December 13, 2010

Extension of estate tax critical for small businesses

Antony Davies

Senior Affiliated Scholar
Summary

House Democrats are raising concerns about an increase in the exemption for the estate tax to 5 million dollars, but this increase is a good first step to help small business owners.

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House Democrats are raising concerns about an increase in the exemption for the estate tax to 5 million dollars, but this increase is a good first step to help small business owners.

Since the estate tax is based on assets, not income, it hits small businesses that provide middle-class incomes (both to employees and to the owners) particularly hard. They’re not generating 7 million dollars in income, but they could hold that in assets.

Detractors of the extension believe that the estate tax only hits a small number of people, but Davies estimates 85,000 small businesses would be susceptible to this estate tax if the owner died.

This tax encourages owners to divert their assets into insurance policies or gifts to their children to help mitigate the sting of when the owner dies. Money that could be invested in hiring new workers is then used in a less than productive manner.