Wednesday, August 09, 2006

A Note on the Globe-Democrat

Yesterday afternoon, prior to Nell, S.P. and myself becoming cripplingly ill from something in the margarita mix, S.P. and I were having a discussion re: the estate tax. S.P.'s father had conned her into thinking the estate tax was not a good thing, in part with a heart-wrenching story regarding the demise of the St. Louis Globe-Democrat in 1986. According to him, the Globe-Democrat had to be liquidated when its owner died and his assets were hit with the estate tax. Alas, his heirs did not have the liquid assets available to pay the tax and were forced to sell the newspaper to raise the money. Another small business, the victim of federal taxes.

Here is what the University of Missouri-St. Louis's Globe-Democrat website has to say about the matter:

"A casualty in the 1980’s of dwindling circulation due to competing forms of media, less income from advertising, and crippling strikes, the Globe-Democrat went the way of many urban dailies in the past generation, leaving a record of unmatched documentary and journalistic achievement as represented in its files."

incidentally, I met his poor orphan once. He had lung cancer from second-hand smoke. He said to me with his last dying breath, "Please, Fishfrog, please ...[coughing], don't let them cut the estate tax. If it weren't for the 2001 cuts [coughing up blood], I would have been able to get a new lung. Please... promise me you'll try... [dies]." Well damnit Timmy (that was his name), I''m try my hardest. For you Timmy. For you.


Blogger Arfanser said...

I think you need a regular spot on the Daily Show, you have a unique ability to look at a complex and controversial topic and present your argument in such a humorous manner that anyone who argues with you looks ridiculous. And yet, whether we agree or not we keep coming back for more.

8:32 PM  
Blogger scarlet panda said...

Fishfrog, while I would love to have some concrete ammunition to use in my debate with my father, I don't think you've provided it yet.

You've shown that the Globe-Democrat faced challenges other than the estate tax. But almost every newspaper in the 1980s faced those challenges, including those that are still around. That doesn't address the issue of whether the estate tax was what ultimately caused the shutdown.

A business facing increased competition and decreased might be able to open and restructure in order to become more profitable. However, if that same struggling business has to pay tax in a single year amounting to 55% of a significant portion of its value, it is far more likely that it will close.

I guess what I'm looking for here is a "but for" answer--but for the estate tax, would the Globe-Democrat have closed?

Surely your formidable research skills are up to the task.

8:26 AM  
Blogger Fishfrog said...

Here's an interesting tidbit: Pat Buchanan was an editorial writer for the Globe-Democrat from 1962-1966.

9:35 AM  
Blogger Matt said...

Well surely that's a problem that could've been fixed by setting up a different business arrangement for the globe. I mean, if the paper had been moderately successful, it would've sold to a buyer and remained publishing and making money. It's not like the business had to be put of its misery because of the estate tax. That theory makes no sense. There's more money in a profitable organization than in liquidation.

11:50 AM  
Blogger Fishfrog said...

I think Matt is absolutley right. If the business in question were in any way successful, the heirs would either find an alternate way to raise the money to pay the taxes or they would sell to someone who would continue to operate the successful business.

But I have found a lead on the Globe-Democrat story. I have to go to the library though, and look at some microfilm.

1:16 PM  
Blogger warm fuzzy said...

doesn't that assume that the heirs are as business savy/have the experience as the person who started/was running the business? It seems extremely likely that they would not have be able to raise the money, but would also not want to sell the business. Its possible that without the hurdle of the state tax, the heirs would have the means to figure out how to be successful and continue the business on their own.

1:24 PM  
Blogger Matt said...

The heirs don't have to be business savvy. By the time dad died, a fair number of accountants and lawyers would've become involved in the estate and any of these could suggest ways to keep the Globe running. But it's not even all that big a deal. Businesses get financing all the time. The paper tanked because the paper was making no money, and you can't blame that on the government.

