Paul L. Caron, Pepperdine University visiting law professor and
author of the TaxProf blog, said he has a proposal that will please
right-leaning deficit hawks and left-leaning redistributionists, all
while spurring economic growth. He suggests raising the federal estate
Presented January 30 as the luncheon keynote address to tax
practitioners attending estate planning sessions at the University of
Southern California's annual tax institute in Los Angeles, the proposal
was not roundly embraced. But its foundation -- that inequality hinders
economic growth -- is intriguing.
The proposal is outlined in a paper by James Repetti of
Boston College and Caron that was first presented at a January 18
symposium cosponsored by Pepperdine and Tax Analysts on tax advice for
the second Obama administration. (Prior coverage here. The paper -- Occupy the Tax Code: Using the Estate Tax to Reduce Inequality -- is available here.)
In the paper, Caron and Repetti review 36 studies examining the relationship between concentrations of income
and economic performance. Nineteen of the empirical studies examined a period of at least 15 years. All were
published between 1992 and 2012. Thirty of the studies and all of the 19 long-term studies found a negative
correlation between inequality and economic growth. In one study of 16 industrialized countries, the two countries
with the highest inequality in 1980 (Australia and the United States) were also the two countries with the lowest
labor productivity growth in the ensuing decade.
"We're hopeful that we can somehow get the left and the right to
agree that it's in both of their interests to decrease inequality,"
Caron said. Doing so would not only reduce adverse health and social
consequences such as low life expectancy, illiteracy, homicides,
imprisonment, mental illness, and obesity, but would also contribute to
economic growth, he said, adding that more tax revenue could help
decrease the nation's debt. "Using the tax law -- especially the estate
tax -- is the least painful way to achieve that," Caron said.
The paper cites a study suggesting that as inherited wealth (as opposed to self-made wealth) constitutes a larger
fraction of a country's GDP, per capita GDP grows more slowly. Using IRS Statistics of Income data, it provides
evidence suggesting that the estate tax significantly reduces the size of the nation's largest estates and therefore
their ability to pass down that wealth to heirs. U.S. estates exceeding a value of $20 million transferred more than
13 percent of their gross values to the federal government in 2010.
The paper debunks the commonly held notion that the estate
tax discourages savings, saying it isn't supported by either economic
theory or empirical evidence. And it provides estimates by Massachusetts
Institute of Technology economics professor James Poterba showing that
the effective impact of the federal estate tax is very low -- between
0.1 and 0.5 percent -- during the period when a person is likely to
create most of his wealth (under age 70).
While the paper does not specify how to raise the estate
tax, Caron told practitioners that the most effective reforms would be
those that are "grand and ambitious" -- like taxing capital gains at
death and repealing section 1014 to eliminate stepped-up basis at death.
"Recent evidence would suggest that the time isn't right for
that kind of a big deal," Caron said. "So a more modest approach would
instead deploy what we already have with the estate tax and just go back
to 2009, where the exemption was $3.5 million and the top rate was 45
Caron said that while that "more modest and perhaps more
doable" approach would raise only about $125 billion over 10 years,
"that's at least a start on both the revenue front and also the equality
All Tax Analysts content is available through the LexisNexis® services.