The Case for Abolishing Death Taxes

Policy Backgrounders | Taxes

No. 142
Friday, June 27, 1997
by Bruce R. Bartlett


Notes

  1. It is important to remember that the $600,000 estate tax exemption is not in fact an exemption. Taxpayers receive a credit of up to $192,800 on their estate tax liability. The effect of this is to exempt up to $600,000 of an estate from tax. Because of the difference between a true exemption and a credit, however, this means that no one actually pays the bottom estate tax rate of 18 percent. The marginal tax rate on the first dollar above $600,000 is in fact 37 percent.
  2. However, the Joint Committee on Taxation predicts that this percentage will rise to 2.64 percent of adult deaths by 2005. U.S. Congress, Joint Committee on Taxation, Description and Analysis of Proposals Relating to Estate and Gift Taxation, JCS-7-97 (Washington: U.S. Government Printing Office, 1997), p. 31.
  3. Even the popular press now discusses exotic estate planning techniques with regularity. See Louise Nameth, "Who Will Get Your Wealth: Your Kids or the IRS?" Fortune (March 17, 1997), p. 195-96; Christopher Drew and David Kay Johnston, "For Wealthy Americans, Death Is More certain Than Taxes," New York Times (December 22, 1996); Lynn Asinof, "Estate-Planning Techniques for the Rich," Wall Street Journal (January 11, 1995).
  4. George Cooper, A Voluntary Tax? New Perspectives on Sophisticated Estate Tax Avoidance (Washington: Brookings Institution, 1979), p. 4.
  5. Henry J. Aaron and Alicia H. Munnell, "Reassessing the Role for Wealth Transfer Taxes," National Tax Journal, vol. 45, no. 2 (June 1992), p. 138.
  6. Kenneth Chapman, Govind Hariharan and Lawrence Southwick, Jr., "Estate Taxes and Asset Accumulation," Family Business Review, vol. 9, no. 3 (Fall 1996), pp. 253-268.
  7. Christopher E. Erblich, "To Bury Federal Transfer Taxes Without Further Adieu," Seton Hall Law Review, vol. 24, no. 4 (1994), pp. 1953-56.
  8. Travis Research Associates, Federal Estate Tax Impact Survey (Costa Mesa, CA: Center for the Study of Taxation, June 1995).
  9. Douglas Holtz-Eakin, David Joulfaian, and Harvey Rosen, "Sticking It Out: Entrepreneurial Survival and Liquidity Constraints," Journal of Political Economy, vol. 102, no. 1 (February 1994), pp. 53-75. See also Patrick Fleenor and J.D. Foster, An Analysis of the Disincentive Effects of the Estate Tax on Entrepreneurship (Washington, DC: Tax Foundation, 1994).
  10. Chelcie C. Bosland, "Has Estate Taxation Induced Recent Mergers?" National Tax Journal, vol. 16, no. 2 (June 1963), pp. 159-168; Harold M. Somers, "Estate Taxes and Business Mergers: The Effects of Estate Taxes on Business Structure and Practices in the United States," Journal of Finance, vol. 13, no. 2 (May 1958), pp. 201-210.
  11. B. Douglas Bernheim, "Does the Estate Tax Raise Revenue?" in Lawrence H. Summers, ed., Tax Policy and the Economy, vol. 1 (Cambridge: MIT Press, 1987), pp. 113-138. It should also be noted that lawyers' and accountants' fees for estate planning can, in many cases, be deducted from one's income taxes, which is another way in which the estate tax reduces income tax revenues.
  12. Edward J. McCaffery, "The Uneasy Case for Wealth Transfer Taxation," Yale Law Journal, vol. 104, no. 2 (November 1994), pp. 319-321.
  13. Nigel Tomes, "The Family, Inheritance, and the Intergenerational Transmission of Inequality," Journal of Political Economy, vol. 89, no. 5 (October 1981), pp. 928-958; Jere R. Behrman, Robert A. Pollak, and Paul Taubman, "Parental Preferences and Provision for Progeny," Journal of Political Economy, vol. 90, no. 1 (February 1982), pp. 52-73.
