TaxProf Blog

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

Wednesday, January 30, 2013

USC Tax Institute

USC ProgramThe USC Gould School of Law Tax Institute concludes today with its Estate Planning session.  I am honored to deliver the keynote address on  Occupy the Tax Code: Using the Estate Tax to Reduce Inequality, 40 Pepp. L. Rev. ___ (2013) (with James R. Repetti (Boston College)):

Inequality has been increasing in the United States. We should care about this increase because inequality contributes to a variety of adverse social consequences that persist across generations. There is also substantial empirical evidence that inequality has a long-term negative impact on economic growth.

For many decades, federal tax policy has played an important role in reducing inequality, although the impact of federal taxes on inequality has waxed and waned depending on the focus of elected officials. We argue that the estate tax is a particularly apt vehicle to reduce inequality because inheritances are a major source of wealth among the rich, and studies suggest that inherited wealth has a more deleterious impact on economic growth than inequality caused by self-made wealth. Although there are loopholes in the estate tax, it is still effective in moderating the amount of wealth that is passed within a family from generation to generation.

The major criticism about the estate tax—that it discourages savings—is inaccurate. Standard tax theory cannot predict the impact of the estate tax on savings and the empirical evidence is mixed. Moreover, the estate tax has a less harmful impact on savings than the income tax for two reasons. First, the event that triggers estate tax liability—death—is ignored by taxpayers during the period of life in which they are likely to be most productive. Second, the expected value of the estate tax’s effective rate is quite low during the period of life in which most taxpayers create wealth.

Other speakers today include:

  • Ronald D. Aucutt (McGuireWoods, Tysons Corner, VA)
  • M. Katharine Davidson (Holland & Knight, Los Angeles)
  • Jeffrey N. Pennell (Emory University School of Law)
  • Scott S. Small (Wells Fargo, Philadelphia)
  • Diana S.C. Zeydel (Greenberg Traurig, Miami)

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The estate tax does next to nothing for those with lower incomes or wealth, even if it chops off some of the higher level wealth holdings.

The estate tax is 1) a welfare program for lawyers and life insurance companies and 2) an inefficient revenue source for the federal government.

Posted by: save_the_rustbelt | Jan 30, 2013 6:36:00 AM

Defenders of the estate tax need to explain why they believe the following scenarios make sense:

1. Someone who leaves $10 million for the lifetime support of his five special needs children is taxed the same as someone who leaves $10 million to his independently wealthy only child.

2. A billionaire who leaves $100 to every man, woman, and child in America is subject to a 40% tax, but not if he leaves his estate to a private foundation that dribbles out 5% each year for charitable causes outside of the U.S.

3. A family owned business is worth $20 million at the date of death, triggering a substantial estate tax payable in 10 year installments, but the business hits hard times and declines in value after death. The heirs end up receiving nothing net of tax, having been taxed on paper wealth.

Posted by: taxguy | Jan 30, 2013 9:52:47 AM