Additional material submitted for the hearing record-Continued Reister, Raymond A., attorney at law, Dorsey, Windhorst, Hannaford, Whitney & Halladay, Minneapolis, Minn.: Prepared statement with Stearns, Thornton, member, SBANE tax committee, and founder and president, Vacuum Barrier Corp., Woburn, Mass.: Excerpts from state- Tonneson, David, C.P.A., member, board of directors, chairman, tax com- mittee, Smaller Business Association of New England (SBANE), on behalf of Small Business United (SBU): Prepared statement... Wolf, Stevan A., general manager, Letty Lane Co., Westville, N.J., and A. Material submitted by the American Bar Association: Exhibit 1-Letter to Hon. Henry J. Nowak explaining unavailability to Exhibit 2-Statement of Harvie Branscomb, Jr., before the Subcommittee B. Material submitted by the National Association of Retail Druggists: Exhibit 1-Letter to Hon. Henry J. Nowak on reform of Federal estate Exhibit 3-Position paper from Minnesota Farm Bureau Federation G. Letter from the Specialty Advertising Association International submitting views on H.R. 3003 and other legislation seeking to revise the estate and IMPACT OF ESTATE AND GIFT TAXATION ON CAPITAL FORMATION TUESDAY, JUNE 16, 1981 HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON TAX, ACCESS TO EQUITY CAPITAL AND BUSINESS OPPORTUNITIES, COMMITTEE ON SMALL BUSINESS, Washington, D.C. The subcommittee met, pursuant to notice, at 9:45 a.m., in room 2359-A, Rayburn House Office Building, Hon. Henry J. Nowak (chairman of the subcommittee) presiding. OPENING STATEMENT OF CHAIRMAN NOWAK Mr. NOWAK. The subcommittee will come to order. I want to apologize for being a few minutes late to all the people who have assembled on this very important topic. We will give many groups access to these hearings because of their importance and because of the upcoming tax issues that are going to be addressed by the Ways and Means Committee shortly. This hearing on the impact of estate and gift taxation on small business capital formation is a topic that this subcommittee has been very interested in during the last 2 years and one which will have substantial input into the Ways and Means membership. We intend to follow through with that membership right after this hearing. This subcommittee is beginning 2 days of investigatory hearings on the impact of the Federal estate and gift tax law on the continuity of ownership of the small closely held business firms and farms. Many commentators suggest that with proper estate planning, the current estate and gift tax provisions are not a major problem for the closely held business. This viewpoint overlooks the fact that large sums of money are spent on estate planning and life insur ance. Small business persons incur these expenditures for the sole reason that they want to be certain their estate will have adequate liquidity to pay the estate tax. Instead of using capital in such an unproductive manner, these business persons could be using the money for capital formation purposes and plant expansion. Balanced with the need to foster capital formation, there is the need to raise revenues for the Government and the social concern for the distribution of wealth. The estate and gift tax provisions are not, however, a major source of Federal revenues. These two taxes are estimated to raise only $6.9 billion in revenues for 1981 and $10.5 billion in 1985. (1) This amounts to less than 2 percent of the total Federal revenues. In addition, it is estimated that only 2.8 percent of all those dying in 1981 will be liable for any Federal estate tax. The estate and gift tax provisions are extremely complex and deserve a thorough review by all parties concerned. We should not attempt any quick fix solutions to the problems incurred by the small business and farm. The objective of these hearings is to accomplish comprehensive reform for the small business person. I would like to call on our minority member who has expressed great interest in these hearings, Dan Marriott. OPENING STATEMENT OF HON. DAN MARRIOTT, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF UTAH Mr. MARRIOTT. Thank you, Mr. Chairman. I first want to commend you for holding these very important hearings. The revision of estate tax law is included in the list of legislative priorities of every major small business advocacy group and trade association in America. It was the third highest recommendation of the delegates to the White House Conference on Small Business. As the Smaller Business Association of New England pointed out earlier this year in hearings before this subcommittee, "Estate taxes are punitive; they work to discourage innovation in industry by an entrepreneur, particularly as he grows older, especially if his or her company is entering a high growth mode." In short, the more a company grows and prospers, the more expensive it becomes to keep the Federal Government at bay sometime in the future. I have always thought it was very unfair that small business people have to load up on life insurance in order to pay the Federal Government. That is insurance against Government. I somehow think that is the wrong principle. the wrong principle. The National Federation of Independent Business noted in those same hearings that estates have been grossly exaggerated as a result of inflation's overvaluation of business assets. In other words, once again we see that misguided Government policy aimed at redistributing wealth supposedly for the benefit of the poor actually penalizes those at the bottom of the economic scale. The worst victims are small businessmen and businesswomen and small farmers and their heirs. Dr. Hans Senholz, a nationally known economist, called the estate tax a widow's tax. Small businessmen and businesswomen are learning to cope the way farmers have for some years. That is, live poor, die rich, and then sell the business to pay the Government. No one should be forced to be in that type of a position. I sincerely hope that these hearings will provide us with the kind of ideas we need to address this problem fairly and effectively, so that the American tradition of passing a family business on to family members can once again be a reality. Mr. Chairman, I