  14. See B. Douglas Bernheim, Andrei Shleifer, and Lawrence H. Summers, "The Strategic Bequest Motive," Journal of Political Economy, vol. 93, no. 6 (December 1985), pp. 1045-76; Thad W. Mirer, "The Wealth-Age Relation among the Aged," American Economic Review, vol. 69, no. 3 (June 1979), pp. 435-443; Paul L. Menchik and Martin David, "Income Distribution, Lifetime Savings, and Bequests," American Economic Review, vol. 73, no. 4 (September 1983), pp. 672-690.
  15. John B. Shoven and David A. Wise, "The Taxation of Pensions: A Shelter Can Become a Trap," National Bureau of Economic Research Working Paper No. 5815 (November 1996).
  16. Laurence J. Kotlikoff and Lawrence H. Summers, "The Role of Intergenerational Transfers in Aggregate Capital Formation," Journal of Political Economy, vol. 89, no. 4 (August 1981), pp. 706-732. See also William G. Gale and John Karl Scholz, "Intergenerational Transfers and the Accumulation of Wealth," Journal of Economic Perspectives, vol. 8, no. 4 (Fall 1994), pp. 145-160; Thomas A. Barthold and Takatoshi Ito, "Bequest Taxes and Accumulation of Household Wealth: U.S.-Japan Comparison," in Takatoshi Ito and Anne O. Krueger, eds., The Political Economy of Tax Reform (Chicago: University of Chicago Press, 1992), pp. 235-290. Summers, a former Harvard economist, is now Deputy Secretary of the Tresury.
  17. Laurence Kotlikoff, "Intergenerational Transfers and Savings," Journal of Economic Perspectives, vol. 2, no. 2 (Spring 1988), pp. 41-58; B. Douglas Bernheim, "How Strong Are Bequest Motives? Evidence Based on Estimates of the Demand for Life Insurance and Annuities," Journal of Political Economy, vol. 99, no. 5 (October 1991), pp. 899-927.
  18. Adam Smith, The Wealth of Nations (New York: Modern Library, 1937), p. 814.
  19. David Ricardo, On the Principles of Political Economy and Taxation (New York: Cambridge University Press, 1951), p. 153.
  20. C.F. Bastable, Public Finance, 3rd ed. (London: Macmillan, 1903), p. 591.
  21. Karl Marx and Frederick Engels, The Communist Manifesto (New York: International Publishers, 1948), p. 30.
  22. D.W. Haslett, "Is Inheritance Justified?" Philosophy & Public Affairs, vol. 15, no. 2 (Spring 1986), pp. 122-155; Michael B. Levy, "Liberal Equality and Inherited Wealth," Political Theory, vol. 11, no. 4 (November 1983), pp. 545-564; Kenneth Greene, "Inheritance Unjustified?" Journal of Law & Economics, vol. 16, no. 2 (October 1973), pp. 417-419; Mark Ascher, "Curtailing Inherited Wealth," Michigan Law Review, vol. 89, no. 1 (October 1990), pp. 69-151.
  23. Joseph E. Stiglitz, "Notes on Estate Taxes, Redistribution, and the Concept of Balanced Growth Path Incidence," Journal of Political Economy, vol. 86, no. 2, pt. 2 (April 1978), pp. S137-S150.
  24. McCaffery, op. cit., pp. 322-324; Joel C. Dobris, "A Brief for the Abolition of All Transfer Taxes," Syracuse Law Review, vol. 35, no. 4 (1984), pp. 1219-1220; Alan S. Blinder, "Inequality and Mobility in the Distribution of Wealth," Kyklos, vol. 29, no. 4 (1976), pp. 618-19.
  25. Edward N. Wolff, Top Heavy, updated ed. (New York: The New Press, 1996).
  26. Rudolph C. Blitz and John J. Siegfried, "How Did the Wealthiest Americans Get So Rich?" Quarterly Review of Economics and Finance, vol. 32, no. 1 (Spring 1992), p. 9.
  27. Stanley Lebergott, The American Economy: Income, Wealth, and Want (Princeton, NJ: Princeton University Press, 1976), pp. 161-175.
