In the mad (probably insane) federal government scramble to bail out all sorts of companies that have run into financial trouble because of their self-inflicted management failures, few people in the lame-duck Bush administration and Congress are talking about doing away with one of the most unfair and egregious taxes: The federal estate tax, also known as the death tax, affects construction intensely because it often causes the liquidation of family-owned businesses or, at the very least, diversion of company resources from support of a sound business plan to asset preservation when the owner dies.

Guy Lawrence for ENR

Congress created the death tax in 1916 to help the U.S. fund World War I, but lawmakers kept it on the books during the 1920s and 1930s to prevent excessive concentration of wealth in society. That argument rings hollow today, when federal efforts are aimed mostly at firms that are “too big to fail” instead of those “too small to help.”

The unfairness of the tax is obvious and pervasive. Firms in construction and other industries that are solely owned, family-owned or closely held are taxed every step of the way as their owners attempt to build the business and their own personal wealth. Companies and their owners pay federal, state and local income taxes, capital-gains taxes, excise taxes, employment taxes, sales taxes and property taxes. It is pay-as-you-go and hopefully grow.

But the real horror begins when an owner dies. In 2001, Congress passed legislation to reduce the federal estate-tax rate from the existing monstrous rate of 55% to 45% for calendar years 2007, 2008 and 2009, while at the same time raising the estate-tax threshold from $1 million in 2002 to $2 million in 2007 and 2008 and $3.5 million in 2009. The tax is scheduled to expire in 2010 but will spring back to life in 2011, at 55%, unless Congress makes the repeal permanent.

This legislation is destructive to businesses because owners have to assume the worst and divert company assets to wealth management even if there is no tax. By some estimates, 91% of all businesses in the U.S. are family-owned, many in construction. About 1% of federal tax revenue comes from the tax, but 65� of every dollar is spent collecting it.

The solution to this moral, ethical and business mess is permanent repeal. Taiwan came close in October when it reduced its 50% estate tax to 10%. Economists there estimated it would cost the government $20 billion a year but said the cut would pay for itself by making the economy more vibrant.

President-elect Barack Obama’s tax proposals include “effectively” repealing the estate tax for “99.7% of estates,” according to campaign literature. For the remaining 0.3% of estates—those exceeding $7 million per married couple—Obama would keep the rate at the current hefty 45%. This is confiscatory and will continue to cause the liquidation of many family-owned firms that already have paid their way. There is no reason why good businesses have to die with their owners.