David Herzig’s forthcoming article, The Income Equality Case for Eliminating the Estate Tax, has a bombshell for a title, juxtaposing two ideas—income equality and estate tax elimination—that at first blush may seem in tension. Herzig, however, spends much of his excellent article carefully explicating and emphasizing the interaction between the estate tax and the income tax, both in historical terms and as a current area of policy concern. Essentially, Herzig argues that estate tax planning enables income tax avoidance among high-income and high-wealth households. Giving these households a choice between tax instruments guarantees lower revenues from a group that should pay more under a progressive tax system. From this deep and nuanced framework, Herzig draws a series of policy prescriptions. Only after teasing out the political impediments to an ideal solution does Herzig turn to estate tax repeal as a possible second-best outcome—and a potential improvement on today’s patchwork agglomeration of estate, gift, and income tax rules.
Central to Herzig’s policy conclusions is his distinction between single- and dual-instrument approaches to household taxation. Herzig characterizes our current tax system as fundamentally dual-instrument, with an income tax and a combined estate and gift tax. If “properly calibrat[ed],” Herzig could live with our current structure; if such calibration proves politically impossible, then Herzig would turn to a single-instrument regime rooted in income taxation with death as a realization event that would trigger either recognition or a carryover basis regime. This position both echoes Alvin Warren’s classic arguments about the fairness of income taxation and reflects a certain Realpolitik in light of current popular attitudes about wealth taxation.
At the end of the day, Herzig seems to settle on carryover basis as his preferred rule, and, to some extent, I was left wondering why. As Herzig notes, we should give little credence to claims that basis cannot be tracked across generations. Hurdles to recordkeeping simply aren’t credible, as they might have been in the 1970s, but these technological changes offer little in the way of an affirmative case for carryover basis. Alternatively, Herzig argues that carryover basis comports with a realization-based income tax in which tax generally is imposed after market transactions that leave taxpayers with cash in their pocket. But death is a big deal, both legally and socially, and a reckoning for tax purposes seems not inappropriate. (Herzig provides data on decedents’ liquidity that further assuage concerns about recognizing gains on death.) Finally, Herzig raises the very real specter of permanent deferral under a carryover regime—a “now or later” problem converted into a “now or never” one. Given the recent U.S. experience with multinational corporations’ deferral of tax on income earned abroad, this concern seems particularly salient. Overall, carryover basis seems most appealing simply because prior Congresses have passed legislation that flirted with the concept. This “art of the possible” argument warrants further explication, however, as well as some assurances that such a regime wouldn’t permanently hobble the income tax’s ability to reach the upper end of the income and wealth spectrum, through either permanent deferral or assignment of income.
For me, these concerns also raise questions about the viability of single-instrument solutions. Drawing on David Gamage’s work, Herzig posits that a triple-instrument structure (with a during-life wealth tax) might mitigate some of the gaming that occurs under current law—and that might be amplified under an income tax in the absence of an estate tax backstop. There are, of course, costs to adding instruments, and we might instead consider whether we’ve simply chosen the wrong ones. An income tax and a wealth tax, or a progressive consumption tax and a wealth tax, might prove superior to an income tax and an estate tax, or to an income tax alone. Furthermore, our current estate tax interplays with issues involving charitable giving and valuation, and these factors seem material to any remixed choice of tax instruments. Herzig largely sets these issues to the side—a justifiable choice, given his already ambitious project of connecting estate taxation with income tax avoidance.
Finally, Herzig’s article offers an important methodological contribution that, from my perspective, merits some emphasis. In taxation, private planning often complicates quantitative analysis. Data collection is difficult, and identifying the full scope of variables may prove obscure. For this reason, Herzig turns to “observational data” to illustrate his core claims about the connection between our current estate tax and income tax avoidance. These data are persuasive, if not reducible to numeric conclusions. Qualitative methodologies can be as rigorous as quantitative ones, and more detail from Herzig on his approach might help move qualitative analysis (back) into the mainstream of legal scholarship. Such a turn might prove fruitful for a profession that, at its core, concerns itself with words and their meanings.
In conclusion, Herzig’s article presents a compelling polemic supported by a thoughtful and comprehensive examination of the connections between the current estate and income taxes. Herzig’s article will be of interest to tax scholars of all stripes, as well as those interested in inequality more broadly.