NCPA - National Center for Policy Analysis

The Inheritance Solution

August 18, 2010

Due to a legal quirk, the death tax is scheduled to come back to life in 2011.  The renewed death tax would once again inflict serious harm on family businesses, workers and the economy.  Congress should act before the end of the year to repeal this economically harmful tax permanently, says Curtis S. Dubay, a senior analyst in tax policy at the Heritage Foundation. 

Proponents of the death tax argue that the federal government cannot afford to repeal the tax because doing so would increase the deficit too much.  But repealing the death tax does not mean assets transferred at death would be tax free.  Instead, the heirs of the estate would pay capital gains taxes on the assets they acquire when they choose to sell them.  The revenue from higher capital gains taxes combined with the increased revenue from the income tax (due to higher economic growth from repealing the death tax) means in the long run there would be no revenue loss, says Dubay. 

  • The major difference between the death tax and the inheritance tax is that the heirs do not pay the tax at the time of the estate owner's death; rather they pay it when they sell what they inherited.
  • While the inheritance tax is still a tax on capital, the punitive effects the death tax has on capital are significantly lessened because other resources do not have to be sold or liquidated to pay the capital gains tax. 

Furthermore: 

  • Heirs base their sale of the assets on purely economic considerations rather than under tax duress.
  • Under the inheritance tax system, there still exists an exemption amount so that a portion of estates remain tax-free and assets contained in smaller estates continue to transfer to heirs tax-free. 

A similar system for taxing transfers at the time of death could remain in place if Congress repealed the death tax permanently.  For the inheritance tax to remain viable in the long term, Congress would need to devise a system to determine the basis for certain assets held for considerable amounts of time, for which no reliable records of the original purchase price exist -- a challenge that is surmountable, says Dubay. 

Source: Curtis Dubay, "The Economic Case Against the Death Tax: The Inheritance Solution," Heritage Foundation, July 20, 2010.   

For text:

http://www.heritage.org/research/reports/2010/07/the-economic-case-against-the-death-tax 

 

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