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Federal Estate and Gift Taxes Hurt Smaller Manufacturers and the U.S. Economy

As we enter a new century, the U.S. economy is achieving unprecedented levels of prosperity, innovation and job creation. American manufacturers and their workers are leading the charge. The higher American standard of living can be traced directly to new technologies that increase productivity. Manufacturers are responsible for 57 percent of the economy’s technological advance. Putting in place policies that enhance technology and productivity are key to sustaining the economy’s long-term growth.

Yet despite this economic progress, the federal estate and gift tax regime — sometimes called the death tax — undermines every aspect of the growth economy for small manufacturers.

As the chart on the back shows, estate and gift tax collections are a miniscule portion of federal revenues. Only once in the past 25 years have tax receipts from these sources ever reached 2 percent of all federal receipts; today they are only about 1 percent. But their impact on the economy — and small manufacturers — is huge.

From a cost/benefit point of view, these taxes are damaging to the nation’s economic growth in several ways:

• Small companies are targets. Among manufacturers, it falls almost entirely on smaller firms because large public companies are not affected by the tax. In fact, when a small company owner dies, the beneficiary is often a larger, publicly traded company that buys up the pieces. The result is less competition in the marketplace and, often, a transfer of jobs as the larger company consolidates operations.

• The costs of the estate tax occur every year, not just upon death. Family-owned manufacturers spend large amounts of scarce capital every year on estate planning to deal with future estate-tax obligations. It is not unusual for even a small company to pay hundreds of thousands of dollars a year just in insurance premiums and more for legal, accounting and annual appraisal fees.

• The estate tax saps economic growth. Expenditures on estate planning mean there is less capital for new equipment and new technology that boost productivity, new jobs and employee training. A manufacturer with only 50 employees generally operates equipment costing anywhere from $100,000 to $1,000,000 a machine. Cash diverted to estate-tax planning leaves less for investment.

• Business planning is supplanted by tax planning. Instead of forward-looking planning to expand, manufacturers are forced to deal with a future estate-tax liability by structuring their companies to allow a partial sell-off of divisions, ceasing acquisitions and increasing debt to lower the value of the company. In the absence of this tax, small manufacturers would spend these resources on staying globally competitive.

• At death, the tax eliminates jobs. At the death of a founder, a small manufacturer often incurs millions of dollars in tax liability. To pay the tax, assets and product lines are often sold off, with resulting layoffs. Since most assets in manufacturing companies are not liquid capital but buildings, inventory and machine tools, these are the assets that the estate tax forces out the door.

Source: Joint Committee on Taxation

The Manufacturing Institute is the research and education affiliate of the National Association of Manufacturers. For more information, contact The Manufacturing Institute at (202) 637-3107, e-mail us at mfg.inst@nam.org, or visit our Web page.