Wealth, Mobility, Inheritance And The Estate Tax

Studies | Taxes

No. 235
Thursday, June 01, 2000
by Bruce Bartlett


Prospects

Figure VI - Public Support for Phasing Out the Inheritance Tax

The problems of the estate tax are now too large to be ignored. There are growing numbers of prominent legal theorists and economists calling for its abolition.79 And even those who support a strong estate tax, either for revenue or redistributive purposes, now concede that it is so riddled with complexity, loopholes and distortions that it needs a thorough overhaul.80

"Supporters of repeal outnumber opponents by almost three to one."

Public Opinion Polls. Even the general public now supports elimination of the estate tax, despite the fact that very few people are likely to pay so much as a penny of estate tax. A Wirthlin Worldwide Poll in August 1999 found 50 percent of voters strongly favoring a phase-out of the estate tax, with another 20 percent somewhat in favor. Only 15 percent were strongly opposed. [See Figure VI.] A possible reason for these results may be found in a Newsweek Poll taken in June 1999, in which 41 percent of Americans thought it was very likely or somewhat likely that they would become wealthy. Only 26 percent thought they had no chance. This suggests that a key reason for opposition to the estate tax is that Tocqueville's vision is still alive and well in America.

Alternate Methods of Taxation. Some scholars are starting to suggest a middle ground in the estate tax debate: abolish the estate tax, but broaden the taxation of gifts by treating them as income.81 The great economist Henry Simons once suggested that this is in fact the most theoretically sound means of taxing transfers.82 It does not appear that there would be any constitutional bar to the inclusion of gifts in the income tax.83 A variation of this idea would be to switch from an estate tax, where assets are taxed as a whole, to an inheritance tax, where heirs are taxed individually, as most other countries do.84 This reform is supported by some liberals as encouraging the breakup of large estates.85

Another group sees taxation of capital gains at death as a better way of taxing estates than the current estate tax.86 Under such a scheme, death would be treated as a realization of capital gains for tax purposes. Canada has such a system in lieu of an estate tax.87 Not only would it raise about the same revenue as the estate tax, but it would redress an unfairness resulting from the step-up of basis at death.88 Under current law, the increase in price of an asset that has appreciated in value is taxed as a capital gain when sold. Tax is owed on the difference between the purchase price, also called the basis, and the sale price. However, if someone dies without selling an appreciated asset, the capital gains tax is, in effect, forgiven. An heir receiving this asset has the basis stepped up to its value at the death of the original owner. Thus, when the heir sells this asset, capital gains taxes are paid only on the increase in value since he acquired it. Even conservative Republicans, such as Senator Jon Kyl of Arizona, now favor taxing capital gains at death as a substitute for the estate tax.

"It is likely that envy is responsible for most of the antagonism toward wealth."

While either taxing gifts as income or taxing capital gains at death instead of taxing estates may have their own problems, at least they would lead to a sharp reduction in complexity and tax rates. The 39.6 percent top rate on incomes and 20 percent top rate on long-term capital gains are both well below the 55 percent (60 percent in some cases) top estate tax rate. And because assets would be taxed under existing provisions of the Tax Code, the entire estate tax section of the Code, all of its supporting regulations and court precedents could be dispensed with forever.

The Continuing War Against Wealth. However, while the problems of the estate tax would seem to make it ripe for repeal or major reform, the vast growth in wealth in America is at the same time fueling support for new taxes on wealth. For example:

  • A New York University economist has proposed an annual wealth tax for the U.S. of 0.3 percent on assets over $1 million, which he estimates would raise more than $40 billion per year.89
  • Two Yale Law School professors have proposed a 2 percent annual wealth tax that would raise $255 billion per year in order to finance an $80,000 grant to all Americans on their twenty-first birthdays.90
  • New York real estate developer Donald Trump proposed a one-time tax of 14.25 percent on all wealth above $10 million to pay off the national debt, during his abortive run for the Reform Party presidential nomination.91

The reality is that the war against wealth is a never-ending one. While there are those who genuinely believe, however naively, that preventing some people from gaining wealth via inheritance will somehow make everyone else better off, it is more likely that envy is responsible for most of the antagonism toward wealth.92 While at present there appears to be some political support for abolishing the estate tax, it seems certain that if this were to occur something else would take its place. Meanwhile, those favoring new taxes on wealth have been busy and may yet find support.


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