Academic journal article
By McCaffery, Edward J.
The Yale Law Journal , Vol. 104, No. 2
I. Introduction 284
II. The Liberal Egalitarian Case For (and Against) Wealth Transfer
III. The Estate Tax: Law, Effects, and Consequences 297
A. The Law 297
B. Revenue Effects 300
C. Capital Stock Effects 304
IV. The (Liberal) Failures of the Estate Tax 312
A. Behavioral Incentives 313
1. Inter Vivos Giving 314
2. Consumption-Savings and Work-Leisure Decisions 318
B. Distributive Effects 322
Privately held wealth and its unequal distribution, and perhaps especially the transmission of such wealth across generations, have long been thought to pose particularly pernicious influences in a liberal democratic state. Thus, some form of a wealth transfer tax--most commonly an estate or an inheritance tax--has typically been a part of real-world and theoretically supported comprehensive tax systems. As our ideas about the role of other taxes have shifted, both in practice and in theory, our intellectual allegiance to a system of wealth transfer taxation in the United States has remained more or less fixed. The present estate tax is similar, in its essential form, to the initial estate tax implemented in 1916,(1) and scholarly support for some type of wealth transfer tax, although far from universal, remains strong.(2) Recently, some scholars have even called for a confiscatory estate tax, or an abolition of inheritance altogether.(3)
But times have changed since 1916. Our political-philosophical ideas have evolved. The federal income tax has grown from a relatively small surcharge on the highest incomes into a massive, broad-based tax system.(4) Corresponding to this expansion in breadth, we have shifted, both in theory and in practice, from an income toward a consumption tax model.(5) Over three-quarters of a century of experience with both estate taxes and nominal income taxation has strengthened our understanding of the possibilities and limitations of tax systems, all during a period of continued inequality of wealth, income, and consumption.(6)
Meanwhile, the estate tax does not, in fact, appear to be working. It does not raise significant revenue. It is and has always been riddled with large exceptions, exemptions, and exclusions. Most striking is the fact that the tax has never been and is not now popular. At the same time, a more sophisticated tax scholarship has given us a wider range of policy options than our untutored imaginations put forth eight decades ago. These changes, in theory and in practice, make the case for the estate tax(7) more uneasy than initial intuitions might otherwise suggest.
What is most surprising in my analysis is that unease over the estate tax arises specifically on liberal grounds. The linkage between liberalism and some form of wealth transfer tax has been so strong that severing this connection seems deeply counterintuitive, and thus highlights the wisdom of rethinking basic theoretic approaches, not just to issues of taxation, but also to social theory in general. Indirectly, at least, this Article is an exercise in how tax policy analysis and political theory can learn from each other.
My argument over tax policy shall be political and interpretive. By "political," a term I am borrowing in this regard from John Rawls, I mean a style of analysis that eschews any reliance on formal, essentialist concepts like "income" or "consumption," or on "metaphysical" notions, such as of the natural rights to individual earnings or entitlements.(8) A political theory of tax takes seriously the idea that legal and economic rights and institutions are human-made; that tax rules are, so to speak, up for grabs. …