Wednesday, February 13, 2013
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.