Oh, by the way, have you noticed that our current president is a shithead? Turns out that when a family has lots and lots of money, it can buy massive amounts of influence for its worthless, cocaine-addled children. The accumulation of wealth in small pockets of society is bad. Family money is bad.

2:37 PM  
Blogger xyzzy69 said...

"Something" in the marguerita mix?
Could it be - oh, I don't know - tequila?

5:53 PM  
Blogger scarlet panda said...

Look, you guys, I want to be for the estate tax, but your arguments are not good enough.

There's more money in a profitable business than in liquidation, yes. But you need the cash to pay the tax, and you need it now. So where do you get it? A loan?

Imagine the pitch to the lender: "We'd like a loan, please. For about half the value of our business. How are we going to use it? To restructure our business? Move into an emerging market? Oh, we're not going to use it--we're just going to give it to someone else. It will not improve our business in any way."

Even if you could get the money, it would have to be at some ridiculously high interest rate because of the high risk involved. And paying massive interest would make your business less profitable and more likely to close.

Let's say I have a business with a value of $1000 and a moderate profit ($5/year). Let's say the estate tax taxes 50% (for simplicity) of everything above $200. I die. My business now owes $400 in taxes.

What do I do?

If I go out of business, why did it happen? Because I'm not making money or because of the tax? Obviously, both.

11:31 PM  
Blogger Matt said...

Huh? It's a one time hit on the business, it only affects whatever interest the father has in the business, and it's paid out of all the father's assets, including his non-globe stuff.

Why on earth would getting a loan for something that comes once and will never come again be such a big deal?

A search of the st louis post dispatch from 1988 onwards for "st. louis globe democrat" and "estate tax" yields 0 hits.

And the new york times from 1981? "Your search for St. Louis Globe-Democrat "estate tax" in all fields returned 0 results."

The Globe Democrat was apparently owned by Herald Company of New York: link. ("The newspaper, owned by the Herald Company of New York, which is associated with the Newhouse publishing concern, is scheduled to cease publishing Dec. 31 because of what it said were continuing financial losses.")

The Herald Company, incidentally, has been around as late as 2000: link. That's the year Pulitzer bought a bunch of the interest in the st. louis post-dispatch.

In 1984, the paper was bought by Gluck Media: In re St. Louis Globe-Democrat, Inc. 86 B.R. 606
Bkrtcy.E.D.Mo.,1988. See also nytimes link

6:49 AM  
Blogger Matt said...

I hit publish when I meant to preview. A couple of things. That NYTIMES search, done pre-1981, yields two hits: in 1970 and 1966. Neither of which are in the timeframe.

The thing was owned by a company that was viable as late as 2000 - ie it was not a small closely held family concern that had to liquidate all of its assets around the time the paper went belly up.

And when the paper *did* go belly up, it *still* was able to find investors in the form of Gluck Media, which seems to've been a Missouri publishing house (I've seen references to Gluck publishing a KC magazine). So finding investors for this thing was not an impossible task.

But wait, there's more.

6:57 AM  
Blogger Matt said...

In re St. Louis Globe-Democrat, Inc. 63 B.R. 131, Bkrtcy.E.D.Mo.,1985.

This is an action where the employees of the globe forced the paper into bankruptcy because they were not getting paid. 1985, you'll note.

from the facts:
"The St. Louis Globe-Democrat, Inc. was founded in 1852 and is one of two daily newspapers remaining in the City of St. Louis. In the latter part of 1983, the former owner of the Globe announced it would permanently close the newspaper. Later the owner agreed to sell. On December 20, 1983, Gluck Media, Inc. was founded by Jeffrey M. Gluck and his wife, Debra McAlear Gluck. After the purchase of the Globe was completed, the name of Gluck Media, Inc. was changed to the St. Louis Globe-Democrat, Inc. The new Globe commenced business in February, 1984. The Glucks are the sole stockholders of the Globe, with Jeffrey serving as President/Publisher and Debra as Vice President/Associate Publisher." Id. at 133.

