Democrats' Estate Tax Plan Trips Next Secretariat

Oct. 28 (Bloomberg) -- The estate tax is one topic getting lost in the dust of the midterm races. That's a pity. This tax, now quiescent, is set to roar back like a stallion in 2011 if lawmakers don't rein it in with new legislation.

The destruction caused by the estate tax can be hard to capture. This is partly because the family business dynamic, so affected by the tax, is also hard to describe. Nonetheless, if left unchecked, this levy can trip up not only the workings of a family enterprise but also the general economy. An entertaining reminder of this fact is a film in theaters this midterm autumn.

"Secretariat" is about the Chenery family and their horse, who in 1973 became the first Triple Crown winner in 25 years. The film is also about Secretariat, the business, and the struggles all businesses suffered in the high-tax 1970s.

Long before the big red horse with white stockings was born, the Chenerys were pouring what dollars they had into their horse farm, Meadow Stables. Money was often tight, so the family leveraged their non-cash assets. One was the family's horse breeding expertise. Another was their knowledge of horse markets, including the insight that investors overestimate the importance of the sire in genetic inheritance, while underestimating the mare.

Chris Chenery, who ran the business, offered investors a deal in which they could breed their studs with several of his mares. In lieu of paying a stud fee, Chenery gave investors one of the foals. A coin flip determined which one they got. Secretariat happened to be a reject the Chenerys received because they lost a coin flip over the offspring of Bold Ruler.

The Chenerys' experience, however, made them confident they had won in losing. For unlike Ogden Phipps, the owner of Bold Ruler, they were familiar with Secretariat's mother and had seen the foal get on his legs earlier than usual.

Inside Information

Just as in many family businesses, a strong social network enabled the Chenerys to make smart decisions. For example, Chris's friends helped his daughter, Penny, select the best trainer and jockey for their colt.

But the racehorse almost didn't become the legend. That's because the family's assets -- hard-won knowledge, intergenerational experience, a foal with potential -- were almost dispersed to the wind. After Secretariat had become Horse of the Year, but before he ran his Triple Crown races, Chris died. The patriarch's death triggered the estate tax. The amount due on Meadow Stables seemed to necessitate liquidation. Avoiding that fate would require losing the focus and resources the farm needed to ready its possible champion.

Overtaxed and Desperate

This trap caused Penny, the new leader of the enterprise, to feel a sense of desperation familiar to other overtaxed businesses of the period. In those years income tax rates were high. So was the capital gains tax. The estate tax was especially burdensome.

"The 1970s was the bad old estate tax days," Paul Caron, a tax expert at the University of Cincinnati College of Law, said in an e-mail. "The exemption was only $60,000 ($334,000 in today's dollars) with a 77 percent top rate. Just as the day's 70 percent top income tax rate spurred all sorts of aggressive tax sheltering activity, the draconian estate tax rates encouraged the wealthy to spend considerable time and money engaging in various strategies to reduce the estate tax bite."

The fact that one of those tax-escape strategies might have been the purchase of gentlemen farms like the Chenerys' doesn't undermine the larger point: navigating tax obstacles stole precious time from more worthy endeavors.

Time-Consuming Distraction

The film depicts Penny as a canny woman who got past those tax traps in the same way that Secretariat bypassed Sham, his strongest competitor. She did it by creating a breeding rights syndicate to raise cash. But this exercise also had costs. The time it required could have been used to breed more Secretariats.

The coming decade, which will see a higher estate tax, income tax and capital gains tax, is shaping up to be a formidable challenge -- one that seems as daunting as surviving all three legs of the Triple Crown.

Democrats who see virtue in the estate tax are doing the equivalent of aborting future enterprises. They deprive businesses of oxygen with their support for capital gains taxes and disregard for contracts.

The Republicans are supposed to prevent a rerun of the 1970s. Several commentators have noticed that there's something Republican about "Secretariat." Actress Diane Lane, who plays Penny, evokes a combination of Sandra Day O'Connor (Western horsewoman) and Sarah Palin (moose-hunting politician).

Still, it isn't clear that the Grand Old Party has the stamina to pass the endurance test that is tax reform. By focusing so much on midterm fury and so little on reform, the party may prove more Sham than Secretariat.

(Amity Shlaes, senior fellow in economic history at the Council on Foreign Relations, is a Bloomberg News columnist. The opinions expressed are her own.)

To contact the writer of this column: Amity Shlaes at

To contact the editor responsible for this column: James Greiff at

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