Tuesday, October 27, 2020
Jason Oh (UCLA) presents Wealth Tax Design: Lessons from Estate Tax Avoidance (with Eric M. Zolt (UCLA)) virtually at UC-Hastings today as part of its Tax Speakers Series hosted by Heather Field and Manoj Viswanathan:
In a remarkably short time period, the wealth tax has evolved from a fringe idea to a major policy option. Two leading candidates for the Democratic nomination, Elizabeth Warren and Bernie Sanders, included wealth taxes in their policy platforms. To the surprise of many, strong support exists for imposing wealth taxes on the ultra-wealthy, even among Republican voters. The fiscal devastation of the coronavirus pandemic has swollen already huge federal deficits and likely will increase levels of inequality. Given concerns of revenue shortfalls and increasing inequality, the wealth tax merits serious consideration.
The potential revenue is eye-popping. Various projections have suggested that Warren and Sanders proposals would raise several trillion dollars over the next ten years. Critics including Larry Summers and Natasha Sarin have used data from estate tax returns and the relatively small amount of revenue the estate tax currently raises to question these revenue projections. This comparison can be useful only if one carefully considers how specific estate tax strategies translate to an annual wealth tax. This article engages in that exercise. When one takes a closer look at estate tax avoidance and how it maps onto an annual wealth tax, a much more complex narrative emerges.
That narrative has five major themes. First, there are some estate tax planning techniques (like valuation games and charitable contributions) which pose similar challenges to an annual wealth tax. These structures provide some support for those who argue that the annual wealth tax will struggle to raise the projected revenue. Second, other structures (such as grantor-retained annuity trusts) work well to minimize estate taxes but are of limited use for structuring around an annual wealth tax. Projecting wealth tax revenue using estate tax revenue without considering the revenue consequences of these strategies will understate wealth tax revenue. Third, other techniques (including the use of lifetime estate/gift exemptions) highlight possible synergies and other interactions between the estate/gift tax and an annual wealth tax. In many ways, a robust estate/gift tax will make the wealth tax harder to avoid and vice-versa. The converse is also true: a poorly designed estate/gift tax will undermine an annual wealth tax. Adopting a wealth tax without strengthening the estate/gift tax as well as parts of the personal income tax makes little sense. Fourth, one major lesson of estate tax planning is that it is much easier to minimize estate taxes on future wealth than existing wealth. Many techniques allow taxpayers to “freeze” the value of assets for estate tax purposes. Freezing techniques will also prove helpful in minimizing wealth taxes. It is possible that even a well-designed wealth tax will have a base that shrinks rather than grows over time. Fifth, how best to design a wealth tax depends on the relative weight given to different wealth tax objectives. Policymakers can differ on whether the primary goal of the wealth tax is to reduce inequality or to raise revenue. These goals are often in tension.