look forward to hearing the witnesses who are here today. Frankly, it is my personal opinion that we ought to repeal the estate tax altogether. If that is impractical, I would hope these witnesses might come up with an idea that might get by the Ways and Means Committee, and that is to at least provide a $2 million exemption for small farms and small businesses with maybe an 8year recovery provision. Again I support a modification and a change in the estate tax laws and I look forward to hearing the witnesses. Thank you again for holding these hearings. Mr. NOWAK. Thank you very much, Mr. Marriott. At this time I would like to call on another member who has been pushing this type of inquiry, Byron Dorgan from the State of North Dakota. OPENING STATEMENT OF HON. BYRON L. DORGAN, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NORTH DAKOTA Mr. DORGAN. Thank you, Mr. Chairman. Why are the Farmer Browns, the Farmer Olsons, and the Farmer Schmitzs of America giving way to the Farmer Atlantic Richfields, the Farmer Coors, and the Farmer Union Carbides? There are many reasons and the estate tax is one. Farmers Brown, Olson, and Schmitz are mortal. They die. And when they do, it is likely that their heirs will be required to pay some estate tax. They may well have to sell part or all of their land to generate the cash to pay the tax. Or, the legal rigamarole involved in avoiding the tax may be so senseless and imposing that they may simply decide to sell out and head south. Farmers Atlantic Richfield, Coors, and Union Carbide are not so burdened. They have a corporate charter that lasts forever. They are immortal. They pay no estate tax, and frequently have the cash and desire to buy up what Farmer Brown and others are forced to sell. Other provisions of our tax laws contribute to this trend. Thus we have created a structure of tax law and corporate law that encourages the transfer of assets from individual Americans— real people-to corporations, which are artificial people. The estate tax was never intended to have this impact. It was never intended to disrupt the transfer of a family sized farm or business to sons and daughters. Still less was it intended to encourage the flow of these assets into the hands of giant multinational corporations. Frequently, however, the estate tax does precisely this. It needs to be reformed. That's why we are here. I don't support repeal of the estate tax. I believe there should be an estate tax, but one that taxes the estate of a Howard Hughes, not Farmer Johnson; of a J. Paul Getty, not a mom and pop grocery store. To understand how the estate tax became what it is, we need to look at a little history. In the 19th century, the estate tax was used primarily to pay for wars. The War of 1812, the Civil War, and the Spanish-American War were financed largely in this way. When these wars ended, the taxes were repealed. By the beginning of this century, however, there was a new concern on the public mind. John D. Rockefeller, J. P. Morgan, Cornelius Vanderbilt, John Jacob Astor, and other well-known in dividuals had amassed incredible fortunes. There was great alarm that if these fortunes were allowed to pass intact, and grow, from one generation to the next, that an "industrial feudalism" would result akin to the agricultural feudalism which had kept Europe back for hundreds of years and which our forebears had rejected in coming to these shores. This concern, combined with the costs of the First World War, resulted in the passage in 1916 of the estate tax which, with numerous changes, we still have today. Small business people, farmers, and laborers were among the supporters of that taxprecisely because it was aimed at large concentrations of wealth, and not at family sized businesses. Millionaire industrialist Andrew Carnegie was another early supporter of estate taxes. Unlike most of his wealthy cohorts who bitterly opposed the estate tax, Carnegie called for a stiff and progressive tax on large estates-including, presumably, his own. The guiding ideal behind the estate tax, then, was to prevent control over large parts of our economy from falling into the hands of a few families. It was to keep America from becoming the kind of aristocracy against which it had rebelled. The estate tax did not, to be sure, dig very deeply into the fortunes of the Rockefellers and others. But at least estate taxes did not pose much of a problem for those farther down the economic scale. By 1942, the tax applied to only 1 estate in 60. After the war, however, inflation started to eat away at the estate tax exemptions which previously had protected most family farmers and small business people. By 1976, 1 in 10 was being hit with the tax. That year Congress raised the exemption levels and in other ways tried to protect from the tax those who should not have to pay it. Inflation, however, has continued to eat away at the new exemption levels. The new rules for valuing farmland, moreover, have proven cumbersome and complex. In many cases the estate tax continues to require the breaking up of a family farm, the most productive agricultural unit in the world, to generate the cash to pay the tax. The land may be sold to a large corporate farm which is less efficient, less devoted to the land, and which contributes much less to the local economy. This result is directly contrary to the original purpose of the estate tax, which was to discourage large concentrations of wealth, not encourage them. I am not advocating the exemption of large passive fortunes. A family farm, and frequently a family business, is genuinely a family enterprise. The kids help out from the time they are big enough to use a pitchfork or run errands. They put their effort and their sweat into building up that which is to be passed along to them. This is a far, far cry from the Rockefeller or Getty heir who inherits millions of dollars' worth of stocks or other securities without lifting a finger. Despite the 1976 reforms, the estate tax still is not working right. The wealthy can avoid it while many others get trapped. Family farmers and small business people still have to jump through frustrating and costly legal hoops in order to carry out what should be |