Paul L. Caron

Tuesday, August 20, 2019

Brunson: Afterlife Of The Death Tax

Samuel D. Brunson (Loyola-Chicago), Afterlife of the Death Tax, 94 Ind. L.J. 355 (2019):

More than a century ago, Congress enacted the modern estate tax to help pay for World War I. Unlike previous iterations of the estate tax, though, this one outlived the war and accumulated additional goals beyond merely raising revenue. The estate tax helped ensure the progressivity of the tax system as a whole, and it limited the hereditary ability to accumulate wealth.

This modern estate tax almost instantly met with opposition, though. The opposition has never been sufficient to entirely eliminate the estate tax, but it has severely weakened its ability to raise revenue and to prevent the accumulation of wealth. As a result, today’s estate tax is functionally a zombie: it accounts for less than one percent of federal revenues and does little to prevent the accumulation of wealth among a small group of citizens. The estate tax largely serves to evoke fear and costly tax planning, but it only manages to bite the largest and slowest estates.

Although the estate tax has proven hard to kill, it is time for Congress to end it definitively, and transfer its functions as revenue-raiser and impediment to wealth accumulation to the income tax. To effect that transfer, Congress needs to do three things: first, it should treat death as a realization event, and tax estates on their assets’ unrealized appreciation. Second, it should treat the receipt of an inheritance as gross income in the hands of heirs, thereby requiring heirs to pay income tax on their inheritance. Third, Congress should eliminate the step-up in basis, and instead assign basis to inherited property under ordinary basis rules. By making these three changes, Congress can put to rest the zombie estate tax, while, at the same time, revivifying taxation at death.

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This is the same tax made more difficult to administer and moved considerably down market.

Posted by: Taxin | Aug 20, 2019 2:59:05 PM

The author minimizes the problem of taxing an heir’s receipt of illiquid property, noting that liquidity can be provided through the use of life insurance. At the same time, however, he proposes to subject life insurance proceeds to the income tax, thereby impairing the ability to provide liquidity and exacerbating the problem of inheriting illiquid assets.

In addition, the author doesn’t propose to have gifts be realization events or to have a donee include the gift in income, thereby leaving the door open to deathbed planning.

Posted by: guy helvering | Aug 21, 2019 8:56:44 AM