Academic journal article Boston College Law Review

What Do We Know about the Behavioral Effects of the Estate Tax?

Academic journal article Boston College Law Review

What Do We Know about the Behavioral Effects of the Estate Tax?

Article excerpt

INTRODUCTION

At its one-hundredth anniversary, the estate tax continues to generate passionate debates reminiscent of those leading up to its enactment in 1916. The tax retains much of its original structure, albeit with a different rate schedule and a much-expanded size of exempted estates.1 In its current form, the tax contributes less than one percent of total federal government revenues.2 It also directly impacts the estates of less than one percent of decedents.3

The estate tax can be viewed as a hybrid inheritance tax. It is a tax on inheritances withheld at the source,4 but with tax rates that vary by type of relationship, form of asset held, and time of transfer (gifts versus bequests). It can also be viewed as a deferred income tax on bequest-motivated wealth accumulations, either as a backstop to leakages from the income tax or simply as another layer of taxes to bolster the progressivity of the tax system to apply at death.5

Ultimately, however it is viewed, the estate tax is a tax on bequestmotivated savings, or capital. It applies to the wealthiest of estates of individuals and addresses concerns related to tax progressivity and wealth concentration.6

Yet despite its limited scope, the tax continues to draw attention with passionate calls for its repeal. This dichotomy raises interesting questions related to the burden imposed by the tax, actual or perceived, that is shaping these views. It also raises questions about the behavioral effects of the tax. Only a very small number of individuals are subject to the estate tax, but as a group they are particularly tax-savvy or otherwise have access to highly competent tax planners.

This Article proceeds in two Parts. Part I explores the change over time in the scope and budgetary importance of the estate tax and in how it relates to other taxes imposed on taxed estates.7 Part II then reviews the economics literature and the empirical evidence showing how the varying burden of an estate tax affects other financial decisions made by those whose estates may become subject to the tax.8

I. THE SCOPE OF THE TAX AND ITS BURDEN

A. Trends in Tax Revenues

How important is the estate tax for governmental finances? At one point in time, the estate tax represented an important source of revenues as it accounted for about ten percent of the federal government's tax revenues.9 Today it is close to one percent.10 It has declined both in terms of its contribution to government finances as well as the size of the population it touches.

Contributions to tax receipts peaked in 1936 at ten percent of collections.11 Contributions to tax revenues, in nominal terms, peaked in fiscal year 2000 at about $29 billion before the dot-com bubble burst and stock market valuations crashed.12 About 50,000 of the estates in 2001, out of 2.4 million decedents, reported a positive tax liability.13 This declined to about 5200 estates in 2014, which reported tax liabilities of $16.4 billion.14

According to Gregory Mankiw, then-Chairman of President George W. Bush's Council of Economic Advisers, "The estate tax . . . raises little, if any, federal revenue."15 Whether the estate tax, even with the recently expanded exemption,16 raises "little" revenue is in the eye of the beholder. Other things being equal, and particularly in the absence of the estate tax, the revenue shortfall will have to be made up elsewhere and at the expense of other taxpayers. What is clear, however, is that the burden of the tax is extended to a very small group of taxpayers who are at the top of the distribution of wealth.

Another observation often encountered is that individuals pay little in taxes, as the estate tax is riddled with preferences and complexities. Although the effective estate tax rate is bound to be lower than that suggested by the statutory tax rates, this does not shed light on how important or burdensome the estate tax is.

One way to gauge the perceived importance of the estate tax is to compare it to the income tax. …

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