax Tales, the Institute purports to show real hardship experienced by real people. Yet, only five of the entries are dated after 1997. Postings before that time simply lack relevance to the current Estate Tax, because of the dramatic increase in the unified credit amount.

Examining the entries listed as being after 1997, at least three are not "tales" at all, but opinion pieces that merely echo the Institute's position. (Two of these, incidentally, are from that paragon of honest reporting, the Wall Street Journal editorial page.)

What about the other two "horror" stories.

One is from an article in the Annapolis Capital-Gazette. (This one cost me five bucks because the AFBI's link would not connect to an article that was was more than 30 days' old. (The article was published on May 27, 2004.))

The story is not about the terror of the Estate Tax at all, but is instead a typical report from a small town paper of a old style garage giving way to a gourmet food store. The garage, together with an adjoining property that was about four times as large, was sold for $1.2 Million in 2004. Since the unified credit amount for decedents dying in 2002 and 2003 was $1 Million, only $200,000, less, of course, the costs of burial, estate administration, etc., would have been subject to the Estate Tax. It is unlikely that the federal estate tax would have been more than $50,000. (Had they sold the business without the post-death step-up in basis, the capital gains tax would likely have been about four times that amount.) This would hardly seem to be sufficient to force the family to sell the business.

And it wasn't. As the article happily reports:

[T]he sale [does not] spell the end of Miller's Garage, which has been serving community motorists since the late 1930s. It will move down the street and service cars in the rear of Miller's Muffler.

The only portion of the article that would lend any credence to the AFBI's argument is the following, which I quote in its entirety:

"The story is we had to sell it off to settle the estate and pay inheritance taxes and such," said Joe Miller, who runs the garage his father built.

I rather think that it was the "such" that compelled the sale.

The other story is even less convincing. It is the tale of Jenell Ross (again, the link does not work and I had to use Google to track down the article) who whines about the tax, but never claims that it caused her family to sell the family business after her father's unexpected death. Instead, she states that after his death:

[T]he responsibility of keeping the business running and the workers employed fell on my mother, brother and myself.

In other words, they kept the business. In fact, not only did they keep the business, good tax planning allowed her family to "not [face] the fear of what could have been." (The family was apparently paying off the estate tax over 10 years at the low interest rates previously discussed here.)

If, as the AFBI claims, family businesses face ruin due to a confiscatory estate tax, there should be at least one case in the past five years they can point to.

In the words of the Smothers Brothers, "Curb Your Tongue, Knave."

Update

Further checking reveals that Ms. Ross' father died in 1997. Thus, her story, even though dated October 11, 2003, is not relevant to current calls for Estate Tax repeal, since the unified credit is so much larger now and moving upward. When it peaks at $3.5 Million, it will allow families such as the Ross' to exempt $7 Million in wealth from the imposition of the tax.

Thus, of the five purportedly post-1997 stories, only one relates to a post-1997 estate. And, in that case, the family likely fared better under the current tax regime than it would had the forces of repeal had their way because of the basis step-up rules.