Friday, August 10, 2018
Weekly SSRN Tax Article Review And Roundup: Kleiman Reviews Weisbord's Postmortem Austerity And Entitlement Reform
This week, Ariel Jurow Kleiman (San Diego) reviews a new essay by Reid K. Weisbord (Rutgers), Postmortem Austerity and Entitlement Reform, 71 Stan. L. Rev. Online 132 (2018).
As readers know well, Social Security and Medicare are on a path to eventual insolvency, and entitlement reform is inevitable. For the most part, reform proposals tend to exist within the familiar bounds of tax hikes or benefit cuts. In his new essay on the topic, Reid K. Weisbord offers a bold reform proposal that includes elements of both, but is somehow not exactly either.
Weisbord starts by dismissing the possibility of a broad-based tax increase to fund entitlements. A tax increase is unlikely in the near future, he argues, because history has witnessed a long-term trend of steadily declining tax rates in the United States. In addition, he notes, U.S. citizens are tax averse, often failing to recognize the connection between tax payments and valued public services. Under such conditions, cutting benefits may be politically more palatable than raising taxes. However, cutting benefits harms individuals who relied on Social Security and Medicare in planning for old age. To solve this dilemma, Weisbord proposes a novel policy of “postmortem austerity.”
Under postmortem austerity, eligible individuals would continue receiving Social Security and Medicare benefits during their lives. Upon the death of a high-wealth recipient, the government would retroactively disqualify her and recover benefit payments from her estate, importing elements of the regulatory structure of the federal estate tax to do so. The total repayment would be based in part on the size of an estate, for example, being capped at 40% of an estate, or increasing progressively with total wealth. It would also account for Medicare premiums already paid, although it is unclear how the repayment formula would account for payroll taxes, or for income taxes on Social Security benefits paid by high-income recipients. The policy would reduce net trust fund outlays—either via collected repayments or from individuals declining benefits up front—while maintaining a social safety net for all aging individuals.
Weisbord’s novel proposal raises interesting challenges. For one, although packaged as a benefit repayment, the policy would operate like a tax on inherited wealth. Concerns about savings incentives, therefore, are unavoidable. Weisbord argues that individuals are unlikely to alter lifetime savings behavior because the repayment would not affect available resources during life. This may be true, although individuals accumulate wealth for diverse reasons beyond personal lifetime enrichment. However, even sidestepping the thorny empirical debate on savings incentives, levying an additional charge on inherited wealth will almost certainly affect estate planning behavior. Just as with the estate tax, wealthy recipients would likely use inter-vivos gifts and sophisticated estate planning techniques in order to avoid post-death benefit repayment. Efficiency concerns notwithstanding, such behavior may reduce anticipated revenue.
Politically, postmortem austerity would face an uphill battle—as Weisbord acknowledges—but need not be altogether doomed. Among government levies, postmortem repayment shares the most DNA with the estate tax, one of the least popular federal taxes. According to a 2016 Gallup poll, 54% of Americans favor eliminating the estate tax entirely. If such figures reflect a deep-rooted national distaste for any post-death government charge, postmortem austerity is unlikely to garner much support. However, if the estate tax’s unpopularity in part reflects tax-label aversion, then Weisbord’s policy may offer a more agreeable mechanism for accessing transferred wealth. That is, policy marketing may matter. For example, voters and policymakers may be more apt to support a post-death charge associated with Social Security and Medicare solvency, compared to an estate tax that contributes to general government funds. Weisbord’s proposal suggests that optics and marketing in the context of wealth transfer taxes may merit further consideration.
There is no silver bullet solution to entitlement reform, and expanding the list of possible policies is an eminently worthwhile endeavor. Postmortem repayment offers an unconventional alternative to be considered alongside other measures such as payroll tax increases and progressive benefit cuts. To that end, it is worth mentioning that FICA tax increases may be more politically feasible than general income tax increases. Although income tax rates have generally decreased over time, payroll taxes have steadily risen since their introduction in the 1930s (aside from a two-year dip in 2011-12). Further, surveys tend to find that Americans support increasing payroll taxes, especially on wealthy taxpayers, over cutting benefits. (See here and here.) This unusual acceptance of payroll taxes may arise because taxpayers view them as a contribution for future benefits, alongside design features that reduce the taxes’ salience. Because of this, it is possible that trust fund solvency could be achieved via some combination of postmortem repayment and more traditional reforms.
Entrenched problems call for bold, creative solutions. Weisbord’s proposal is exactly that. Most importantly, it should remind commentators and policymakers to look beyond standard fiscal proposals and consider alternative revenue sources to ensure entitlement solvency.
Here’s the rest of this week’s SSRN Tax Roundup:
- Reuven S. Avi-Yonah (Michigan) & Yoseph M. Edrey (Haifa), Putting the Public Benefit in Cost Benefit Analysis of Tax Regulations: A Response to Hemel, Nou and Weisbach (2018)
- Megan L. Brackney (Kostelanetz & Fink), Tax Controversy Corner - Consider the Constructive Partnership Rules Before Reorganizing to Elect Out of the BBA, Journal of Passthrough Entities (2018)
- Jeffrey J. Burks (Notre Dame), David W. Randolph (Xavier), & Jim A. Seida (Notre Dame), Modeling and Interpreting Interactions in Accounting Research (2018)
- Shu-Chien Chen (Erasmus Univ. Rotterdam), Predicting the ‘Unpredictable’ General Anti-Avoidance Rule (GAAR) in EU Tax Law, InterEULawEast: Journal for the International and European Law, Economics and Market Integrations, Vol. 1 (2018)
- Gerrit De Geest (Washington U. St. Louis), Rents: How Marketing Causes Inequality (Chapter 1), Washington University in St. Louis Legal Studies Research Paper No. 18-08-01 Available at
- Andy Grewal (Iowa), The Charitable Contribution Strategy: An Ineffective SALT Substitute (July 18, 2018), 38 Virginia Tax Review (forthcoming 2018)
- David Hasen (Florida), Asset Basis in Acquisitive Asset Reorganizations: General Utilities Hangover (2018)
- Joseph Heath (Toronto), Policy Forum: From Independent Tax Commission to Independent Tax Authority, 66 Canadian Tax Journal/Revue Fiscale Canadienne 387 (2018)
- Sigrid Hemels (Erasmus Univ. Rotterdam), The Position of Married Women in Dutch Income Tax Law Since 1893 (2018)
- Calvin H. Johnson (Texas), Wherein Our Duty Lies, 159 Tax Notes 1969 (2018)
- Lin Lin (Nat’l Univ. of Singapore), Venture Capital in Singapore: The Way Forward, Journal of Business Law (forthcoming)
- Charles Lincoln IV (Boston U.), Are International Tax Treaties Compatible with Controlled Foreign Corporation (CFC) Rules? A Technical and a Political History Approach for a Normative Result (2018)
- Adolfo Martin Jimenez (Univ. de Càdiz), BEPS, the Digital(ized) Economy and the Taxation of Services and Royalties, UCA Tax Working Papers 2018/1 (2018)
- Ruth Mason (Virginia), Implications of Wayfair (2018)