"In 1984, the Debtor reported a loss of $2,100,224.00 of taxable income on its U.S. Corporation Income Tax Return, line 30, form 1120. The Globe's Statement of Income for the year ending December 28, 1984 showed a net income loss of $1,725,108.00." Id. at 135.

"IT IS FURTHER ORDERED that Jeffrey M. Gluck and his wife, Debra McAlear Gluck, forthwith surrender the possession of the property of the Debtor to the Trustee and cease participation in the daily operations of the Globe, except as requested by the Trustee." Id. at 140.

So basically what I'm saying is that the Globe was a dog that died because it was a dog, not because of the estate tax.

Incidentally: link: "The Tax Policy Center projects that roughly 440 taxable estates were primarily made up of farm and business assets in 2004." and "Far from imposing tax bills on farms and businesses that "cost them everything," the average estate tax paid by all farm and business estates in 2004 was just under 20 percent of the value of the estate, according to calculations by the Tax Policy Center." and "Of the 440 taxable family farm and business estates in 2004, two out of five paid an average rate of only 1.6 percent. These were taxable estates valued at less than $2 million.Very large estates valued at over $20 million paid at an average effective rate of just over 22 percent, a hefty tax bite but well short of "everything.""

There's a table, there, too, that's worth checking out.

7:08 AM  
Blogger Arfanser said...

If you accept the premise that taxes are good, then who cares how they are raised. A company that is viable will continue to function though potentially under new or different management. A company that is not viable will disappear with or without the estate tax. The estate tax however is just another example of BAD tax policy brought about by bad politics and vote mongering.

1:48 PM  
Blogger Fishfrog said...

Nice work, Matt! I thought I was the tax guy, but maybe it's you....

And Arfanser, why is the estate tax bad policy? It's good policy! Tax the rich on money they don't need and will never use. Then use that money to finance wars overseas that open up new markets for the children of the rich to make more money on. The tax the children when they die.

I'll probably post a more substantial comment tomorrow or Monday. But I'm sore and tired.

6:56 PM  
Blogger scarlet panda said...

First, on the topic of the Globe-Democrat, I do appreciate the research. I will confront my father with this information later. It is not appropriate to argue your case with false examples.

Second, I find the "actual rates people pay" question irrelevant to a tax policy discussion, however important it might be in a political discussion. The fact that most people can get out of paying a tax with adequate accountants and lawyers is not a reason the tax should be kept on the books.

Third, on the more theoretical question...

Matt said, "Why on earth would getting a loan for something that comes once and will never come again be such a big deal?"

In the hypothetical example I describe above (assuming, for simplicity, that the father has no assets other than the business), the business would have to give the lender 100% of its profits for the next 80 years just to pay back the principal on the loan. How could that not be a big deal???

And arfanser, you said, "A company that is not viable will disappear with or without the estate tax." NO!!!! A company that is super-profitable will survive regardless of the tax. A company that is unprofitable and can't turn around will go under regardless. But a company with small profits will die BECAUSE OF the estate tax.

Am I crazy? Or is no one listening to me?

9:45 AM  
Blogger scarlet panda said...

x = a business's yearly profits without the estate tax.

y = the money that must be paid out yearly from the business because of estate taxes (whether to the government or in payments to a lender who has loaned money to pay the estate tax)

No estate tax: yearly profits are x
With estate tax: yearly profits are x-y

If y > x, a business goes from profitable to unprofitable because of the estate tax.

Am I wrong?

10:11 AM  
Blogger Matt said...

Yes, you are being listened to. Here's some more direct response to your 2 hypos:

1-Your guy's $1000 investment is netting him $5/year and he's hit with a $400 tax bill. It's an overwhelming amount because his tax is high while his income low. Your example presents an artificially egregious differential in income and investment.

