TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Tuesday, June 27, 2006

Cato Institute Releases Repealing the Federal Estate Tax

The Cato Institute has released Repealing the Federal Estate Tax, by Chris Edwards,

Congress is debating permanent repeal of the federal estate tax. The "death tax" is assessed at a high rate on the accumulated savings of deceased persons above a basic exemption amount. Some pundits say that repeal would be an unfair break for the wealthy, but the issue is more complicated than that. Many public finance experts believe that the estate tax causes broad harm to the economy by suppressing investment and generating unproductive tax avoidance activity. In addition, the estate tax might not raise any revenue for the government when all its effects are taken into account....

Does the United States need an estate tax? Table 1 shows that many countries have decided that they do not. Of 50 countries surveyed by PricewaterhouseCoopers in 2005, 24 do not have an estate or inheritance tax, including Australia, Canada, New Zealand, and Sweden. Of the 26 countries in the table that do have estate or inheritance taxes, the United States has the third highest rate at 46%:


[Click on chart to enlarge.]

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You have to be a bit careful since countries have compromises in the death/estate tax area. A good example is Canada. We don't have an estate tax (although probate fees do exist), but do subject all unrecognized capital gains and a number of other types of deferred incomes (such as RRSPs - similar to IRAs) to taxation at death barring very limited deferrals. The US imposes an estate tax, but gives a tax free step-up in cost base upon death and has a good sized exemption threshold.

More importantly, Canada has very tight rules for trusts (either testamentary or inter vivos). They effectively limit the trust's lifetime to 21 years (unless the trust is willing to trigger immediate tax on all unrealized gains once the 21st year is hit) once the clock starts running - for qualified spousal trusts, the clock starts after the spouse's death in most situations.

So we don't allow indefinite trusts that now exist in the US. All my comments show is that a country can skin the cat in more than one way. An estate tax isn't the only or necessarily even the best mechanism to do so.

Posted by: SAN | Jun 27, 2006 11:00:51 AM