Whenever I see the pros and cons of an inheritance tax discusses one common argument against it is as follows:
If an inheritance tax is imposed on transferring a family owned business, then this tax will have to be taken from the cash flow of the business. This will often bankrupt the business and therefore also destroy all the jobs associated with it. Hence an inheritance tax is (on businesses) is a very bad idea.
However I think this argument is based on a simply fallacy, namely that the business has to pay the inheritance tax, whereas in fact the new owner has to pay it.
So suppose the inheritance consists of exactly the family business, previously owned to 100% by the patriarch, and there is a 30% (of the value of the business) inheritance tax. Now the successor has multiple options:
- take the tax from the cash flow of the company, this is usually very destructive to the business and hence a bad idea
- sell a 30% stake of the business for cash to some other investor and use the cash to pay the inheritance tax
- get a credit for 30% of the company value with the business as security from some bank and use that to pay the inheritance tax
Neither of the other two options takes any cash out of the business directly, so there is no danger for the business or the jobs attached. All that changed is that the son only has about 70% of the wealth of the patriarch.
Question: Is the initially stated argument a valid argument against an inheritance tax and I overlooked something? Or is it just a plausible sounding straw man that doesn't hold upon closer inspection?
Note that I'm not interested on whether an inheritance tax would be a good or bad idea in general, that would be opinion based and not suitable as a question here.