In particular, this guy's business is a shitty investment. Let's say he stuck that $1000 in a series of yearly CDs yielding 2%. After 20 years, if he reinvests that money, he'll have $490. That's in the same time it would take his business to earn $100. Even the low rates a generic savings account offers would represent a better investment than this business. And unlike a business, a savings account or CD doesn't present the investment risk that a business does. Particularly a business with a five dollar margin. If this dude spills his soup, the extra dry cleaning puts him in the red. The problem isn't with the tax, it's with the business.

Furthermore, a bank would make more effective use, from the perspective of society as a whole, of that $1000 than would your five buck Warren Buffett. They could, for example, give loans to people whose businesses return more than half a percent a year.

2-If y>x, then yes, it's unprofitable. But the empirical evidence is that the burden is quite low. (link) There was no farm or business estate in 2004 valued less than $1,000,000 which paid estate tax. Of the 440 estates which paid, 95% paid (on average) less than $3000, which is a very very small burden. Even at higher levels of tax burden (the eight digit estates), the tax doesn't rise to the level of 50% of the estate's worth. And so the evidence indicates that the one time cost to the business is not so significant as to bring upon it permanent ruin. Out of 440 total, 250 2004 estates paid less than 200 bucks. They can handle this one time cost.

And this tax will only hit the business interest of one person. Any diversity of ownership in the business decreases the liability of the business itself. If SexyCorp is 100% owned by me and I die, then the estate tax is going to come after all of my assets, of which a portion is SexyCorp.* If SexyCorp is a joint venture between me and famed actor/orange juice afficianado Robert Loggia, then only my interest is taxed. This halves SexyCorp's liability. halves! And so the tax would encourage less solitary, more communal investment. And that's a good thing.

Let's say that I solely own SexyCorp, and my estate is big enough to take a substantial hit from the estate tax. (ie I'm the extremely exceptional exception and not the rule.) Which is better - that I diversify the business by selling shares to Goldtoe, Arfanser and Squishy, Fishfrog and Nell, SP and Warm Fuzzy, -or- that my boy Superelectric, Jr. inherit the business wholesale when a nubile-Brazilian-model-induced heart attack strikes me down at the age of 112? You know that that little hypothetical punk is going to be a dissolute emo brat lacking any sense, business or common. He'll be so busy trying to convert SexyCorp's assets into pornography and pie that he'll be the ruin of my once-beautiful empire! How is it better that he get the company rather than you guys?

Wouldn't it be preferable to vest control of a successful company which is about to lose its leading light (a) in a small group of investors with at least a modicum of business smarts rather than (b) in the kids, which is a total crapshoot? Doesn't the former case make it more likely that my profitable business survive and contribute positively to society? Isn't the latter case an example of the dangers of dynastic wealth?

And so overall, I think you've presented a theoretical estate tax boogeyman. Or to quote Monty Burns, a "boogerman". I don't think that your hypos are very realistic.

As for your real world vs theory framing concerns - I have no problem using figures which show what people actually pay. An empirical understanding of the law is not a bad thing - it is one flavor of knowledge and can shed light on the discussion. Furthermore, a business would better be run by actual expenditures and receipts than by projections or theoretical cases. And in an area like this, where we're talking about the interests of multimillion dollar estates, it's safe to assume that tax professionals - accountants and attorneys - have a hand in reckoning what taxes are actually paid. Now is that fair? Well, would it be fair to legislate in more loopholes to assuage a sense of justice and then find that no tax gets paid? Is it fair to shift the tax burden away from those who are most able to afford it and have most profited from a stable and well-regulated economy and onto those poor whom it exploits?

But I don't know and don't claim to know all that much about the issue, and I'd be happy to consider evidence other than the evidence that I've cited.

*SexyCorp is not going to be the entirety of my estate, so to say that SexyCorp would be hit with a 50% tax isn't quite the whole picture, even assuming that 50% is the rate. If any of my other assets are more liquid - like cash - then they can be used to pay more of the total tax than their value generates, decreasing burden that SexyCorp will bear. If I have a $1000 business and $1000 in the bank, and then I'm hit with a $1000 tax, then that business doesn't have to be liquidated.

4:00 PM  

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