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A sure way to win sympathy from Congress is to cast two icons of the American economy--small businesses and family farms--as victims of a rapacious federal government. That's how powerful Washington lobbies are pushing for estate-tax relief: telling tragic stories of families forced to pay the ''death tax'' by selling what a parent had spent a lifetime building. And so it is that congressional tax writers are proposing to raise from $600,000 to $1 million the value of assets that are exempt from the levy. By 2007, when the change would be fully phased in, this will amount to an $8-billion-a-year break.

The trouble is, the big winners from this rewrite of the federal estate-tax law would be wealthy investors, not small-business owners or family farmers. And despite the myth that the current levy falls hardest on family-owned enterprises, in reality, more than 55% of the tax is paid on publicly traded stocks, bonds, mutual funds, and cash (chart). Only about 10% of the assets of taxable estates are made up of family farms and small business.

INSTALLMENT PLAN. As it is, the tax hits an incredibly tiny slice of the population. In 1995, it was paid by approximately 30,000 estates. Fewer than 1,500 of the descendants were farmers, and barely 2,000 were small-business owners. How many were forced to sell out in order to pay the taxman? Barely a handful. If pressed, the owners of closely held farms and small businesses can make a request to pay their estate tax over a span of 14 years. But according to the IRS, in 1992--the most recent year for which data are available--only 716 requested the special treatment.

There is no question that estate taxes can cause real pain for some families. That's why so many small-business people are outraged by the levy. ''It's an emotional issue,'' says Jamie Wickett, a lobbyist for the National Federation of Independent Business (NFIB). But those few who really suffer can be helped without giving away billions of dollars to those who don't need it. Payments can be stretched out to 20 years or more--an idea Congress is considering. It also makes sense to ratchet up the $600,000 exemption--which hasn't changed since 1987--but only to keep up with future inflation.

If Congress, despite the ramifications for the federal budget, is really determined to spend $8 billion a year to help entrepreneurs, there are better ways to do it. Lawmakers could cut income-tax rates--the simplest and fairest way to divvy up a windfall from a balanced budget. But if Congress insists on targeting benefits to small companies, it could aim for the bottom line by reducing the two biggest stones around the necks of small businesses and the self-employed: the payroll tax and the cost of health insurance. Says University of Michigan tax economist Joel Slemrod: ''If what you're trying to do is encourage investment in small business, this is not the way to get the biggest bang for the buck.''

The real killer for startups and other companies facing a profit squeeze is the payroll tax that goes to Social Security Medicare. Business must pay 7.65% for most employees--right off the top. And it's even worse for the self-employed, who must fork over a staggering 15.3%. Says Clint Stretch, a partner at accountants Deloitte & Touche: ''Wage taxes are the most important issue for small businesses.''

FAILURES. Health insurance is another tremendous expense for labor-intensive businesses. Properly structured medical savings accounts, which is another item on the Republican agenda, would in reality do far more for cash-strapped small businesses than estate-tax relief.

Businesspeople may dream about leaving their companies to their children. But in truth, most don't. The NFIB reports that only 30% of family-owned businesses survive one generation. The estate tax may be one reason why, but most small businesses simply fail. And often, owners sell out because they become too old to keep up, or their children decide they aren't interested in taking over the business.

Curtailing the estate tax may sound appealing to small businesses. However, by throwing their lobbying clout behind the estate-tax proposals that are now moving their way through Congress, small business may actually be missing out on an opportunity for some real and immediate tax relief.

By Howard Gleckman


CHART: A Big Cut Aimed at Pleasing a Small Group

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Updated June 23, 1997 by bwwebmaster
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