Ah, The Estate Tax Again

I fired another shot at the effort to repeal the Estate Tax again in the middle of the blog "Missing A Few Rungs On The Corporate Ladder" and everyone should read the eloquent and passionate shot a fellow by the name of Costikyan Jarvis fired back at me in the comments section.  He is apparently the next in line to be the big kahuna at Jarvis Cutting Tool in New Hampshire - you can click here to see what Jarvis is all about - and to take a look at Costikyan.  I presume the guy next to him - Marshall Jarvis - is the one whose estate we are worrying about here since he looks a little older.

A couple of quick, personal comments: First, it is clear from the picture that Costikyan Jarvis is an intelligent, good looking guy. (I have a personal stake in convincing the world that follicle deficiency is a solid indicator of intelligence and that all such guys are, of course, good looking).  His opinion is quite valid and should be taken seriously.  Second, if my guess that Marshall Jarvis is the one whose impending death will toss Jarvis Cutting Tool into the hands of the tax man, Marshall should be a little worried, if not peeved at Costikyan.  Marshall looks pretty healthy to me and I know that I am not pleased at the thought of my sons spending a lot of time and energy planning my death.

Also, I should point out that Jarvis Cutting Tool is obviously a first class outfit and has been well run since 1901.  At the recent Lean Accounting Summit, Dr. Tom Johnson said it is easy to spot an 'advanced manufacturer" in America - any manufacturer still in business in America's business climate is, by definition, an advanced manufacturer.  He is right.  Jarvis has been doing things right for 104 years and the thousands of stakeholders involved for that century have been fortunate to have had the Jarvis family around.

And another note - since the name of the company is 'Jarvis' and Costikyan's name is 'Jarvis', unless there have been some funny things going on at the family reunions, it is a safe bet that Costikyan is a son - not a "dim witted son in law" - so I should be off the hook for that remark in my blog.

All of that said, there are two reasons why I have staked out the position I have regarding the Estate Tax.  First, the notion that the Jarvis family is at great risk of losing the business is more smoke than fact.  The Republicans are trying to repeal the tax all together - the position Costikyan advocates.  The Democrats have compromised by offering a bill to raise the exemption to $8 million (assuming the Jarvis boys are married men).  Further, the current estate tax law gives the Jarvis family 14 years to pay off any amount above the exemption if more than 35% of the estate is actually tied up in the business.  With an $8 million grub stake and a 14 year low interest loan for the balance, I think young Costikyan can squeak by.  In fact, the incidence of families losing their family businesses and farms due to the Estate Tax has been near zero - Willie Nelson and the Farm Aid bunch notwithstanding.

More important is the reason for the Estate Tax in the first place.  It is not about taxes - it is about the crux of the American dream.  Its purpose is to prevent an American aristocracy.  It is hard enough for a middle class person, let alone a low income person, to create a business today.  Most come out of school with a pocketful of promissory notes for student loans and nothing in the bank.  It takes hard work just to get a family up and going and to put a roof over their heads.  Going beyond that and putting together the capital to get into manufacturing is nigh impossible.

In the New England town where Jarvis Cutting Tool holds forth, there may well be a young man or a young lady named Smith who will make a better manager, a better employer and a better business owner than Costikyan - probably not, but maybe.  The Smith Cutting Tool company will never happen if, in addition to putting together the capital it takes to form the company, he or she has to compete with Costikyan who has a completely established, fully paid up, tax free factory full of machines.  It just can't happen.  The employees and customers of Jarvis most certainly have been well served by the Jarvis family, but just maybe they would be even better served by the Smith Cutting Tool company.  We and they will never know.

I have written this blog about Jarvis simply because Costikyan Jarvis took the time and effort to respond and it is certainly not fair to single that family out.  (I hope they have a sense of humor in addition to their obviously sharp business skills.)  I have enormous respect for the Jarvis family and what they have accomplished.  I am merely a pundit - a critic - while they put it on the line and fight the manufacturing battle every day.  I do hope that when Marshall's time comes (hopefully not soon) the company stays in the family.  But c'mon guys.  Have a little faith in Costikyan.  I think that with an $8 million headstart and the knowledge and work ethic the family has instilled in him, he will be able to make it in this world.

Comments

[Richard Veryard]

If the purpose of the Estate Tax is to prevent an American aristocracy, how effective is it?

Your attempt to reassure young Mr Jarvis gives me the impression that the Estate Tax is a pretty half-hearted measure, and leaves plenty of opportunity for an aristocracy to emerge.

If young Mr Jarvis has the intelligence and character to run a large company, then he is well-positioned to take full advantage of his good fortune. He would undoubtedly prefer to retain a large share of the equity of his father's business, but is there any reason to think he couldn't do just as good a management job on a normal senior exec compensation package?

If he is the best candidate for the job, surely he doesn't need to own the shares.

[John Hunter]

The repeal of the estate tax is a bad idea.

My previous post on this topic:

http://evop.blogspot.com/2005/07/estate-tax-repeal.html

Taxes constrain economic growth. Eliminating any tax is nice (to those who have to pay it or those who benefit from those who don't pay it instead using the un-taxed money in some way that benefits them). But taxes are necessary and the best tax economically (the most consistent with the tenants of capitalism) is the estate tax.

Unfortunately the estate tax alone can't fund the government, so we need to have other taxes as well. But the idea that you cut the estate tax while keeping other taxes in place shows a bad understanding of capitalism (just as has been done recently). If you want to lower taxes that is fine, cut spending and lower taxes but don't cut the most sensible tax while leaving more burdensome (to the economy) taxes in place.

If the politicians want to fund additional benefits to those who inherit millions of dollars, fine give those you want to fund cash that the government collects in taxes on others. I think that is a bad idea but that is a choice we can make if we want. And that way you can target it to those special interests you want to provide tax dollars (I doubt we would see politicians decide it makes sense to give millions and billions to the children of Hilton, Trump, Gates, Buffett... but maybe I am wrong). Just fund those the politicians believe it is in the best interest to fund (like small farmers or small business owners - I am not sure why they would deserve funding more than others who do the same thing but didn't get a huge inheritance, but that is a choice we can make if we want).

If it were up to me I would increase the estate tax and cut other spending and taxes. But it is not up to me. To bad for me, but those who stand to inherit millions are lucky.

My previous post on the estate tax repeal.

The estate tax is not meant to prevent an aristocracy. Capitalism is based on the idea you reward those who produce economic benefit (through their labor or good decisions - wise use of their capital) and the result of such a system is economic benefit overall. Inheritance was recognized as neither of those and therefore not something to be protected by capitalism from the beginning. The intent of the estate tax is to collect funds to run the government not to prevent kids for getting millions. But those that have the gold have a great influence on making the rules so they have successfully limited the inheritance tax (having amazing success recently).

The result would likely be, in a perfectly ideal world, the elimination of aristocracy but that is not the goal. However, realistically, even complete elimination of inheritance would not eliminate aristocracy. Many factors (that individuals may take advantage of or may waste) still benefit those who grow up wealthy (good schools, good contacts, favors granted to children of the wealthy in the hopes wealthy parents would be grateful, good health care, direct nepotism...).