Paul L. Caron

Wednesday, February 13, 2013

Caron & Repetti: Occupy the Tax Code: Using the Estate Tax to Reduce Inequality and Spur Economic Growth

Jim Repetti (Boston College) and I have revised our article, Occupy the Tax Code: Using the Estate Tax to Reduce Inequality and Spur Economic Growth, 40 Pepp. L. Rev. ___ (2013), in light of the helpful comments we received at the Pepperdine/Tax Analysts Symposium on Tax Advice for the Second Obama Administration (Jan. 18, 2013) (press coverage here) and the USC Gould School of Law Tax Institute (Jan. 30, 2013) (press coverage here):

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.

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I read the original article, not your revised piece. A quick look at the authors who found inequality deleterious at least indicates that they might have a bias in this area. I did not have the time or the necessary skills or the inclination to evaluate their positions. So, I will accept them as true for the purpose of my response.
You seem to reject the notion that tax should be levied to raise income for the state. You seem to propose that tax should be levied to make certain people (heirs) poorer. Again, your position seems to be that reducing the wealth of heirs is a societal good – you seem to concede that the amounts collected will not significantly fund government or reduce the deficit.
You also seem to assert that self-made wealth causes less problems of inequity that inherited wealth. By this, I take it that Michael Jordan is fine, but passing wealth to his children is less good. Does this also apply to the Gates Foundation, which has avoided beaucoup estate taxes for Gates and Buffet? Why should they be allowed to deny the government money in order to fund their personal vision of how their money should be spent?
I feel I have the better claim to passing what I have accumulated to my children on my death. If it is just to take my money after I die, why is it not just to take it while I live? (I don’t see how you can argue that death should be a recognition event.) It appears that you have made a moral judgment that inherited monies are morally (societally) bad. Obviously, I disagree with your argument.
I believe it is futile to attempt to cure inequity. (The poor will always be with you. Matthew 26:11) If the successful did not lie. cheat or steal, why can’t they pass on what they earned. The success enjoyed by Eli and Peyton Manning certainly had quite a bit to do with the genetic stuff and training they inherited fro Poppa Archie. How should this inequity be addressed?

Posted by: air65cav | Feb 13, 2013 8:59:23 AM