  28. Aaron and Munnell, "Reassessing the Role for Wealth Transfer Taxes," p. 138.
  29. Gerald P. Moran, "Estate and Gift Taxation: The Case for Repeal," Tax Notes, vol. 13 (August 17, 1981), p. 341.
  30. Dan Throop Smith, Federal Tax Reform (New York: McGraw-Hill, 1961), pp. 294-296; George Guttman, "Change the Rules on Death and Taxes," Wall Street Journal (October 21, 1986). Alternatively, one could simply include gifts and inheritances in the taxable income of the recipient and avoid a separate inheritance tax altogether. Some commentators have suggested that this is the only correct way to tax inheritances. See H.C. Simons, Personal Income Taxation (Chicago: University of Chicago Press, 1938), pp. 125-147.
  31. Taxation of Net Wealth, Capital Transfers and Capital Gains of Individuals (Paris: Organization for Economic Cooperation and Development, 1988), p. 77; U.S. Congress, Joint Committee on Taxation, Issues Presented by Proposals to Modify the Tax Treatment of Expatriation, JCS-17-95 (Washington: U.S. Government Printing Office, 1995), p. C-1.
  32. For discussion, see Lawrence Zelenak, "Taxing Gains at Death," Vanderbilt Law Review, vol. 46 (March 1993), pp. 361-441; Joseph M. Dodge, "Further Thoughts on Realizing Gains and Losses at Death," Vanderbilt Law Review, vol. 47 (November 1994), pp. 1827-1861.
  33. Jonathan Brown, "The Locked-In Problem," in U.S. Congress, Joint Economic Committee, Federal Tax Policy for Economic Growth and Stability, 84th Congress, 1st session (Washington: U.S. Government Printing Office, 1955), pp. 367-381; Charles C. Holt and John P. Shelton, "The Lock-In Effect of the Capital Gains Tax," National Tax Journal, vol. 15, no. 4 (December 1962), pp. 337-352; Shlomo Yitzhaki, "An Empirical Test of the Lock-In Effect of the Capital Gains Tax," Review of Economics and Statistics, vol. 61, no. 4 (November 1979), pp. 626-629; Donald W. Kiefer, "Lock-In Effect Within a Simple Model of Corporate Stock Trading," National Tax Journal, vol. 43, no. 1 (March 1990), pp. 75-94.
  34. According to the Treasury Department, taxing capital gains at death would raise $30.7 billion in FY1997. However, the Joint Committee on Taxation estimates that it would raise only $15.5 billion. Office of Management and Budget, Budget of the United States Government, Fiscal Year 1998: Analytical Perspectives (Washington: U.S. Government Printing Office, 1997), p. 73; U.S. Congress, Joint Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 1997-2001, JCS-11-96 (Washington: U.S. Government Printing Office, 1996), p. 19.
  35. A number of important tax theorists have called for repeal of the estate tax in recent years. In addition to the articles by McCaffery, Dobris, Moran and Erblich cited above, see Charles O. Galvin, "To Bury the Estate Tax, Not to Praise It," Tax Notes, vol. 52, no. 12 (September 16, 1991), pp. 1413-1419; Robert B. Smith, "Burying the Estate Tax Without Resurrecting Its Problems," Tax Notes, vol. 55, no. 13 (June 29, 1992), pp. 1799-1811; Edward McCaffery, "The Political Liberal Case Against the Estate Tax," Philosophy & Public Affairs, vol. 23, no. 4 (Fall 1994), pp. 281-312; Richard E. Wagner, Federal Transfer Taxation: A Study in Social Cost (Washington: Institute for Research on the Economics of Taxation, 1993); William W. Beach, "The Case for Repealing the Estate Tax," Heritage Foundation Backgrounder no. 1091 (August 21, 1996).

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